Is the owner of Israel's largest business pyramid the right man to break it up?
To regain the market's trust, IDB needs to be led by a financially brilliant, frugal, efficient person with an impeccable record. Is that man Nochi Dankner?
Months before a going-concern warning was appended to IDB Holding Corp's financial report, before local credit rating agency S&P Maalot downgraded the company's debt, and before the yield on its bonds reached triple digits – IDB, the largest business pyramid in the Israeli economy, began liquidating itself.
The person who began breaking it down is none other than the group's own controlling shareholder, Nochi Dankner.
He has already sold agro-chemicals manufacturer Makhteshim Agan Industries to the Chinese. He sold Clal Industries to the Russian-American investor Len Blavatnik. He also sold the leading Israeli manufacturer of pipe valves, Ham-Let, to the private equity fund FIMI and hawked Maxima, one of the country's largest industrial gas producers, to investor George Horesh.
Dankner is meanwhile closing sales of IDB's property holdings in both Israel and abroad and is sending out feelers to sell Clal Insurance. He's also been sporadically trying to sell supermarket chain Super-Sol.
Were it able to find buyers, IDB would likely also sell other assets, to alleviate its cash crunch and avoid having to reach an arrangement with bondholders to restructure its debt. Dismantling the group is logical.
IDB Holding Corp, the public company at the top of the IDB pyramid, is in difficult financial straits. Going by the pricing of its securities on the stock exchange, the company appears to be on its deathbed.
The IDB group owes billions of shekels and has built up a vast deficit in shareholder's equity (i.e. its balance sheet liabilities greatly exceed its assets). Even if it can meet its liabilities in the coming months, it can't go on without selling off additional assets or rolling over its debt. But it can't possibly refinance debt with its bonds trading at one-third of their par value.
In practice, a debt restructuring is already underway. Institutional investors holding the company's bonds are bracing for tough negotiations. They have already demanded that the company not spend a shekel without coordinating with them first.
So, the question is begged: Who is the person or what management team should take charge in dismantling IDB? Nochi Dankner is in charge of this task, but is he the right man for the job? Does the track record that Dankner brings to the table show him to be the best-suited person for the complex task of dismantling a company whose dominance is spread out across quite a number of key sectors in the Israeli economy?
1. Financial wizard
IDB's receiver must be extremely financially adept. IDB is a pyramidal holding group. It other holding companies below it, which own holding companies, which own shares in many businesses. A body with so many myriad assets, that owes so much money to the investing public and to banks, has to be run by a financial wizard.
In the early years of his control over the IDB group, the public thought that was what Dankner was. Thus he raised billions on the market. But it's become clear that this impression was erroneous.
His success was based on holdings in monopolies and companies that dominated uncompetitive markets. Also, he raised capital from institutional investors that neglected to exercise due diligence.
The moment that competition begun to arise, dividends from the business pyramid's front-line business operations suffered – and that threw a wrench into the pyramid's debt roll-over machine. The entire group has begun to crack under pressure.
Most of the front-line companies in the group inherited Dankner when he bought control of the group from the Recanati family. But even those activities that he himself initiated, revealed him to be a financial failure.
He paid top dollar for land in Las Vegas to a megalomaniac casino-hotel (in concert with Israeli business baron Yitzhak Tshuva) - moments before the floor fell out of the U.S. real estate market. He's lost his shirt on the deal. Dankner has also done badly on his investment in Credit Suisse stock.
The first principle of sound financial management that appears on the first slide presented to every first-year business school student is "don't use up your cash reserves". Nochi Dankner failed in this respect as well.
For these reasons, Nochi Dankner receives a failing grade for financial management.
2. Transparency, objectivity and the no conflicts of interest
The IDB group's receiver must be a transparent executive with a reputation for objectivity whose only concern will be the public interest, who won't pursue deals out of his own self-interest.
IDB hasn't actually belonged to Dankner for some time now. He invested only a small sum in the company during his initial takeover. Most of the funds for the takeover came from the public.
He controls the front-line companies in the IDB pyramid through relatively small controlling stakes – the exact problem that the laws set by the Knesset antitrust committee is set to solve in the near future.
Dankner's sale of Israir Airlines, in which he had a personal controlling stake, to IDB was scandalous. Through the deal, Dankner managed to transfer to IDB an asset that burns through a mountain of cash every year, thereby relieving himself of personal debts reaching $49 million. Subsequently, Israir didn't meet the rosy forecasts that the company's value assessors, hired by Dankner, had provided. Israir has in fact lost nearly NIS 100 million annually for the last two years in a row.
Dankner also bought the floundering Ma'ariv newspaper group using money provided by public investors. Beforehand, Ma'ariv had an annual operating loss between NIS 70 million and NIS 100 million. Since its acquisition by IDB, it has burned through NIS 300 million. Why did Dankner buy it? To influence the public? For prestige?
On the subject of the absence of conflicts of interest receives a low grade.
3. Frugality and efficiency
The person tasked with breaking up IDB must operate with a slim, frugal and efficient staff. From the moment IDB is in the hands of creditors, every penny it has is theirs and any savings must flow into their pockets.
To garner the trust of the banks and the appreciation that the receiver is working on behalf of investors and not for himself – even appearances are of critical importance.
Dankner sits in comfortably appointed offices on the upper floors of Tel Aviv's Azrieli Towers. He pays himself and a long list of senior executives salaries that reach into millions of shekels per year. Dankner owns his own private airplane worth tens of millions of dollars even though he has no business operations abroad (IDB has announced that it intends to sell the airplane, though it hasn't been sold yet). Just by trimming the operations at IDB headquarters it would be possible to save tens of millions of shekels per year. To be clear, whoever breaks up IDB won't have to make do with a minimum wage salary.
When it comes to operating with a scaled-back management appropriate to IDB's current financial situation, Dankner receives a failing grade.
4. Impartial relationships with creditors
IDB's receiver needs a clean slate and a reputation for impartiality when it comes to the history of his business relationships with the banks and major institutional investors. In any case of business liquidation, an executive who won't favor one creditor or person ahead of others when the proceeds of assets sales are apportioned to creditors, shareholders, employees and all other corporate stakeholders is necessary. Consequently, he must be independent of all these parties.
Dankner can't claim to have this quality. Bank Leumi CEO Rakefet Russak-Aminoach and Mizrahi-Tefahot Bank CEO Eliezer Yones have already classified the loan they provided to Dankner and his private company Ganden Investments, which he used to acquire IDB, as a doubtful debt. Despite this, even though the law entitles them to it, they haven't take control over Ganden and through it the entire IDB Group.
They didn't need to wait for the going concern warning that appeared on the IDB's financial report last Friday. Like with any loan, Russak-Aminoach and Yones have conditions clauses in the loan covenant intended to preserve the deal's value. Since the loan has become a debt whose repayment is shrouded in doubt, it is clear that the covenant's conditions haven't been made.
Russak-Aminoach and Yones could have already pulled up the stakes on the loan two months' ago. They could have perhaps appointed an audit committee and demanded a change in IDB Groups' management. These matters are already known and warnings have been issued in different banking forums regarding the deteriorating condition of IDB and recommended selling company holdings or demanding additional forms of collateral. This wasn't done. Instead, they wrote-off the loan from their banks' profits and shareholder's equity, this despite Bank Leumi being a publicly-owned bank. Why? Where were the banks' CEOs, credit committees and board of directors, since the handwriting on the wall has been clear for some time?
This same question can be asked of some of the institutionals as well, among them Harel Insurance Investments, Phoenix Insurance and Psagot Investment House. All held large quantities of IDB bonds and knew that the group wasn't in a glowing financial condition.
The answers aren't simple ones, but perhaps they are tied to the web of long-term ties that Bank Leumi and Russak-Aminoach have with Dankner.
Bank Leumi, in the days when it was led by former CEO Galia Maor, was the bank that financed the Dankner family's purchase of Bank Hapoalim. Bank Leumi also financed Dankner's IDB purchase. Russak-Aminoach's sister, Ayelet Ben-Ezer, is one the board of directors of Koor Industries, which is controlled by Dankner. Galia Maor's son, Ron Maor, is the CEO of energy exploration partnership Modi'in, in which IDB is a key shareholder. Additionally, the accounting firm KPMG Somekh Chaikin, controlled by Gad Somekh, is where Russak-Aminoach earned her professional chops, and serves as auditor to both Bank Leumi and chief auditor for the IDB Group.
One thing is clear: the heads of the banks and insurance companies are members of an exclusive club of company owners and executives in which Dankner is one the key and most influential of members. Many of them manage public money and earn gigantic salaries for their services, but they don't always make sure that the interests of public investors are given preference to the interest of fellow club members.
Thus, also on the subject of the receiver's independence from the existing financial system Dankner's doesn't meet the threshold grade required.
In the previous Israeli era of monopolies, uncompetitive economic sectors and a weak capital market lacking in independence, perhaps Dankner was an executive-operator who knew how the system worked. But the conclusion from this brief analysis of the capabilities and sense of ethics required from IDB's future receiver in the Israel of 2012, the current CEO doesn't receive high marks.
But will the banks, the institutional investors and other IDB creditors place on the table a proposal to change CEOs and senior executive staff in favor a man better suited to the job? The experience of the last decade suggests that they will not, that they will prefer to stubbornly stick to their guns and defend their past decisions. Instead taking into account the interests of the investing public, they will prefer not to upset the unwritten rules of the game for members of the club of the business elite.
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