The Israel Corporation (TASE: ILCO) wants to buy a stake in Paz, about 33%. The only question is from whom.

Paz is privately-held by several parties, including Zadik Bino and Bank Leumi. Selling a third of Paz would dilute their own holdings, to some degree. One plan involves reducing Leumi's holding from 19% to 13%.

The Israel Corporation board approved negotiations to go into partnership in Paz, after Paz won the race to buy the Ashdod refinery facility. Most financial market sources believe The Israel Corporation will pay $300 million for a 33% stake in Paz.

Others, however, believe Paz will be valued at $1.2 billion for the purposes of the deal, meaning The Israel Corp. will pay $400 million.

Bino said this week that several potential partners had expressed interest in the fuel company.

After the ownership structure is changed, Paz would probably be floated to the public in either stock or bond form. This would likely further dilute the controlling shareholders, although market sources suggest Bank Leumi would seek to reclaim its 19% holding by buying shares in the public offering.

Another issue is the size of Leumi's holding in Paz.

Should the deal close, Leumi will have both a direct 19-percent holding as well as an indirect stake via The Israel Corporation. Bank Leumi has a 19-percent stake in The Israel Corporation.

When The Israel Corp. buys a stake in Paz, Bank Leumi will also indirectly hold 19% of Israel Corp's 33-percent piece of the Paz pie. Banking regulations do not allow banks to own more than 20% of a non-financial corporation.

Bank Leumi stated in response that the banking law did not cover indirect holdings in non-financial institutions, so even if its combined Paz stake was larger than 20%, it would not be required to sell surplus holdings.

In other words, should the deal not involve dilution, and should Bank Leumi continue to hold 19% of Paz directly and about 6% via The Israel Corporation, the 6% will not be affected by banking regulations that would force it to sell off holdings.