It had been pretty clear: buying the PKN mutuals fund management company from Bank Hapoalim hadn't been as sweet a deal as the buyers wanted to make out. The truth of the matter is, the deal was worse for them than the market had imagined.

Not only did the buyers overpay, but the mutual fund management company has lost NIS 3 billion assets since the deal was signed, making the deal all the more unpalatable.

The prospectus that Solomon Consulting, controlled by Amit Berger, published on Thursday night sheds light on the unhappy takeover. The papers reveal that the price, NIS 954 million, for a company that then had NIS 20.6 billion assets under management and today only has NIS 17.6 billion, was only part of the draconian agreement that Solomon signed with the seller, Bank Hapoalim.

No opinion in writing

The prospectus reveals that Solomon bought PKN from Bank Hapoalim without any evaluation of its true worth. It held no due diligence process and didn't even get a pre-ruling from the Income Tax Authority about PKN's aggressive tax program.

Regarding taxes, the problem is all the more painful. The way in which PKN is taxed, and the fact that it was an assets deal, not a shares deal, are the main reasons for the high price paid for PKN. They are the same reasons Markstone leaped: if it couldn't buy PKN because it was outbid by Solomon, it could (and did) buy Solomon.

Solomon does write in its prospectus that based on its own assessments and advice it received, buying PKN's assets and goodwill reduced income liable to tax by NIS 96 million a year over ten years. In the first years it should owe no tax, it says.

The problem is - that may not be accurate. Solomon not only has no such ruling from the ITA, it doesn't even have an internal paper to that effect. The company itself admits: "Materialization of these expectations may be substantially different from the expected results".

Adjustments - nyet

Bank Hapoalim made sure to put something into the agreement that hasn't even been ratified by the Knesset Finance Committee yet: PKN will pay distribution fees to the bank, when the bank sells units in the funds. Not only will distribution fees be paid in new money coming in, but on the entire inventory as well!

Meaning, Bank Hapoalim will be getting a fat chunk of the money already sitting in PKN, which means that before "other costs", the new owners will be cutting Bank Hapoalim a check topping NIS 50 million.

The prospectus clears up something that had been whispered about: it's true, the agreement allows no adjustment between the money it has under management and the amount the buyers are paying. The fact that NIS 3 billion has evaporated since hands were shaken is Markstone's problem.

The only adjustment mechanism that could change the original price touches on the distribution fees.

Regarding distribution fees, the PKN agreement is based on the very figures that the Finance Ministry presented to the Knesset Finance Committee: (0.8% for share based funds, 0.4% for bond funds, 0.25% for shekel funds). If the Knesset Finance Committee decides the banks shouldn't make that much, that would - for instance - reduce Bank Hapoalim's income from distribution fees by NIS 5 million a year, then for each additional million, PKN will pay Bank Hapoalim another NIS 6.4 million beyond the NIS 954 million.

However, if the distribution fees increase the sum PKN must pay the bank by more than NIS 5 million, then Bank Hapoalim will return NIS 6.4 million to Solomon.

The distribution fees agreement between Markstone and Bank Hapoalim is for ten years. If the Finance Ministry decides to raise the fees in a couple of years, Markstone will lose a lot of money. That may explain why Bank Hapoalim was so pressed to shove the issue of the distribution fees through the Knesset while allowing for an option that the issue be revisited in a few years.

Oh, and NIS 217,000 a day

Another bizarre clause states that if the distribution fees don't come into force from April 1, 2006, then from then until July 1, 2006 or when the fees come into force - whichever is earlier - Bank Hapoalim will receive NIS 217,000 from Solomon for each day (including Friday and Saturday) of the 90 days of the second quarter. Meaning, a modest sum of NIS 20 million for the second quarter.

After July 1, if there is still no distribution fee in effect, the bank will continue to get NIS 217,000 a day or NIS 80 million a year. On the payment from April 1 to July 1, Solomon received a pre-ruling from the Israel Securities Authority, which stated it did not deem the arrangement illegal. But note that bizarre note at the bottom of Page 104 of the prospectus: Solomon clarifies there that the second payment, meaning after July 1, is actually illegal!

What else did Bank Hapoalim manage to squeeze from Berger? For two years Solomon has to employ the bank's employees; it has to rent PKN's offices in Tel Aviv and pay the bank NIS 1.2 million for renovations to these offices. PKN will also be using the bank's management operational services for NIS 10 million a year.

Solomon also undertook to give Bank Hapoalim first shot at offering brokerage services. Flouting press reports to the contrary, Solomon will be making no brokerage income at all from the takeover: Hapoalim gets it all.

Hapoalimtrust will be the funds' trust, probably ending PKN's longstanding relationship with Ernst & Young Brightman-Algamor as trustees. No, it is not legal and contravenes the ISA's pre-ruling, PKN admits in the prospectus. That is quite some admission in a prospectus.