The state sold a 5% stake in Israel Discount Bank to Deutsche Bank yesterday morning. Deutsche Bank also received an option to buy an additional up to 3.33% of the bank's shares at a 0.5% discount off the winning bid price by 5 P.M. yesterday. The winning bid was not disclosed until late yesterday afternoon, when Deutsche Bank announced that it did not intend to exercise the option.

With the announcement, investors learned that Deutsche bank paid NIS 435 million for its 5% stake in one of Israel's third largest bank.

Ten large foreign banks were offered the right to bid for the shares Monday evening in a competitive process held after the close of trade: Merrill Lynch, Deutsche Bank, Goldman Sachs, J.P. Morgan Chase, BNP, UBS, Paribas, Morgan Stanley, Barclays and HSBC. Five of these - Deutsche Bank, Citibank, UBS, Goldman Sachs and HSBC - submitted offers.

Finance Minister Yuval Steinitz said that the sale represents an achievement for the State of Israel and a reflection of trust in its economy and financial stability. Steinitz said that the state's remaining stake in Israel's commercial banks would be privatized this year. The state currently owns about 10% of Leumi Bank's shares, and after the current deal, about 20% of Bank Discount shares. As part of the deal, the state has undertaken not to privatize any additional Discount shares for the next 90 days.

Deutsche Bank's shares were immediately offered for redistribution to investors yesterday at a discount of up to 2.5% off market price. At NIS 8.87 - NIS 9 per share, there appeared to be no lack of willing investors, including all the large Israeli institutional investors as well as a number of foreign ones. Deutsche Bank's chief executive Boaz Shwartz solicited a sale of part of the bundle of shares to the Delek Group. Delek is said to be weighing the offer, but is limited to acquiring a maximum 1% share in Discount by the Supervisor of Banks. Rony Hizkiyahu has prohibited the Delek Group from owning a stake of more than 5% in any bank in Israel.

The sale coincides with Discount Bank's pending rights issue valued at some NIS 400 million, in which the treasury has no plans to participate. As a result, the rights issue will further dilute the stake owned by the state.

Discount Bank's controlling shareholders the Bronfman-Schron group, who own a 26% stake in the bank, had an option to acquire the state's shares. The option expired at the end of 2008 without being exercised.

The state has been gradually divesting of its stake in Bank Discount. With the sale of the block representing 8.33% of the bank's shares, the treasury will remain with a 16.67% holding. Under a shareholders' voting rights agreement that is set to expire in February of this year, so long as the state treasury owns more than 10% of Bank Discount shares its rights are represented by five board members, and the Bronfman-Schron Group by no more than eight board members. Once the state's stake drops below 10% of the bank's shares it will be entitled to be represented by two board members. Under the agreement, the state is required to support board member candidates proposed by the Bronfman-Schron group.

Discount Bank's chairman Joseph Bachar welcomed the government's decision to privatize its stake in the bank. Since the bank's shares are owned by a controlling core, its management will remain unaffected by the move, Bachar said. He added that the timing of decision is appropriate in light of the rising markets. Bachar said he had not been aware in advance of the sale of the state's stake.

The privatization of state-owned bank shares, and the best way to do so, has been the subject of heated debate in the past. Asked whether he thinks that sale of the shares on the stock market, or through sale of the controlling stake, is the preferable path to privatization, Bachar said: "I was unable to say unequivocally at the time that sale of the controlling stake is the preferable method either. The state will be facing a decision about Bank Leumi. The state is left with 10% of the shares. It's very difficult to consolidate a controlling share with 10%, and I don't see the state buying more shares."

The state, he says, will soon be faced with the decision of whether to grant the controlling holding to Eliahu, who owns another 10% of the bank's shares.