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At 2 A.M. yesterday the State of Israel announced that the winning bid for its 9.99 percent stake in Bank Leumi belonged to the consortium of New York-based hedge funds Cerberus Global Investments and Gabriel Capital.

Cerberus-Gabriel, which manages investments totaling some $16 billion, bid NIS 2.474 billion, or NIS 17.50 per share, which reflected a 16-percent premium over Leumi's closing share price on Monday and a whopping 54 percent above Leumi's shareholders equity.

Accompanying the deal is an option to buy another 10.01-percent stake in Leumi, although unlike the purchase of the 9.99-percent interest, exercise of this option is contingent on a slew of regulatory approvals. Altogether, Cerberus-Gabriel will be paying NIS 4.62 billion if it decides to exercise the option.

Fears that Leumi would wind up in the hands of a financial investor that would treat Israel's second-biggest bank as a cash cow to be milked and dumped have been allayed, since the Cerberus-Gabriel group's interest in Leumi is strategic: It actually wants to keep and run the bank. It is fully expected to exercise its option to wind up with a 20-percent interest in the bank, assuming it receives the requisite regulatory nods.

Accountant General Yaron Zelekha said this was the first time in Israel that financial and strategic investors competed in the same tender. The participation of the financial investors prompted the strategic investors to raise their offers, he said.

The sealed bids were opened after midnight. The treasury reported that seven groups entered bids for the state's share, including two foreign groups. Four of the groups were strategic and three were financial.

The also-rans

The second-highest bid was that of Nochi Dankner's IDB group, which offered NIS 16.90 per share compared with the winning bid of NIS 17.50. Dankner had apparently teamed up with Merrill Lynch, which decided to compete as a strategic investor and also offered a price well above Leumi's market cap.

Diamond baron Lev Leviev, who among other things owns Africa Israel, also threw his hat into the ring. Though he lost the race, sources reported yesterday that he now wants to team up with the Cerberus-Gabriel consortium.

Another party who wants to get into the controlling group and says so openly is banker-insurer Shlomo Eliahu, who had been expected to put in a bid.

Yesterday Eliahu told Haaretz that he is the ideal partner for the American hedge funds because he already owns a 10-percent interest in Bank Leumi and has regulatory permission to own another bank (Union Bank - Bank Igud). Eliahu says this would help the foreign stakeholders shorten the process of buying the controlling interest in Leumi.

The three potential financial investors were UBS, Citigroup and Deutsche Bank.

The kitty is smiling

The outcome of the tender was a stunning success for the treasury team headed by Accountant General Zelekha and his deputy Yuval Bronstein, and for the state kitty. Rumors had been circulating that potential investors were balking because the treasury team stood tough and refused to sweeten the terms of the deal. Late yesterday the treasury officials rebutted that the whispers were a smoke screen and that plenty of bidders were slavering to buy the bank. They were right, it seems.

The Finance Ministry has said proceeds of the privatization will go to paying off Israel's high national debt.

Cerberus and Gabriel are both hedge funds. Cerberus has $16 billion worth of assets under management and has a special fondness for putting money into banks. Its representatives visited Israel several times ahead of the tender and managed to cover their tracks by hinting that they weren't really interested in buying the bank.

The Cerberus-Gabriel group was led by Gabriel president J. Ezra Merkin, assisted by CPA Avi Berger, the general manager of the Kesselman & Kesselman accounting firm, and attorney Yaakov Ne'eman.

Stephen Feinberg, 45, a Jew from New York and the wunderkind of the hedge funds world who, within 20 years, turned a $10 million fund into a holding company whose companies have combined sales of $30 billion a year, is the founder and manager of Cerberus Global Investment. Cerberus is chaired by former U.S. vice president Dan Quayle.

Changes at the top?

Industry observers expect that Leumi chairman Eitan Raff, who is widely regarded as a political appointee, will be replaced by someone from the winning group despite denials yesterday from Cerberus-Gabriel sources that they have no "concrete intentions" to do so.

"As soon as the new owners receive control [of the bank], they will make their decisions and I will respect whatever they decide," Raff said yesterday in response to a question about his career plans.