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Zadik Bino and Bank Leumi, the controlling shareholders in Paz, are in talks to sell a stake in the company, which won the Ashdod oil refinery tender, to The Israel Corporation, diluting their own holdings. One plan involves selling 33 percent of Paz, reducing Leumi's holding from 19 to 13 percent.

The Israel Corporation board approved negotiations to go into partnership in Paz, after the company placed the winning bid for the Ashdod refinery facility. Most financial market sources believe The Israel Corporation will pay $300 million for a 33-percent 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.

Paz controlling shareholder Zadik 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 percent 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 percent of Israel Corp's 33-percent piece of the Paz pie. Banking regulations do not allow banks to own more than 20 percent 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 percent, 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 percent of Paz directly and about 6 percent via The Israel Corporation, the 6 percent will not be affected by banking regulations that would force it to sell off holdings.