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The First International Bank of Israel (FIBI) and its controlling shareholders, the Safra family, have expressed willingness to buy the state's controlling share in Israel Discount Bank so that it can be merged with FIBI.

Over the past few months, a number of meetings have been held between senior FIBI executives, including chairman Shlomo Piotrkowsky and CEO David Granot, Accountant-General Nir Gilad, and MI Assets and Properties Director-General Itzik Klein to discuss the possibility of the sale. The last meeting was held about a month ago in which attorney Moshe Shahal negotiated between the sides.

Senior financial sector sources said that negotiations are only at the preliminary stage and there are still fundamental problems preventing the deal.

The sources said the key issue is the price at which the state is willing to part with its Discount share. FIBI is willing to pay slightly above Discount's stock market value of $574 million, which is 45 percent below the bank's equity.

Government representatives have said they will not sell at that value, but have yet to name their price. The Finance Ministry believes that Discount Bank's stock market value does not reflect the potential of some its assets, in particular Israel Discount Bank of New York, which is valued at $700-800 million.

In preliminary talks, the sides discussed the state's gradual withdrawal from its Discount holdings, however, the Bank of Israel has yet to express its opinion on that type of sale. In the past, the central bank has been opposed to a merger between a private bank and a state out of concern that the state would have to make up the difference in the case of losses. Government representatives have clarified in the talks that their main goal is to eliminate the state's holding in Discount Bank without having to pump equity into the bank, even if there is a gradual withdrawal from its holdings.

The situation of both FIBI and Discount Bank has worsened over the past two years, and in order to complete a merger, heavy investment is required to finance voluntary retirement of surplus employees. The heads of First International have expressed willingness to put equity into the bank to finance the deal, but have clarified that it is conditional on the acceptance of their price offer for Discount.