The Bottom Line / From all of us, on your wedding
Before the ink on the sale of Israel Discount Bank has had a chance to dry, there are already murmurings that Finance Minister Benjamin Netanyahu sold off state assets on the cheap, making the tycoon who bought them all the richer.
Before the ink on the sale of Israel Discount Bank has had a chance to dry, there are already murmurings that Finance Minister Benjamin Netanyahu sold off state assets on the cheap, making the tycoon who bought them all the richer. That will always be the fate of whoever sells state assets in our Bargain Basement Land. Forget the important figures, or the circumstances or even the state of the bank. That's not the issue, they'll say; the point is that yet again the rich are getting richer.
They even said that back when Bank Hapoalim was sold in 1997 for 126 percent of its shareholders equity, when Netanyahu was prime minister. So they'll argue it's even more true today, with Discount being sold for 80 percent of shareholders equity. But is it really only 80 percent as the treasury says?
Discount Bank's equity stands at NIS 6.2 billion. A 26 percent stake is therefore worth NIS 1.61 billion, but Netanyahu is selling it for only NIS 1.3 billion. That appears to be 80 percent, but only ostensibly.
Apparently Matthew Bronfman will be getting a three-year option on a further 25 percent stake for NIS 1.25 billion. This option is worth a tidy sum of money, because if the bank gets into trouble and he fails to overcome the workers committee, then he may choose not to exercise the option. In addition, the payment is in installments, and that's also a sizable benefit. According to the Black-Scholes calculation, the payment method grants a break of NIS 250,000. In other words, Bronfman will be paying NIS 1.3 billion now and a further NIS 1 billion in three years, a total of NIS 2.3 billion for 51 percent of the bank. This means he's buying the bank according to 73 percent of equity and not 80 percent.
And that's not all. Because Bronfman also gets control of the bank, which means he can appoint its managers, get paid high wages and pull the economic political strings. All this is worth money. So this should be reflected in a modest "control premium" of say 3 percent - so the bottom line is that Bronfman is buying the bank for only 70 percent of its equity, and not 80 percent.
Now that's not saying that the price is too low. It's the right price if you look at the bank's difficult circumstances, its low profitability, its surplus work force (20 percent of its payroll), a militant union and a firmly entrenched collective work agreement that, according to the contract, must stay in force for the next five years. Taking it altogether, the treasury should announce that the bank has been sold for 70 percent of its equity, and not 80 percent.
After the bank shares plummeted in October 1983, Discount effectively passed into state control. It should have been sold off long ago over the past 21 years, but political considerations and impotent governments prevented this. So it would have been wrong to delay the sale yet again and to wait for "better times," because better times make very rare appearances here. And Netanyahu won't be finance minister forever, and someone else may not be as keen to privatize.
There is a great advantage in having Discount in private hands. The owners will manage it better, more efficiently, with more innovation. Workers and the public will both benefit. We see this clearly in recent changes at Hapoalim and Mizrahi.
Matthew Bronfman, Discount's new owner, married this week (for the third time) in the Caribbean. He's bought himself a fine wedding gift. Let's hope he will succeed, both for his sake and ours.