The Bottom Line / It's all in the. Timing
The Finance Ministry plans to issue 6 percent of Bank Leumi on the Tel Aviv Stock Exchange in the next month as part of moves to privatize the bank via the exchange. The plan is based on the Marani Committee recommendations which determined a mechanism for putting a controlling bloc in public hands.
The Finance Ministry plans to issue 6 percent of Bank Leumi on the Tel Aviv Stock Exchange in the next month as part of moves to privatize the bank via the exchange. The plan is based on the Marani Committee recommendations which determined a mechanism for putting a controlling bloc in public hands - a sale procedure that has not been tried in Israel and involves a complicated process of legislation.
The decision to sell 6 percent of the bank's equity before completing the legislative process is intended to signal the government's serious intention of privatizing the bank this way. The problem is - the timing could not be worse, and timing plays a crucial role in almost any privatization or share offering.
The price always seems too low, the question is always asked if the state is giving away its assets, and the officials involved are always criticized. But in Bank Leumi's case, it looks as if the skepticism is justified since legislation is not complete and Bank Leumi is trading below sea level. It is therefore unclear why selling the share bloc is so urgent when the timing is so problematic.
Bank Leumi yesterday traded at a NIS 7.9 billion market cap, 40 percent below its own equity of NIS 13.2 billion. Looking at the bank's share price from recent years reveals that this is its lowest point.
The sharp drop in value certainly has several very real reasons - the recession, large borrowers' financial difficulties, provisions for doubtful debt, decreased profitability, the international downgrading of the major banks. All these factors helped the capital market decide on the bank's particularly low valuation and its lack of confidence that shareholders equity reflects its value.
The question now is what message the state is sending investors by putting 6 percent of the bank's equity on the block under these conditions. Does the state agree that Leumi's market capitalization reflects its real value - in other words that its equity is completely detached from reality?
Does the state think the current value may even be too high so it wants to dump some shares before the value spiral continues? Does the state just want to broadcast determination about its privatization plans by selling the bloc at any price?
In addition to considering market conditions, there is another rationale for delaying the offering. The Bank of Israel's banking supervision division has not yet determined criteria for approving the acquisition of control on the exchange floor. The controlling shareholders of private banks such as Hapoalim, United Mizrahi and Union, had to meet strict criteria, providing twice the purchase price in equity. But this criterion will not apply to potential Leumi investors.
It is also possible that publicly traded shares in the bank will come into the hands of entities barred from taking control. The sale of 6 percent of equity at this time, increases that concern. It therefore seems that postponing the offering until the price picks up and the new system has been completely laid out, wouldn't hurt at all.