Bank Hapoalim and Bank Leumi are competing to buy IDB (Israel Discount Bank) New York as parent Israel Discount Bank plans to sell assets to solve its capital problems. The initiative to sell the New York subsidiary was born of the state's refusal to allow the bank to issue shares, which would have diluted the state's stake to below 50 percent and made future privatization difficult. Lack of treasury cooperation pushed Discount Bank to opt for the sale of its New York chapter for lack of choice. It looks like the Bank of Israel also prefers Discount Bank solve its capital problems once and for all with the sale of a valuable asset rather than through a small public offering or the sale of a marginal asset that would provide only a few months of breathing space.
The deal being discussed is in the $600-800 million range, making this the second largest bank privatization since the Bank Hapoalim deal in 1997 in which the state pocketed a cool $1.4 billion. The fact that Discount New York is a wholly-owned subsidiary of a state-controlled bank leaves no room for doubt: This is privatization. And if this is privatization, there are some questions the state must answer before permitting allowing Discount chair Arie Mientkavich to close the deal.
The sale process: What process will allow the state maximum consideration? By negotiating with two banks headquartered less than 300 meters from the Discount Bank head office, or through an orderly investment bank beauty pageant that would present the bride to other potential investors.
Buyer's identity: If this is privatization, does selling Discount New York to Bank Leumi - also state-controlled - constitute privatization? Not really. It is true state-controlled banks must be given equal opportunity to compete with privately-held banks, but in such a circular transaction, Leumi should be prevented from growing overnight to proportions that will be even more difficult to privatize. It is hard enough to find buyers who can purchase a Leumi-sized bank.
Use of funds: Discount Bank underwent shocks in recent years that brought it to the point of selling assets. There is no guarantee that transferring the consideration for the sale to the bank will enable it to deal with its serious problems of veteran employees and problematic credit. It is therefore desirable to leave the consideration in the bank's hands but require it act according to a memorandum of understanding with the supervisor of banks (as is accepted practice in the U.S. banking sector) that will enable the bank's rehabilitation. Such a move would enable the bank's management to prevent employees' eyes growing big at the sight of any profits the bank posts, and maintain the bank's attractiveness even after it bids farewell to its most important and profitable asset. Anyone interested in buying Discount Bank in the past was primarily drawn to that quality New York holding.
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