The Losses of Leon Recanati

Nathan Lipson
Nathan Lipson
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Nathan Lipson
Nathan Lipson

It happens every day. A company borrows money from a bank but fails to meet the terms of the loan, and finally, the bank recalls the loan. But these days, with so many companies in breach of the terms of their loans, banks prefer not to resort to that extreme step. That renders what happened to Leon Recanati all the more extraordinary.

About two weeks ago Bank Hapoalim took the unprecedented measure of immediately recalling a NIS 27 million loan to Recanati's company Gmul Investment by helping itself to Gmul's deposits.

Leon Recanati, 60, was born into wealth. The Recanatis were already wealthy when immigrating to Israel from Greece at the start of the previous century. Upon arrival the family struck an alliance with another wealthy family of Greek origin, the Carassos. Together they set up the Discount group, which evolved into Discount Bank and the IDB group. But though they shared ownership equally, the Recanatis ruled the roost.

Their management skills nurtured Discount and IDB while developing other businesses mainly in commercial and cruise shipping, tourism and Swiss banking. The branch of the family managing the joint businesses wasn't Leon's but that of his uncle Raphael and Raphael's son, Oudi.

His noninvolvement in management had its upside. Raphael and Oudi were convicted with others in the "bank shares manipulation" scandal of the early 1980s. Leon wasn't even questioned as a suspect.

In the aftermath of that uproar, Discount Bank and IDB were nationalized. The Recanatis and Carassos bought back the controlling interests in IDB - without the bank - from the state in the early 1990s and later floated them on the stock exchange. For the following decade Raphael ran IDB, then passed the scepter to son Oudi. Leon held an executive position but remained subordinate to his cousins.

With the new millennium, for reasons still unclear, Oudi bowed out of IDB. Leon took over as CEO and chairman. Leon saw Oudi's departure from management as an opportunity to take over the family business. He put together a group headed by himself and Kardan's Yosef Grunfeld to buy the controlling interest from Oudi and the others. But the deal fell through and in May 2003 IDB was ultimately sold to Nochi Dankner.

That development must have been a vast disappointment for Leon. His whole life had been spent in the back seat and now the opportunity to seize the reins had evaded him. With the sale to Dankner, he embarked on a new road. But he lacked the sheer power that had always been the driver of the IDB managers.

For four years after the sale of IDB, Leon's main occupation was an investment fund he founded, Glenrock, which he ran with his wife Shula Recanati and Ziv Kop. He also invested in listed companies including Kamada, Salt Industries and Mivtach Shamir - an investment that turned out to be very wise.

But he stayed hungry. He wanted something of his own and in 2007 found Gmul.

Gmul had been founded in 1950 by Bank Hapoalim, the Histadrut labor federation and pension funds. In 2001, brothers Jules and Eddy Trump (no relation to Donald) bought the company and listed it on the Tel Aviv Stock Exchange. In October 2003 they sold it to Eyal Yona and Amnon Barzilay.

Four years later those two, who hadn't been noted for their talent at management, sold it to Leon after months of negotiations. Leon bought a 73% control stake in the company together with a few minority partners at a company valuation of NIS 600 million, twice its market cap at the time, even though Gmul was a company shot through with flaws.

Gmul had changed form several times under the Trumps and under Yona and Barzilay. When Recanati bought it, Gmul had four main activities: real estate, hotels, investments and automotive (through Metis Capital, which controls Subaru importer Japanauto).

The year under Recanati was Gmul's worst.

Its third-quarter report lists the damage: dropping value of property, wilting value of securities in the company's portfolio, losses on asset sales and rising financing costs.

From January to September 2008, Gmul lost NIS 180 million, far worse than any damage in the past. Its cash-burn rate was something to behold. At the end of 2007 it had NIS 453 million in cash; at the end of September 2008 it had only NIS 127 million.

Worse, it also had towering debts, the greatest threat to the company. Gmul reported debts of NIS 737 million to bondholders and banks, of which NIS 330 million has to be repaid within a year. Much of that debt was created under the former controlling shareholders, by the way.

Will Gmul collapse? It may. But don't single out Leon Recanati for blame. It seems that seeds of destruction were planted by Yona and Barzilay. You can wonder why Recanati agreed to pay a 100% premium, which seemed an odd decision at the time and looks even odder today. A source close to the company says that Yona and Barzilay were willing to shed the company at a far lower price, but others say an intense contest over Gmul had developed and that competing bids weren't much lower.

But Recanati wasn't the only one mulling over these matters. So were his bankers. They'd lent most of the money to buy Gmul and now shares he'd bought for NIS 450 million are worth less than NIS 40 million. More than NIS 400 million vanished in a year.

With a shrunken kitty containing less than NIS 127 million and losses that seemed likely to mount, how is Gmul going to repay NIS 330 million inside a year? That question led its auditors to slap a going-concern warning on its quarterly report, meaning they suspect the company is on its last legs.

One of the bankers was Hapoalim, which had lent NIS 27 million. One of the terms of the loan was that it could be recalled if Gmul's shareholders equity slipped below NIS 250 million.

It has. As the losses march on, Gmul's shareholders equity in fact slipped below NIS 168 million. And at the end of last month, Bank Hapoalim recalled its loan by simply taking the money out of deposits Gmul had made with the bank.

Not surprisingly, Bank Hapoalim's move pushed other banks to take similar steps: Bank Leumi, who finances Gmul's real estate subsidiary, Gmul Nadlan, walked away from the deal and also demanded it will immediately repay a NIS 10 million debt.

Third round with Arison

When a borrower fails to meet the terms of a loan, the operative word is "fails" and it's the bank's right to reclaim its money. Usually they don't resort to recalling loans, if possible, and certainly don't act at such speed.

Will Gmul meet its liabilities? Will Recanati inject capital of his own? Does he have the money? We can't see into his future, but his past is an open book.

The Recanatis were deep into the shipping business through their company OSG. Engaged mainly in bulk shipping, until mid-1997 it also had a cruise business, Celebrity, which swam with the sharks in the Caribbean seas - Ted Arison's Carnival Cruise and Sammy Ofer's Royal Caribbean.

In 1997 the Recanatis decided to sell Celebrity. It was a small company but its addition would have helped either Carnival Cruise or Royal Caribbean in their perennial battle. Finally the Ofers' Royal Caribbean bought it.

The second round between the Arisons and Recanatis was a year later. Arison already owned Bank Hapoalim. One day a relatively businessman came in and asked Hapoalim to sell him its 25% stake in Delek, an investment firm. If Hapoalim would agree, the unknown businessman said, he could pick up another 25% of Delek on the market and nab Delek from under the nose of its controlling shareholder at the time - the Recanati company IDB.

That man was Yitzhak Tshuva and Arison said yes. Tshuva bought the 25%, picked up another 25% and humiliated the Recanatis. IDB never recovered from the blow and when the Recanatis finally sold IDB (which then changed direction under Nochi Dankner), they lost the influence they'd held in Israel for 70 years.

Ted Arison passed away in 1999. Today Bank Hapoalim is controlled by his daughter, Shari Arison. And now the bank has recalled its NIS 27 million loan in another devastating move, 10 years after Hapoalim helped Tshuva skewer the Recanati family.