The Shakshuka System: A View From 2009

Did the Ofers fleece the state? Did the state fry the Ofers? You're in for a surprise

Miki Rosenthal couldn't get any major television channel to broadcast his movie "Shitat Hashakshuka" - the Shakshuka System - about the relations between wealth and government, specifically, between the Ofer family and the leadership. If anything, however, the Ofers' battle against the film made it symbolic of the The Rich Families' clout in the media world.

The movie's name was taken from a remark the family's lawyer Ram Caspi made during negotiations by Ofer family company Israel Corporation to buy the state's stake in Zim.

Caspi suggested to the state's representatives that the deal be conducted at the average of all the prices suggested during the talks: Like the famous tomato-and-egg dish, whisk all the components together and fry.

A few months after the sale, Zim was appraised at three, maybe four times the price at which the state sold its interest, making the shipping company's privatization a symbol of how the state always loses its pants when it deals with the powerful families.

The "shakshuka" deal was five years ago last week. Now, it's time for another look at that notorious event of privatization. We might also suggest that Sammy Ofer offer to finance a sequel to The Shakshuka System, to shatter some misconceptions about privatization in Israel.

In a few weeks, Israel Corporation will be publishing its financial report for 2008, showing just how much trouble it and Zim are in, with colossal losses and billions in liabilities.

In late 2007, when Rosenthal was putting the final touches on his movie, Zim was estimated to be worth more than $1 billion, quadruple the value at which Israel Corporation bought the controlling interest. Today Zim is estimated to be worth negative $500 million and the parent company has had to inject hundreds of millions of dollars.

How did Zim lose $1.5 billion in value in just over a year? The same way its value jumped in the preceding two years - vagaries of its industry.

From 2005 to 2007 the shipping industry boomed and haulage prices rose to unprecedented heights. The price of container shipping increased by hundreds of percent.

Then it crashed. As 2008 ended, the price of shipping had fallen by more than 90%. The sector that had provided a happy harbor for billionaires became a hell of titanic loans fueling ships bereft of cargo to haul.

Who did whom? Did the Ofers diddle the state? Did the state stick it to the Ofers? As usual, the real answer lies somewhere else entirely.

The state didn't fleece the Ofers: It really did sell Zim for less than its value at the time. Not by much: The state didn't sell it for a fifth of its price, as some claimed, but it did sell Zim at a discount of tens of percent. Why? Mainly because the Ofers already owned 50% of the thing and there was little interest in the state's stake.

But somebody did get screwed: the Ofers, and a party not often mentioned and certainly not heard - the minority shareholders of Israel Corporation. Meaning, the general public. You.

A year after Israel Corporation took control of Zim, it pushed through a giant insider transaction under which Sammy Ofer sold or leased to Zim $820 million worth of ships. When objections were raised by public shareholders, company representatives said it was a terrific deal for them too.

Up to a year ago, the deal looked good, not because the ships were an especially good deal, but because the cargo business was booming, and when the tide rises, so do all ships.

But when the tide turned and the crash came, Zim turned into the iceberg into which Israel Corporation is colliding. Its market has imploded and it's agreed to buy $3 billion worth of ships, some as part of that insider deal and the rest on the open market. In any case, the Ofers, who failed to foresee the magnitude of the crisis, are losing tons of money.

The Zim story repeats itself with most other instances of privatization. When a government company is sold during a bust, the buyers look like geniuses and the state looks stupid. When it's sold during a boom, the state looks smart and the buyers look like dolts.

But the truth is, neither side has the slightest idea how the transaction will look down the line.

Three years ago Israel's financial circles stood slack-jawed as the private equity fund Cerberus bought 10% of Bank Leumi for NIS 2.5 billion, well above the stake's value on the market and more than anybody had ever paid for a piece of an Israeli bank.

On what was that price based? In retrospect - on nothing. On the elation characterizing the financial markets those days. Today those shares are worth a billion shekels on the market and Cerberus is out NIS 1.5 billion on its investment. Itself struggling, the fund is trying to dump the shares.

Three years ago they said Matthew Bronfman was buying Discount Bank for peanuts, and that Benjamin Netanyahu, finance minister at the time, sold it too cheaply. Today the bank is trading at half the share price Bronfman paid.

What does the Discount deal say about the state, or Bronfman? Nothing. The price at the time seemed good for him; a year later, as the financial markets boomed, it seemed he'd made the deal of his life. Now, as the markets writhe in crisis, the value of banks has collapsed.

The sour consensus that the state always sells its companies too cheaply is balderdash. Since it stopped selling its companies through closed tenders, it's generally gotten fair prices. Next week, barring dramatic developments that require our urgent attention, we will address the Second Myth of Privatization. You may be in for a surprise. We may conclude that price is the least important aspect of the deal.