The Long Road to El Al's Privatization

As of today, shares in the national airline are for sale on the Tel Aviv Stock Exchange following Tuesday's initial public offering. The state had hoped to sell more of its holdings in the company, but investors were in no hurry to respond: Only 15 percent of El Al shares and options were sold.

Haaretz
Haaretz

As of today, shares in the national airline are for sale on the Tel Aviv Stock Exchange following Tuesday's initial public offering. The state had hoped to sell more of its holdings (up to 50 percent) in the company, but investors were in no hurry to respond: Only 15 percent of El Al shares and options were sold, leaving the state with 85 percent of the airline.

The El Al offering has been defined in government circles as privatization, but the sales mechanism was only a first step that may ultimately lead to El Al's becoming a publicly-held private company. El Al, therefore, remains under government control, something that will make it difficult for the company to restructure and become efficient. The possibility that the company will operate on Saturdays, and improve business as a result, also appears distant. The IPO, the low price for which it was paid, a write-off of the company's enormous debt, and the government's tremendous efforts just to get to an IPO not only send a message of determination, which is very important for the privatization process, but also demonstrate a strong desire to sell off the company at any price.

El Al's shares were offered in five different variations, and investors chose the alternative setting a minimal price for the company at $55 million. That is a discomforting price. In effect, El Al was sold at a price equivalent to half the price of a Boeing 777 passenger plane, and El Al owns five of those plus another 25 other planes. But the price of the company was set by the ratio of its debts to assets and its ability to generate future profits. Since El Al is carrying huge debts and given the depression in the global aviation industry, it is difficult to expect profitability in the near future. Therefore, despite criticism of the low price, that is a marginal issue.

Today marks a new start for El Al. On the one hand, it is no longer under full government control, and on the other, the government still controls it. The state will remain the airline's main shareholder until the end of 2004, according to an agreement with Bank Hapoalim, the company's main creditor. As long as investors in the public markets do not organize and try to win control over the company, it is difficult to expect a change in its business. The treasury might declare that it will not interfere with private investors or strategic groups organizing to replace the state and take over management, but the possibility exists that the investors will not succeed. In that case, the government will be drawn back into the decision-making mechanisms at El Al, something it wants to avoid.

There is one strategic investor known to have acquired shares in the IPO, the Borovich family, which owns controlling interest in Arkia. The decision as to whether the family, and others, acquired shares to fulfill their options and take over the company will be affected by the enormous debt load of the company, the state of the global travel industry, and the extent at which El Al workers cooperate in restructuring the company. The range of possible scenarios is large and covers the possibility that a controlling interest indeed will take over the company and its management all the way to a re-nationalization of the company in the event that it collapses.

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