Analysis

Hapoalim’s Arison Favors Spinning Off Isracard Unit as Stock Dividend

Option would solve problem she faces selling half her Hapoalim stake and earn her richer return on investment

Bank Hapoalim controlling shareholder Shari Arison.
Nir Keidar

Bank Hapoalim announced two and a half weeks ago that it was beginning to explore options for selling off its Isracard credit card unit, as it is under government orders to do sometime in the next three to four years.

In the April 6 announcement the bank said it was exploring three options: an initial public offering in Isracard; selling it to an investor or group of investors; or distributing its stock as a dividend to Hapoalim shareholders. It looks like the bank’s controlling shareholder, Shari Arison, likes that last option best.

Arison has been seeking to sell about half of her 20.5% stake in the bank, but she hasn’t been able to find a buyer. She initially retained the investment bank Rothschild to find one and when it failed, she asked Bank of America Merrill Lynch several months ago to give it a try.

There are at least three reasons why no one has emerged as a buyer for the Hapoalim stake.

One is that Arison is intent on getting a high valuation for her shares. Sources talk about valuing the 10% block she wants to sell at 3.4 billion shekels ($930 million). That’s a considerable premium over the bank’s current market capitalization, which values the stake at just over 3 billion shekels, or about 0.88 times shareholders’ equity.

The other is the sheer size and status of Hapoalim as Israel’s largest lender. Israel’s banking industry contends with an increasingly tough regulatory environment – the government-ordered sale of the two biggest banks’ credit card subsidiaries is a case in point – and Hapoalim is also in the midst of a U.S. probe into how it helped American clients avoid U.S. taxes.

In addition, there are a lot of financial-service companies for sale, or will be soon, putting supply out of sync with demand. They include Isracard and Bank Leumi’s Leumicard unit, as well as the investment houses Psagot and Meitav Dash and the insurance companies Phoenix and Clal and two smaller banks, Dexia and Union Bank of Israel.

Spinning off Isracard as a stock dividend would solve a lot of Arison’s problems in one fell swoop.

It would give her a 20% stake in Isracard, making her both controlling shareholder of the bank and the credit card business. If Isracard (merged with its sister company American Express Israel) is worth what it is listed at on Hapoalim’s books, the shares distributed as a dividend would amount to 3 billion shekels. Of that, 600 million would accrue to Arison – an amount equal to three years’ worth of cash dividends paid by the bank.

Arison would then be in a position to sell a controlling stake not just in a bank but in a bank and Israel’s biggest credit issuers, and enjoy the price premium that a controlling stake ordinarily awards the seller.

The other two options of selling Isracard on the stock market or to an investor would mean sharing the premium with the rest of Hapoalim’s shareholders.

Moreover, shorn of Isracard the market value of Arison’s Hapoalim stake would be several hundred million shekels less than it is now, making it a more digestible purchase for a potential buyer.

That said, the road to a share dividend is not without any bumps. Arison will have to get approval from minority shareholders to go ahead with a share dividend.

The fact that Hapoalim issued a formal statement on its Isracard plans may be the first step in a strategy of winning over shareholders to the idea. (Leumi, which is also starting the sale process for Leumicard, hasn’t issued any statement on the matter.)

There is a good chance that the big financial institutions which hold the bulk of Hapoalim stock will support Arison.

But it’s not so self-evident that regulators will allow her to hold controlling stakes in two major financial-services companies for very long, if at all. The goal of the law forcing them to spin off the units was to increase competition, a goal that would be undermined by a single controlling shareholder.

Finally, the Bank of Israel may not take kindly to the idea of Hapoalim reducing its capital by 3 billion shekels by divesting Isracard as a dividend rather than selling it for cash.