Nearly three quarters of a century after it was formed as a workers cooperative, Dan Public Transportation is about to come under control of a private investor group that includes a giant U.S. investment fund.
Dan demutualized in 2002 under government orders, but it still counts 1,078 shareholders who were once members of the Dan cooperative. Meanwhile, it has expanded from its original business as a monopoly provider of bus service in the greater Tel Aviv area – a little brother to the more famous Egged cooperative – into real estate and even high technology.
But Dan’s core business remains providing bus service in the Gush Dan region. There, it’s socialist roots continue to weigh heavily on the company: Its members are growing old, with an average age of 55, and a lot of them have moved on to desk jobs at headquarters even as the company struggles with a shortage of drivers.
Dan’s new owners aim to complete its transition into a profitable business primed to cope with the vast changes in public transportation brought about by shared driving and “smart” transportation.
The group that won competitive bidding to buy control of Dan is led by the investment bank Value Base and the newly formed Europe Israel Fund. They have agreed to buy 40% stake in Dan for 500 million shekels ($142 million) in a deal that values Dan at 1.265 billion shekels.
Value Base in controlled 50-50 by Ido Neuberger and Victor Shamrich, the company’s founders and veterans of the Israeli financial markets; real estate entrepreneur Natan Hetz; Dori Wertheim, a heir to the Coca-Cola Israel fortune; and the investment house Meitav Dash.
Europe Israel has its origins in the public sector. It is managed by Shimon Ben Hamo, a former CEO of the government water company Mekorot, and Bari Bar-Zion, a former Israel Broadcasting Authority executive.
In addition to the 1,078 shareholders, 10% of Dan is owned by Pinchas Rotenberg. He acquired his stake when Dan became a corporation in 2007 in what critics said at the time was a deal aimed at circumventing a government order for Dan to sell a stake in the company, in either a public offering or to a strategic investors.
In fact, Rotenberg was closely connected to the company as a representative of Man, a company that has sold buses to Dan. Value Base and Europe Israel plan to sell Rotenberg 5% of the shares they are buying and negotiated a joint control arrangement with him before the final transaction is set to Dan’s board for approval.
The two partners are putting up very little capital of their own: They have lined up 480 million shekels in capital from a group of Israeli institutional and private investors, and an as yet unnamed American fund that will be contributing 100 million of the total.
The goal is to beef up Dan’s business and get it ready for an initial public offering in two to three years’ time.
They have their work cut out for them. The core of Dan’s operations are 1,250 buses operating 98 lines in the greater Tel Aviv area (Gush Dan). Dan was once a monopoly in the region but reforms in public transportation have seen it lose part of its traditional business.
On the other hand, it has been able to enter new markets, too. Four years ago it won a tender to operate bus routes in the northern Negev and in January 2016 won another to operate the urban routes in Be’er Sheva.
The Negev operation, which counts 553 businesses and 150 employees, is well-run, but the Gush Dan business is weighed down by Dan’s socialist antecedents. The company has been offering incentives for members to retire early, but as of today some 400 of its 2,600 employees are ex-cooperative members and, as noted, their average age is 55.
Few of them want to drive buses anymore, so that three quarters of them are working at a heavily overstaffed headquarters. Meanwhile, like other public transportation operators, Dan is coping with a shortage of drivers. The new owners are expected to try and coax more of the old members into retiring early or going back to driving.
On the other hand, Dan has been aggressive is readying itself for the revolution in transportation. Its fleet of 20 electric buses is due to grow five-fold in the next few years and it has bought a 16% stake in the Israeli startup Electreon Wireless, which has developed a wireless energy-transfer technology for powering electric buses.
Dan is also a partner with another Israeli startup, Via, for a ride-sharing service in Tel Aviv. Called Bubble, the pilot program operates a fleet of minivans that pick up riders ordering by an app.
Dan also operates the fast-lane service at the entrance to Tel Aviv from Route 1 and is competing for other franchises like it. It’s also bidding to operates the Green and Purple lines for the Tel Aviv Light Rail.
Dan has even entered infrastructure investment, buying the Sorek A desalination plant at the end of 2018 for 350 million shekels. Unfortunately, the reason why Dan is entering the sector is to capture higher rates of return than it could get elsewhere to cover obligations to former members.
Under an agreement from 2002 aimed at cutting costs, Dan members agreed to give up close to half their salaries in exchange for the company investing 240 million shekels in a deposit that paid 7.5% annual interest. At the time, the rate was considered reasonable but in an era of near-zero rates, Dan is struggling to achieve returns that can match its commitments.
Meanwhile, Dan in recent years has undertaken real estate development of obsolete facilities, like bus garages, in central city locations. Its biggest project is a residential tower on Tel Aviv’s Arlozorov Street now in development and a 30-dunam site in the city’s Shikun Dan neighborhood zoned for 800 apartments.
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