This past Sunday Tel Aviv District Court Judge Eitan Orenstin gave IDB Development Corporation 70 days to sell half its 55% stake in Clal Insurance Enterprises Holdings. The proceeds are meant to pay down part of the NIS 8 billion owed to IDB Development’s creditors.
Controlling shareholder Nochi Dankner and his partner, the Argentine investor Eduardo Elsztain, insist that they will be able to bring in an outsider willing to buy half of IDB’s stake in insurer. Based on its Tel Aviv Stock Exchange market capitalization, Clal Insurance is currently worth around NIS 3.4 billion, but Dankner and Elsztain think they can sell their stake at a company-wide valuation of at least NIS 4 billion.
This isn’t the first time Dankner has tried finding a buyer for Clal Insurance. Back in March 2007 he put the company on the block with an asking price of $2 billion, a 50% premium over its market value of about about $1.3 billion at the time. One of those expressing interest was Motti Zisser, the real estate entrepreneur.
“Insurance companies like Clal interest us in the group, particularly for our ability to operate them in the emerging markets where we do business,” Zisser told TheMarker back then. “Clal Insurance is one of the companies we’ve considered.” Two weeks later the financial newspaper Globes reported that Ilan Ben-Dov’s Tao Tsuot was in talks over buying Clal Insurance and that the asking price remained $2 billion.
Neither deal went through. In any case, neither Zisser nor Ben-Dov are potential buyers any longer as they are both in varying stages of debt restructuring over the hundreds of millions of shekels each of them owes to their creditors.
The short timeframe imposed by the court this week and the price tag put on the company create a challenging situation for the sellers.
“Two months isn’t enough time to close a deal,” explains Alon Glazer, vice-president in charge of research at Leader Capital Markets. “It’s enough time for negotiations, but a buyer wanting to perform a due diligence on the company will need more time. And that’s before taking into account the regulatory checks and approvals needed by anyone buying control of an insurance company.”
Glazer, nevertheless, sees the urgent sale of Clal Insurance as a positive move. “The process should be beneficial to the company,” he says. “Clal Insurance needed to be sold in any case [following new regulations barring cross-ownership of financial and non-financial companies]. Being sold quickly will benefit Clal, and it should actually help the stock price.”
At the beginning of the year, Clal Insurance was greeted with the unfortunate news that it has dropped from second to thirdplace as measured by insurance premiums collected and profitability − not just in market value which already occurred earlier. Moving up into second place was Harel Insurance Investments & Financial Services, which is controlled by Yair Hamburger.
Izzy Cohen, who assumed the position of CEO of Clal Insurance four months ago, has since set out on an aggressive reorganization of the company that has cut staff by 200, including more than 13 senior executive. They were replaced by a handful of managers from Migdal Insurance & Financial Holdings who followed Cohen to Clal Insurance. Cohen also divested money losing operations, including its mutual funds and portfolio management divisions and Titanium Asset Management to Clal Finance. He also sold off the U.S. subsidiary Guard Financial Group and UK-based Broadgate Underwriting.
Now it looked like that all Cohen had left to do now was to focus on the insurer’s core operations. But talk about a sale has renewed the sense of upheaval that the company had hoped was a thing of the past. Meanwhile, the list of potential buyers is very short.
Purchasing half of IDB Development’s share in Clal Insurance, in other words a 27% equity stake, will entail an outlay of NIS 1 billion, including more than NIS 700 million in cash. If we add the conditions set by the conclusions from the business concentration committee requiring ownership of financial and non-financial companies to be separated, the buyer will almost certainly need to be from abroad.
THe Israeli insurance market has grown rapidly in recent years. A conference of Israeli insurance companies a month ago at Tel Aviv’s Hilton hotel was attended by the top brass of the global insurance industry − a vote of confidence of sorts for the local market. So it’s not inconceivable that we’ll see the European private equity firm Permira once again showing interest in Clal Insurance.
The question of valuation
Dankner and Elsztain’s insistence that they can sell their share in the company at a NIS 4 billion valuation, a considerable premium on Clal’s NIS 3.4 billion market valuation, raises serious questions.
“In terms of value, all kinds of numbers have been tossed around, including a price of up to NIS 4.5 billion,” says one market analyst, who asked not to be identified. “While such a price isn’t totally unrealistic, it’s hard for me to see how anyone buying at such a price will show any profit. On the one hand, Clal Insurance operates in a very competitive and regulated environment. There are several future regulatory measures that it’s still unclear when they will take effect.
Among them as the Solvency II directives on risk management practices and implementing the new IFRS Phase II accounting standards, which will change the financial reports. On the other hand, the company has a “well-oiled” elementary insurance business and is “generally better” than competitors, the analyst says.
“Clal Insurance is currently one the more attractive companies in the market,” according to Glazer. “The company cashed in most of its problematic holdings overseas. It must be remembered that finance is a local business: It would have been very hard to buy Clal Insurance with Guard, Broadgate and Titanium. The decision by (previous CEO) Shai Talmon and Izzy Cohen not to be there was correct.
Glazer notes that there have been “ dramatic changes” in the long-term savings market, which includes life insurance. The decision by Insurance Commissioner Oded Sarig to bar sales of managers’ insurance with guaranteed payouts has caused the growth in life insurance to slow, he says. Clal doesn’t depend entirely on life insurance and has a strong footing in elementary insurance, as well as pensions and health insurance.
“Its diversification, like that of Harel, spreads out risk better than companies focused exclusively on long-term savings,” Glazer says. Glazer gave Clal Insurance a target price of NIS 80 a share, a 30% premium its NIS 61.05 closing on Thursday. That equals a market cap, incidentally, of NIS 4.4 billion.
“This is a company winding down its streamlining measures,” adds Glazer. “Cohen took advantage of his assuming the position four months ago, cutting losing operations, focusing on insurance activity, and reducing staff - and he’s apparently staying put.”