Clal Insurance is on its way to becoming Israel’s first insurance company without a major controlling shareholder after the Chinese investment firm Macrolink backed out of talks to buy a controlling interest at the last minute on Wednesday.
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Capital Markets Commissioner Dorit Salinger had given Clal's parent company, IDB Holding Corp., an extension until Thursday to sell its 55% controlling stake in Clal.
Clal shares tumbled 9% on the news to a market value of 2.53 billion shekels ($640 million). IDB Development shares dropped by nearly 9%, while its bonds fell 10%, sending their yields soaring to as high as 35%. This is well into junk territory, meaning investors suspect the company is unlikely to pay back bondholders in full, if ever.
Earlier this week, Macrolink Vice President Wu Tao met with Economy Ministry Director General Amit Lang while Lang was in China for an investment conference. Wu told him that due to the unusual requirements set by Israeli regulators, the company was pulling out of the deal. Wu added that Macrolink had been impressed by the Economy Ministry and would look to invest in Israel in the future.
The decision by Macrolink and two other Chinese groups to back out of the Clal deal suggests that the Finance Ministry is unlikely to approve a buyout of competing insurance company Phoenix by the Chinese group Fosun. Fosun Chairman Guo Guangchang is scheduled to meet with Salinger Thursday to explain why he was detained by police last month.
IDB had agreed to sell its 55% stake in Clal four months ago. Under a deal with the Finance Ministry, it would sell 5% of Clal’s shares every month, so the total sell-off would take three and a half years. Shareholders would need Finance Ministry permission to hold more than 5% of the company and permission to become a controlling shareholder before amassing more than 30%.
Meir Slater, head of research at the Bank of Jerusalem, said the sell-off plan was a reason not to touch the stock.
“There’s going to be heavy pressure on the share” every time IDB sells another 5%, he said. Since most Israeli institutional investors already own shares in Clal, new investors will need to be found to meet the ministry’s 5% cap, he added.
The Finance Ministry sees no problem with having Clal’s shares sold on the stock exchange and the company becoming Israel’s first insurer without a single controlling party.
Salinger has noted that there are banks without a controlling shareholder, and that the professional literature doesn’t state whether one control method is better than the other.
“On the one hand there’s a fear of a strong management team, but on the other there are controlling shareholders who have other business interests and therefore aren’t always focused on the [insurance] business,” she said.
This would be bad news for IDB controlling shareholder Eduardo Elzstain.
Elzstain had wanted to keep Clal, but to win the Finance Ministry’s blessing to hold the controlling stake he would have needed to substantially improve IDB’s finances.
IDB had hoped to sell Clal at a 50% premium over its trading price, as Macrolink and the other Chinese groups had offered. As a result, Elzstain will have trouble getting a return on his massive 2-billion-shekel investment in IDB.
To date, Elzstain has lost 1 billion in IDB, at least on paper. Without the potential to profit from a Clal sale, and without the potential to profit from a sale of agrochemical company Adama – formerly Makhteshim Agan – Elzstain will be left with few options to make back his investment.
This also is bad news for IDB’s lenders, including bondholders and banks. The company has 3 billion shekels in debt.