Cracks in the Smooth Surface of Caesarstone

The phenomenal success of Sdot Yam's quartz countertop firm has sparked a power struggle at the kibbutz over control of its cash cow.

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Kibbutz Sdot Yam has experienced something of an economic miracle in recent years. The value of its 51% stake in Caesarstone, which for years provided just a small profit, has ballooned to an incredible $875 million – impressive considering that just over a year ago the kibbutz was entertaining an offer to sell its entire holdings at an overall company value of $600 million. Even more striking is the fact that the stake now represents an asset worth $2.2 million to each of its 380 members.

Sdot Yam, however, remains a communal kibbutz so its members don’t personally own any of the shares and can’t cash in. So in the shadow of the apparently dizzying success story, this somewhat frustrating limitation has laid the foundations for a power struggle on the kibbutz.

The first round took place in October 2012 when the general meeting of members voted to implement a previous decision preventing Maxim Ohana from continuing to serve simultaneously as chairman of Caesarstone and head of the kibbutz financial committee. Amir Rotem, a former CEO of Caesarstone, was then chosen to head the financial committee.

The latest and most critical round was meant to take place this week, with the general meeting set to vote on ousting Ohana and Boaz Shani from the board, replacing them with Rotem and Ram Belinkov. The meeting, however, was postponed indefinitely after the company’s board met last Thursday and lent Ohana its full support. But tensions haven’t died down and another frontal confrontation is apparently only a matter of time.

The princes vs. Ohana

It seems that along the way at least some of the combatants have overlooked the fact that since March 2012, investors holding 48% of Caesarstone’s shares aren’t kibbutzniks and they expect the company to follow corporate governance rules. These rules, for example, require a public company to examine whether having Caesarstone employees sit on Sdot Yam’s financial committee gives the committee the opportunity to directly influence company management and circumvent the company’s board.

The argument is ostensibly about where the kibbutz is headed and how it manages its main asset, but behind any principle-driven ideological debate lies an interpersonal conflict. On one side stands a group dubbed “the princes” – scions of the kibbutz’s founding families. Led by Rotem, it includes other members of the Rotem and Amir families, the dominant clans in the kibbutz in recent decades.

This group was seemingly displaced from the center of power when Ariel Halperin’s Tene Investment Fund became an investor in Caesarstone in July 2006 following a battle led by Rotem for the company’s purchase of its Australian distributor. The deal kicked off the first stage of Caesarstone’s new strategy which was followed by the acquisition of distribution companies in the United States and Canada in 2010 and 2011 for a total of $37 million. The move boosted sales and profit margins, providing the basis for the company’s surge in value in the past two years.

One the other side is a group led by Ohana that’s grown fed up with having the princes in charge. Ohana, who came to Israel from Morocco alone during his youth, has served as company chairman since December 2010 when the Tene Fund decided to waive its right to appoint an external chairman from outside the kibbutz.

The entire future on one stock

A major disagreement between the two groups hinges on what stake Sdot Yam should retain in Caesarstone, its only major asset. The company’s value has jumped 350% in less than two years and currently reflects a price-earnings ratio of 30 based on earnings of the past 12 months.

The rapid growth driving the rise in profits and company share price seems likely to continue. Caesarstone produces a premium product and is in good financial shape compared to its competitors, most of which are either losing money or breaking even. The company’s main target market, the United States, is climbing out of a long recession, and the share of the company’s quartz surfaces in the estimated $24 billion kitchen countertop market is just 6% – so there’s plenty of room to expand.

But along with the opportunity looms a major risk. All the assets for the future of Sdot Yam for generations to come are tied up in one stock. The group led by Ohana wants to diversity this risk by reducing the kibbutz’s share in Caesarstone from 51.4% to 40%, if not 33%. The sale of 11.4% of the company would enrich Sdot Yam’s coffers by $195 million and enable the kibbutz to diversify its investments, perhaps by creating additional sources of employment and growth engines.

Two months ago the general meeting of the kibbutz did authorize the financial committee to look into a suitable timeframe for reducing its Caesarstone holdings to 40%, but the decision still hasn’t been carried out. In the meantime the share price has risen, so the kibbutz has benefited so far by not selling. But it seems the share price is not the only consideration delaying the sale.

Caesarstone is subject to Nasdaq corporate governance rules which define it as a controlled company – a company with over 50% of its voting rights held by a single individual, group, or parent company. One special privilege enjoyed by a controlled company is an exemption from the requirements of having a majority of independent board members as well as having the board’s appointments and compensation committees made up entirely of independent members.

Reducing the kibbutz’s stake to 40% might lower its financial risk, but it would also take away the absolute control the kibbutz now enjoys over Caesarstone, including the sensitive issues of appointing the CEO and compensating senior management. Caesarstone itself points out to investors in its annual financial report that, as a controlled company, its shareholders don’t enjoy the same level of protection given to shareholders of companies subject to Nasdaq’s corporate governance rules.

Lose of complete control in this manner would limit Sdot Yam’s ability to make managerial appointments and set compensation policy for its top officers, including the chairman. It would also create tighter controls for interested party transactions with the kibbutz, which totaled $10.3 million in 2012 (an average of $25,000 per member a year).

The replacement of Ohana and Shani on the board by Rotem and Belinkov would have allowed the group of princes to appoint two additional candidates on its own behalf at the general meeting of shareholders taking place on December 19 and institute a new compensation policy before Sdot Yam’s stake is cut to 40%.

“Kibbutz Sdot Yam is currently in the process of making decisions in economic and social areas affecting the kibbutz way of life,” responded Sdot Yam community manager Sara Ben Horin. “As part of this process, discussions are also being held on the policy of the kibbutz’s holdings in Caesarstone, Sdot Yam’s main source of strength and livelihood. On behalf of

Kibbutz Sdot Yam I want to make it clear that there is no kibbutz decision to replace any Caesarstone directors whatsoever, to replace the company’s CEO, or replace any other person working at the company. Sdot Yam and its institutions are aware of various parties with a financial or personal interest trying to act in various ways, including the utilization of media and other devices to promote their financial or other agencies.”

Caesarstone headquarters on Kibbutz Sdot Yam, in 2012. Credit: Itzik Ben Malki

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