Israeli Bank and Financial Shares Worth $3 Billion on the Block

The business concentration law and other legislation are forcing controlling shareholders to bail out. Fortunately for them, bank shares have soared

Bank Leumi CEO Rakefet Russak-Aminoach, April 2019.
Morag Bitan

Since the start of 2018, the Israeli banking and financial services world has been abuzz with share sales, asset reshuffles and merger and acquisition deals amounting to no less than 11 billion shekels ($3 billion). But the action is far from over.

Over the next two or three years, more transactions are in the offing with a combined value of 11.6 billion shekels, according to TheMarker’s estimates.

The sellers are mostly controlling shareholders being forced to divest assets to meet deadlines set by Israel’s anti-business concentration law. The buyers are expected to be mainly Israeli institutional investors, with a smatter of foreign investors.

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As it turns out, it’s a good time to sell Israeli bank shares. Thanks to strong financial performances and encouragement from the Bank of Israel’s banks supervisor, Hedva Ber, to cut costs, Israeli bank shares have been the top performer on the Tel Aviv Stock Exchange.

Over the last three years, the TA-Banks 5 index has risen 71%. This year the index is up 13.5% versus 10.3% for the benchmark TA-35 index.

The biggest of the sales widely expected to occur over the medium term is all or most of Shari Arison’s stake in Bank Hapoalim.

Arison, who gained control of Israel’s largest lender as heiress to father Ted Arison’s fortune made from Carnival Cruise Line, has been divesting her Israeli asset. In the past year she has sold controlling stakes in Housing & Construction Ltd. (also known as Shikun & Binui), the salt maker Salt of the Earth and the water company Miya.

After selling a 4.26% stake last November for 1.43 billion shekels, Arison remains Hapoalim’s biggest shareholder and wants to offload more. Under an agreement with the Bank of Israel, she can sell at least 15.01% by September 2025 but has the option of retaining as much as 4.99%, which would keep her a minor shareholder under Israeli securities law.

Awaiting a settlement

Hapoalim is the last of Israel’s banks to reach a settlement with U.S. authorities for its alleged role in helping American clients evade tax. Market sources believe Arison will wait until the bank reaches a final settlement before selling.

Arison sold her Hapoalim stock last November to the public at 25 shekels a share, a discount of 5.78% to the market price at the time. On Sunday, the stock was trading at 26 shekels, giving her holding a market value of 5.45 billion shekels.

Hapoalim itself is slated to be another big seller of stock, in this case for its Isracard credit card unit. Earlier this month its sold a 65.2% stake in the company, Israel’s biggest issuer of credit cards, for 1.8 billion shekels in an initial public offering.

Hapoalim, like its main rival Bank Leumi, is under government orders to divest its credit card business in order to create more competition in consumer lending.

In the case of Leumi the divestment is complete. Together with Azrieli Group, the bank sold 100% of Leumi Card (since renamed Max) to a group of investors led by the U.S. private equity fund Warburg Pincus earlier this year for 2.8 billion shekels. Hapoalim, on the other hand, must sell another 33% of Isracard by February 2021. At Isracard’s current market value, that stake is worth about 930 million shekels.

Leumi is done with Leumi Card and has no controlling shareholder, but Arison Group is mulling selling its remaining 3% in the bank sometime this year. Today the stake is worth 1.1 billion shekels.

Azrieli Group, a publicly traded property and mall developer, acquired 4.8% of Leumi a decade ago and its investment has since doubled. Still, the company is believed to be looking to cash out and use the funds to invest in real estate and new ventures.

The anti-business concentration law will be present a hard choice to another heir to a banking fortune. David Wertheim inherited a 21.75% stake in Mizrahi Tefahot Bank, Israel’s third largest lender, from his father Moshe, as well as 19.25% in the real estate company Alony Hetz. The law bars ownership of both a major publicly traded financial and nonfinancial business, which means Wertheim will have to divest one or the other by end of this year. Both businesses have performed well in recent years, enjoy top-flight management and have paid hundreds of millions of shekels in dividends.

Their shares are trading near their highs on the TASE – Mizrahi is up 26.4% this year and closed Sunday at 79.20 shekels, a drop of 0.75% for the day, while Alony Hetz is up 26.5% this year and rose 1.8% on Sunday to 44.20.

Mizrahi shares got a big boost from the bank’s $195 million settlement with the United States over tax allegations, far less than the $342 million U.S. authorities had originally sought. As a result, the lenders’ shares are trading at a generous two times book value, which makes Wertheim’s stock worth close to 1.3 billion shekels. His Alony Hetz stake is worth 1.45 billion.

Smaller banks

Another bank stake up for sale is the 27.2% of Union Bank of Israel controlled by Shlomo Eliahu. He has faced a government deadline to sell the shares since he acquired control of the insurance company Migdal in 2012 and in the meantime has placed his Union stock in the hands of a trustee.

Eliahu, along with Union’s other controlling shareholders, had hoped to bail out of the bank by merging with Mizrahi via a share swap. Antitrust officials blocked the deal but Eliahu has appealed to the antitrust court. A decision is expected in the new few months.

Any deal to sell Union will be much smaller than the others expected over the medium term. Union is a small bank and trades at a low 0.5 times book value, so Eliahu’s holding is worth just 346 million shekels.

If the court rejects his appeal, he will have to find another way to offload the stock either alone or with his fellow controlling shareholders. The options are to find a single buyer or sell it to the public via the TASE.

The final bank deal coming up is the possible sale of the Municipal Bank, formerly Dexia Israel. The Belgian government sold its 59% stake in Dexia, which specialized in municipal finance, to Israeli institutional investors 14 months ago for about 350 million shekels.

Last November, Israel Discount Bank, the country’s fourth-largest lender, offered to buy Dexia for 670 million shekels, but still awaits approval from antitrust regulators. If the deal is rejected, Dexia will probably end up being sold to tiny Bank of Jerusalem, which sought to acquire Dexia before being outbid by Discount.