Israeli Tycoons’ Holding Groups Have Been Cut Down to Size

Research finds their share of the Tel Aviv Stock Exchange and economy has dropped sharply in the last six years

Shaul Elovitch, former controlling shareholder of telecom giant Bezeq
Moti Milrod

A decade or more ago, they ruled Israel’s economic roost. Nochi Dankner, Eliezer Fishman, Shaul Elovitch and other tycoons controlled big holding groups with a wide range of businesses and were household names even among people who never invested money in the Tel Aviv Stock Exchange.

But pressed by massive debt and the 2013 Business Concentration Law, their day has mostly – but not entirely – passed, according to a study released last week by the Israel Securities Authority.

“Business groups are occupying less space [on the TASE], and they have become smaller,” Liza Teper and Guy Sabah, two of the ISA economists who conducted the study, said in the report.

Danker ceded control of his IDB group in a 2013 debt bailout and Fishman was declared bankruptcy in 2017. Elovitch lost control of his telecoms group and the phone company Bezeq last year after he was swept up in a combined securities and police probe.

Among the benefits to the economy of a diminished tycoon class, along with the decline of holding groups, is an increase in competition and lower risk to the economy and financial markets when a big holding group is in crisis.

But the ISA report warned that the process of paring back the power of the groups was far from complete. The final deadline for holding groups to meet the terms of the Business Concentration Law, whose main terms addressed the problem of pyramid-structure groups, only comes at the end of this year.

“The aims of the committee to reduce business concentration in the economy have only been partially achieved and the process of breaking up the pyramids has still not been completed,” the report said. “It’s premature to say that the law has contributed to increasing competition in the economy, which was its main goal.”

Nevertheless, the ISA found a big drop in the power and presence of the holding groups. Defining them as groups comprising three or more companies in at least two different industries, it found that they accounted for 34% of the TASE market capitalization at the end of 2017, down from 54% in 2010. Among the big 10 groups, their share of the TASE’s market cap dropped even more sharply – to 29% from 44% in those years.

However, the number of business groups remained relatively stable, with only two of the 28 that existed in 2010 disappearing by the end of 2017, it said.

Institutional investors, which manage pension and other money for the public, reduced their exposure, hence risk, to the big groups, too. The holding groups’ debt as a percentage of all tradable bonds held by institutions declined to 55% in 2017 from 68% seven years earlier. The share of holding group stocks also fell even more – to 37% from 55%, the report said.

As a share of the Israel’s entire economy, the groups have also been downsized: The value of the equity and debt shrank to 37% of gross domestic product at the end of 2017 from 55% in 2010.

The Business Concentration Law, which was passed by the Knesset amid concerns about the tycoon’s excessive control of large swathes of the economy and a series of big debt bailouts, sought to reduce their power in various ways.

One was to limit the number of tiers in pyramid-structured holding groups, a structure that enables a tycoon to control a business empire with relatively little invested capital. Another was to bar groups from holding both major financial and non-financial businesses.

The ISA report said, however, that the law was not the major factor in the decline of the holding groups and the tycoons who ran them. It said that only 16% of the companies it surveyed cited the law as the direct cause for their reducing their pyramids; most instead cited a changing business environment.

One thing that the ISA found that hasn’t changed is the phenomenon of public companies with controlling shareholders. Although the percentage on such companies in the TASE has declined in recent years and a few major ones, like Bank Leumi, the number remains high.

In 2010, 92% of TASE companies had a controlling shareholder. At the end of 2018, it was 74%, a unusually high figure for a developed economy, the ISA said.