The Tel Aviv Stock Exchange is poised to go public itself, but the success of its initial public offering hinges on investor perceptions as a long troubled institution or one that is on its way to a brilliant future.
Underwriters and others involved in the IPO say the negative perception of the TASE comes mostly from Israeli investors themselves. Foreign investors, to whom the TASE will be pitching the stock, are more likely to look at the successful record of other stock exchanges that have become for-profit businesses.
As a result, said one underwriter who asked not to be named, the IPO is likely to be bought up mainly by overseas institutions.
“This will be [an IPO] for foreigners, not for locals. Israelis are laughing that the bourse’s CEO, Ittai Ben-Zeev, is trying to present it as a growing company worth 700 million shekels [$200 million]. The day will come when it will come back to the locals like a boomerang,” he said.
The TASE released a draft prospectus for the IPO on Monday and Ben-Zeev and his host of senior bourse executives have already begun a roadshow with Israeli investors. No final date has been set for the offering.
“They’ve set up six to seven presentations a day. By the end of the week, they will have been at all the institutions and hedge funds in Israel,” said a course close to the offering, who asked not be named.
The IPO is part of a larger strategy of turning the TASE after years of sagging trading volumes and de-listings. While Israel’s economy is strong, local investors have traditionally rather put their money in real estate. High-tech companies prefer to list their shares abroad.
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As a result, the combined market capitalization of the TASE relatively to Israel’s gross domestic product is a very low 58.5%, according to the prospectus, In Norway, it’s 69.3%, in Britain 102.7% and in the United States if 182%.
In a bid to shake up the bourse, the TASE became a for-profit corporation in 2017 and last August it sold nearly a 20% stake to investment fund Manikay Partners and 19% to four other foreign investors.
Another nearly 33% were sold to the four investors – Sunsuper PTY, Moelis Australia Asset Management, Dalton Investments and Novo Nordisk Foundation – and placed with a trustee on condition it would be sold via a later IPO.
That time has come. Some 31.7 million shared will be sold in the IPO at a tentative price of 7 shekels ($1.97 at the current exchange rate) each. The deal values the TASE at 700 million shekels.
For the four investors it will be lucrative transaction, if the TASE can fetch the price it hopes to for the stock. They bought their stock last August in a deal that valued the TASE at just 550 million shekels, which means they could earn a 27% return on their investment in less than a year. They also retain the combined 33% stake they have been holding directly.
In spite of that lucrative return, one source close to the IPO said if they had their choice the four would have held on to the stock.
“In my opinion, they would have been happy not to sell. They see here a company [the TASE] on the upswing and making the transition from a nonprofit organization into a corporation,” he said. “Not surprisingly, it’s foreign investors. These are investors who have seen the transformation of other world bourses 15 years ago.”
The bourse’s performance has been spotty, figures from the prospectus show. Average daily trading volumes in shares rose slightly in 2018 to 1.124 billion shekels from 1.103 billion the year before, but in the first quarter of 2019 it dropped to 932 million. Trading in corporate bonds followed the same trajectory, reaching 893 million shekels in 2017, edging up to 899 million in 2019 and falling to 793 million in the this year’s first quarter. Some 447 companies are listed on the TASE.
Meanwhile, revenue growth has been slack. It grew from 242 million shekels in 2017 to 255 million last year. In first-quarter 2019, they reached 64.4 million, or 258 million annualized. The TASE lost 11.1 million shekels in 2017, a figure that jumped to 113.6 million -- though just 21 million after taking into account a writedown of the TASE headquarters building.
Thus, the 700 million valuation is asking investors to buy TASE shares at an expensive 33 times profits based on the 21 million figure. That compares with an average of 20 times for word bourses, including 19 time for the Nasdaq and 21 for Deutsche Borse group.
However, the TASE’s board approved a new dividend policy, under which it will pay shareholders between 30% and 50% of net profit.
Ben-Zeev was brought in as CEO in 2016 after stints as head of the capital markets division of Israel’s Bank Leumi and at Bank of America Merrill Lynch in Israel and London. Although the TASE’s performance has been slack, capital market sources give him good marks.
One described his as a “charismatic person and a good manager.” Another described as enterprising and determined to turn the TASE around, with the help of foreign capital.
“The bourse today is more focused. It has a clear strategic plan. It’s increasing its activities and its building a better bourse,” said a source.