Regulatory Surprise May Snag Sale of Leumi Card to Warburg Pincus

Officials scrambling for solution after Bank of Israel official says that three insurers financing the $690 million deal must get a control permit

File photo: A branch of Bank Leumi in Tel Aviv, May 30, 2013.
Nir Elias/Reuters

It’s been billed as one of the biggest acquisition deals of the year in Israel and a key part of the government’s drive to insert more competition into the banking sector. But the sale of Bank Leumi’s credit card business to the U.S. private equity fund Warburg Pincus could be scuttled in the next few days by new demands from the Bank of Israel.

Warburg Pincus agreed last July to buy Leumi Card, Israel’s second-biggest issuer of credit cards, for 2.5 billion shekels ($690 million at current exchange rates). The fund planned to finance much of the deal with 1 billion in loans from the Israeli insurers Harel, Menorah and Phoenix.

Nearly all the arrangements for the sale to be completed by a Thursday deadline have been completed, but Tida Shamir, the Bank of Israel’s legal adviser, several weeks ago raised an unexpected obstacle by requiring the three lenders to get a control permit before they can make the loan.

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The requirement is jeopardizing the entire deal and last week sent Israel’s top economic officials – including Finance Minister Moshe Kahlon, Banks Supervisor Hedva Ber and treasury Director General Shai Babad and Capital Markets Authority Chairman Moshe Bareket – scuttling for a solution.

If they are able to reach a solution in the next few days, the sale should be completed next week and an initial payment of 1.05 billion shekels, including a 400 million shekel dividend by Leumi Card, will be paid to Bank Leumi and property developer Azrieli Group, which now own 80% and 20% of the credit card issuer, respectively.

However, if the sides can’t reach a solution, it will be a body blow to the so-called Strum reforms of the banking sector, whose centerpiece is the sale of Leumi Card and Bank Hapoalim’s Isracard in the hopes of turning the two companies into serious competitors to their former owners.

Failure to complete the Leumi Card sale will also hurt the reputations of Kahlon and Ber. They have touted the Strum reforms as a major achievement in opening up the Israeli economy and Leumi Card sale in particular as a vote of confidence by one of the world’s leading private equity investors with $45 billion in assets.

Bank Leumi will also suffer a setback – losing the 234 million shekels of profit it is due to record on the sale and even more in the next 5-6 years if Leumi Card meets financial milestones spelled out in the sale agreement.

Leumi Card is also likely to suffer if the deal falls through because the most likely alternative to the Warburg Pincus sale is for it to be spun off as a standalone company, which is what Bank Hapoalim is doing with Isracard after failing to find a strategic buyer.

Without Warburg’s backing, Leumi Card will have trouble reaching agreements on issuing credit cards and on financing. Leumi Card was able to reach many such deals after the bank and Warburg Pincus reached an agreement last July just on the promise of Warburg’s coming in as Leumi Card’s new owner.

Shamir’s new requirement for a control l permit is based on the terms of the loan deal the three insurance companies made with Warburg Pincus. The three will be making the loan to a special purpose vehicle formed in Israel 75%-owned by Warburg Pincus and 25% by its three Israeli partners – Menorah (which is a lender and shareholder), Clal Insurance and the investment company Allied Holding.

What concerns Shamir is the collateral the lenders are getting on the loans, namely 80% of the shares in SPV. That means that if the borrowers fail at any time to meet the terms of the loan, the three lenders could end up in control of Leumi Card.

The Bank of Israel is willing to waive its demand for a control permit if the financiers waive the covenants on the loan, but the three are unwilling to do that. Moreover, getting a control permit would place restrictions on other lending and their ability to hold nonfinancial assets.

For its part, Warburg Pincus is not willing to buy Leumi Card without the leveraging. Coming up with the full cash amount would reduce would its return on equity on the deal.

As it is, the fund paid a generous 35% premium on Leumi Card’s shareholders’ equity last July and has not asked Bank Leumi to lower price even though a series of regulations introduced in the interim are likely to reduce the return it gets on its Leumi Card investment.

Warburg Pincus has produced a legal opinion that takes issue with Shamir’s requirement by noting that when the private equity fund Apax Partners bought the financial services company Psagot and when the Arison group brought Bank Hapoalim no such requirements were made of the lenders.