Tel Aviv Stock Exchange Defies Doubters to Win a $200m Valuation in Its IPO

The final results aren’t in yet, but foreign investors are believed to have bought most of the stock

The entrance of the Tel Aviv Stock Exchange, January 29, 2017.
Baz Ratner/Reuters

The Tel Aviv Stock Exchange’s initial public offering appeared to be huge success Monday amid indications that the company had sold a 32% stake at the ambitious 710-million-shekel ($201 million) valuation that CEO Ittai Ben-Zeev had sought.

Sources said the main buyers were foreign investors, who may have taken as much as 80% of the shares on offer. On Sunday, market sources said the IPO had gotten orders for 1.2 billion shekels of stock, nearly six times the amount being sold.

Israeli investors, looking back at the TASE’s history of declining trading volumes and listings amid slim profits, had looked askance at the IPO and especially the valuation, sources in the local market said Monday.

Foreign investors, on the other hand, were willing to bet that the company has a brighter future, especially because of Ben-Zeev’s leadership. After a period of stormy management at the TASE, Ben-Zeev was named CEO in 2016.

“Foreigners relate entirely differently than Israelis to the profession of management. They examined what has happened at the stock market in recent years and are happy with what has happened,” said one senior market figure who asked not to be named.

The TASE became a for-profit corporation in 2017 and last August sold a majority stake to Australian investment fund Manikay Partners and four other foreign investors at a 550-million-shekel valuation. It was those funds that sold part of their shares in the IPO on Monday, earning a 27% return in just five months.

The IPO is part of a larger strategy of turning around the TASE after years of sagging trading volumes and delistings. While Israel’s economy is strong, local investors have traditionally put their money in real estate. High-tech companies prefer to list their shares abroad.

Still, the company’s performance over the last three years 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 they dropped to 932 million.

Last week, the TASE released unaudited second-quarter figures showing revenues of between 62.6 million and 63 million shekels, a modest increase of between 2.7% and 3.7% from a year earlier — and that was due to factors other than the TASE’s main business of fees from trading and clearance.

Second-quarter net profit came in at a meager 2.3 million to 2.5 million shekels, down from 69.3 million a year earlier when the bottom line was boosted by the cancellation of a 85.1-million-shekel write-down. Adjusted profit for the second quarter was 5.3 million to 5.5 million, an increase of as much as 45.7% year on year.

Israeli institutional investors also attributed the difference between them and foreign investors to Ben-Zeev’s personal connections and salesmanship. Before coming to the TASE, he headed the capital markets division of Bank Leumi and built a network of international connections working at Bank of America Merrill Lynch in Israel and London.

Another thing working in the TASE’s favor is the record of stock exchanges that have made the same transition to a for-profit corporation and then gone public.

Since 2012, the average annual return for the CME Group (the Chicago Mercantile Exchange and the Chicago Board of Trade) in dollar terms has been 27.5% annually. The London Stock Exchange has returned 23.1% and the Nasdaq 20.6%. Only the Japan Exchange Group has logged a poor performance since 2012, with an annual dollar return of just 3.7%.

“Stock exchanges around the world that have undergone a similar process [to the TASE’s] have improved themselves,” said one market source who asked not to be named. “The Israeli economy is perceived as very interesting.”

Another factor was the role of the U.S. investment bank Jefferies, which ran the offering as an American-style IPO where the underwriter commits to buying any stock not sold to investors. The result was more confidence in the TASE valuation.

The Israeli underwriters for the offering were Leader Underwriters, Leumi Partners, Poalim IBI, Discount Capital, Barak Capital and Orion.