The Complete Guide to Tel Aviv Stocks Buyouts: Excuses and Accusations

The wave of public takeover bids is growing: Owners blame the regulators, but also institutional investors, and some hope to buy back from the public on the cheap after selling to them at top prices.

Bloomberg

Two weeks ago, the shares of the Tiv Textile Group were delisted from trading on the Tel Aviv Stock Exchange. During its final days, the share attracted turnover of only about 1,000 shekels ($260) of a day in total, which was not really much less than the turnover even during the share’s earlier days. Given such a trading volume, it was not really a surprise that the owners of Tiv Textile decided there was no point in keeping the company listed on the exchange.

But headlines in the local financial press showed that the publicly traded Tiv Textile actually did arouse some interest – mostly because of a fight between the owners, the Gutreich family, with their 81-percent share of the company, and the minority shareholders, led by the Lapidot investment house. The battle was over the salaries of the family members who worked for Tiv Textile, among other things, and that disagreement seems to have been the straw that broke the camel’s back for the Gutreichs.

The family decided to delist the share 23 years after its IPO, but to do so they were required to raise the share purchase offer by 54%, as compared to their initial one. Ultimately they had to pay the public shareholders 17.5 million shekels to take the company private.

Thus Tiv Textile – which manufactures and sells various types of yarn and fabrics, as well as other home textile products – joined some 225 other companies that have been delisted from the TASE since 2007. To put this number in perspective, today there are only about 470 companies traded on the exchange.

Mor or less

The case of the Hanan Mor Group construction company provides a different angle on the crisis affecting the TASE. Four years ago the chairman, Hanan Mor, and the CEO, Avi Maor, tried to delist their company – unsuccessfully. In October 2011 they published a tender offer that was 20% more than the market price for the outstanding shares, in order to delist at a company value of 24 million shekels.

Here is how they justified their decision: “We decided to delist the shares of Hanan Mor from trading because in recent years the capital markets have undergone a dramatic change. Small- and medium-sized companies that are traded in Tel Aviv only cause damage to their shareholders because of their low liquidity. Whoever invests in small shares loses out because of the low liquidity.

“The reality of the local capital markets shows that only about 20% of the companies are tradeable and demonstrate a relationship between their operations and their true value in the market. This has created a situation in which bond yields better reflect the way the investors see the company than the share prices – and whoever invests in the share loses out.”

In retrospect, the rejection of the buyout tender by the minority share holders in Hanan Mor was justified. Today the company trades at a market cap of 92 million shekels – four times the value reflected by the tender offer from the controlling shareholders.

The case of Hanan Mor also reflects the conclusions reached by Pini Shmueli-Nisan, a CPA and senior partner at BDO Ziv Haft, in a study conducted in the past for TheMarker. Shmueli-Nisan examined the details of the tender offers made from 2005 through 2012 on the TASE, and his conclusion was quite simple: The owners of public companies in Israel exploit the public’s lack of information and knowledge, and try to delist their companies in times of financial crises. Shmueli-Nisan explained that the controlling owners issue shares to the public at high prices when the market is on the rise, and then try to buy them back from the public cheaply when prices drop.

Delisting at the bottom, and top

As of the end of July, the shares of 467 companies were listed on the TASE, a sharp drop from the 651 publicly traded firms at the end of 2007. Since early 2014, 53 companies have been delisted, many because of buy-out offers by the controlling owners – and this despite the fact that the TASE has been showing record results over the past year and a half, with the TA-100 index rising 21% during this period.

In order to receive a more complete picture of the situation of the stock exchange, we must take into account a few dozen other companies that were moved to the Maintenance List of firms with very low levels of trading volume, though they can also be added to that list for having extremely low equity or public float. It is highly likely that many of these shares will join the ranks of the delisted in the not-distant-future.

In 2014, 20 firms on the Maintenance List were delisted from the TASE for not meeting the minimum requirements for publicly traded companies. Two more have been delisted so far this year. Generally when the stock market is on the rise, more companies list, which is what happened in the 2005 to 2007 period.

The large number of tender offers from owners usually shows that the share price is considered to be low – which allows the controlling owners to buy the firm cheaply and benefit from future increases in value – at the expense of the public.

It seems that in recent years the delisting trend is not only linked to the overall situation of the markets. In 2008, the TA-25 index of blue chips plunged 49%, and 15 shares were delisted. In 2009, the TA-25 climbed 75%, but another 22 companies were delisted. In 2012, the TA-25 rose 9%, and 43 firms were delisted – 17 as a result of tender offers and mergers.

Dismantling the ‘pyramids’

This trend of delisting is certainly upsetting the top echelons of the TASE, whose members are searching for ways to increase trading volume and the number of firms that are listed – and to preserve the exchange’s position as the main arena for raising capital in Israel. Yossi Beinart, CEO of the TASE, called the large number of delistings a dangerous trend. “Some of the companies are delisted for economic reasons and some for other [reasons]. But in my opinion, our focus as a stock exchange is supposed to be not on the trend and the reason that the companies are delisting, but rather on the question of how we are supposed to bring new companies to the stock market. Therefore you can already see that we are advancing legislation, helping companies with analysis and investor relations, and are trying to bring in more medium-sized companies, which are appropriate for the local market.”

Beinart explained that the TASE is effecting changes so that being put on the Maintenance List does not necessarily mean a company will end up being delisted. The idea is to allow shares with low trading volumes to be traded under different rules, on a new list.

“There is a price for being a publicly traded company. We need to ensure that this price is proportional to the benefit received from it. We are on the way to such a market, where these proportions will be correct,” said Beinart.

Nurit Dror, from the TASE’s research department, tried to determine the reasons leading to the delistings – and found, to her surprise, that the recommendations of the committee to reduce economic concentration in Israel, recommendations approved in April 2012, played a role.

The recommendations included a proposal to reduce the number of layers in “pyramids” – ownership of companies taking the form of multiple levels of subsidiaries. Other reasons Dror found included the global trend toward mergers and acquisitions, stricter regulation, and a desire by companies to lower costs and avoid disclosing information to the public.

She studied 24 companies which delisted themselves voluntarily from 2013 through April 2014 and found that most went through the process because of mergers with multinational corporations or as a way to flatten the control pyramids – similar to the phenomena that occurred in 2010 to 2012.

One reason for delisting a subsidiary from the stock market is that it allows the parent firm to get its hands on the cash in the subsidiary’s coffers. This was one of the incentives for Koor’s merger with its parent, Discount Investment, which paid 1.1 billion shekels in 2014 to Koor shareholders – and paid off its bondholders.

That merger increased Discount Investment’s cash kitty by 1 billion shekels, because Koor had made large profits from its sale of Makhteshim Agan and the shares it held in Credit Suisse. But it seems the merger did not solve the liquidity problem of Discount Investment; its bonds are now traded at a yield to redemption of 10% to 11%, which reflects a fear that it will be unable to pay them off.

“It’s not just regulation that is driving the companies from the stock market,” said Alon Glazer, vice president at Leader Capital Markets. “The social protests [which reached their peak in Israel during the summer of 2011] turned companies and owners into suspects, and some are even seen as criminals. What was considered legitimate in the past, is not today.”

“In the past,” he added, “owners could manage a publicly traded company as if it were a private company. They employed family members and drew large salaries. A family business worth 300 million to 400 million shekels has a lot of advantages in having its stock traded. It is easier to raise equity and debt, and easier to pass on the shares to heirs. Today, these advantages are disappearing. For owners it has become a headache. In order to employ your son in a public company, the owner must go through many committees and approvals.

“If you don’t need the capital,” Glazer said in summation, “many prefer to avoid the situation and keep out of the spotlight.”