David's Harp / Why Israel Chemicals Should Not Be Sold

Simply put, there's no upside for Riki Cohen, just for Idan Ofer and Canada.

Those grasping, predatory, Canadians – half-frozen imperialists from the great white north – won’t be getting their hands on Israel Chemicals anytime soon, thanks to Finance Minister Yair Lapid.

Riki Cohen, Lapid's symbol of the middle class, can go to bed tonight, still fearful of her growing overdraft, but taking succor that no maple leaf will ever be affixed to a bag of Israeli potash. That is, if potash comes in bags. Come to think of it, what the hell is potash?

Never mind, it must be a critical national resource. Otherwise why would the finance minister have refused to let Potash Corporation of Saskatchewan take control of ICL? A good question and one that remains useful to ask because PotashCorp has made it clear it hasn’t given up on acquiring the Israeli company.

Thankfully there was none of this kind of florid nationalism or simplemindedness in the debate over PotashCorp and ICL. The arguments were civil and business-minded, although often wrong-headed and therefore worth examining.

The benefits to the Canadian company are quite clear, which is why it can be counted on to try again. ICL also has a strong presence in the emerging markets of China and India, where PotashCorp is weak. Moreover, compared with its peers, ICL's cost of producing fertilizer (that's what potash is) is low.

The other reason PotashCorp wants ICL is more problematic: Two marketing groups, one of which is led by PotashCorp, control more than two thirds of the global potash market, adjusting production to make sure supply doesn’t overtake demand, and ensuring high prices. ICL doesn't belong to either of the groups and therefore acts as a spoiler. Gaining control of ICL would enable the Canadian company to put one of the bad boys of the potash world into line.

Thus, by selling ICL to PotashCorp, we would not be adhering to the principals of a global free market but strengthening a worldwide duopoly. Lapid’s flag-waving inadvertently has a capitalist logic to it.

Hype and hypocrisy

ICL’s unions have expressed concern that their strength will be diminished once ICL is folded into a global company. They are also fretting that PotashCorp may well decide to reduce production in Israel.

The first claim has some truth to it, but that’s the union’s problem, not a national interest at stake. As to the second, ICL is a very low-cost producer because it gets its potash by dredging it up from the Dead Sea whereas other producers have to mine it way under the earth. It also gets free, outdoor warehousing, thanks to the arid climate. Moreover, ICL is geographically closer to India.

For all those reasons, there’s no reason to assume PotashCorp would reduce, much less shut down, ICL’s operations over the years. It is true that PotashCorp controls 28% of Arab Potash on the other side of the Dead Sea. The Jordanians are presumably even lower-cost producers because of more modest wage costs and because they don’t face the same environmental restrictions ICL does. On the other hand, Jordan may come crashing down in revolution.

Lapid’s argument against selling, as expressed on his Facebook page, is that “countries are not supposed to sell their natural resources to foreigners.” But countries do that all the time, including Israel.

The Leviathan gas field is by far a more critical and lucrative national resource than anything ICL controls. Its reserves are so valuable that the government needs to set up a special fund to make sure its revenues don't ride roughshod over the rest of the economy by causing the shekel to appreciate. Its exported gas has the potential to buy Israel friends (or at least influence) by turning the country into a midsized energy power. Even if it is not, gas will have profound effect on the environment and the cost of energy. Yet, the U.S. company Noble Energy owns 39% of the field, and if Australia’s Woodside takes a stake, the two will control a combined 60% – all without any of the ruckus the ICL sale generated.

Indeed, Israel has happily allowed, at various times, the controlling interest in three of its five biggest banks (Hapoalim, First International and Discount) to be sold to foreigners, albeit Diaspora Jews, and was ready to sell Leumi to a foreign hedge fund. The country's' biggest food maker, Tnuva, is owned by a British buyout fund, as was its biggest telecommunications company, Bezeq, for five years. Until ICL, about the only national asset that was hands-off to foreigners were defense companies.

Bye-bye, biotech

The biggest sale of a national resource to foreigners, however, happens on a regular basis and is lauded rather than blocked. It occurred twice in the past week, with the biotech companies Prolor and Alma Lasers being sold to American and Chinese buyers, respectively, for a combined $720 million. Indeed, Startup Nation operates on the assumption that the country's most valuable resources – the brains of its engineers and scientists – will be hired to create new ideas and innovations that are then sold to foreign buyers.

A few well-heeled investors and entrepreneurs do extraordinarily well, not unlike Idan Ofer (the controlling shareholder of the Israel Corporation, which owns ICL) expected would happen if ICL had been acquired. But the gains for the economy as a whole from ICL's sale are far less apparent.

Any acquired technology company, if it continues to exist at all, becomes the local research and development center of the multinational that bought it. The center provides jobs, and very good ones at that, and it may expand its payroll over the years. But the real value of the intellectual property the multinational has acquired is transferred overseas. The buying company creates a lot more jobs back in its home country for a lot more people with a wide range of skillsets and capabilities by taking the Israeli intellectual property it has acquired to manufacture and market the product, and provide all the back-up services behind it – the people who engage in everything from finance to sweeping up the offices. Needless to say, the resulting profits accrue to the multinational's shareholders.

In the case of the Leviathan gas field, Israel had no choice but to bring in multinational partners. They were the only ones who could supply the billions of dollars needed to explore and develop the fields. They also had the technical expertise for deep-sea drilling, gas liquefaction and creating markets for the product abroad.

But in ICL’s case, not even PotashCorp is claiming it will bring new technology or capital to the company. It’s unlikely to be a better manager of the country’s potash reserves either, since they are only one part of a bigger business.

Indeed, the PotashCorp-ICL deal more closely resembles a high-tech M&A transaction: ICL will be downsized into a wing of a large multinational, mining phosphate locally but no longer taking responsibility for other corporate operations. PotashCorp might well shut down or sell off ICL’s downstream businesses – the ones that manufacture products based on the company’s raw materials, thereby capturing more value-added – because they are not part of the Canadian company’s core business.

Deciding between genuine national interests and free markets is often a tough call in the realm of cross-border M&A because emotions and private interests get in the way. But the prospective PotashCorp-ICL deal seems to be a win for PotashCorp and a loss for Israel. 

Reuters