Israel's Alpha Tycoon

Nochi Dankner symbolizes many ills of Israel's system: the vast business pyramids, risk to our pension savings, cross-holdings, and ties in government. How did he do it? And will it last?

In the summer of 2011, a thing changed. For the first time, the people arose and took to the streets, aiming arrows at the government - and at Israel's business barons, first and foremost Nochi Dankner.

Nochi Dankner - Olivier Pitoussi - 05092011
Olivier Pitoussi

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The tycoons and Dankner weren't an obvious target for the tent-dwelling squatters on Rothschild Boulevard or the hundreds of thousands who showed up at the mass demonstrations. After all, Dankner isn't an elected official. Less than 10 years ago, hardly anybody had heard of him. Yet he's so central a figure that he's even become a character on the "It's a Wonderful Country" satirical TV show - Nodi Ben-Tov - featuring the head of a pig. Nodi ("Farty" ) has a finger in every pie ("except for a garage on Shontzino Street and a kiosk in Netanya" ).

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Yet the demonstrators shouting against Dankner may not understand the full extent of the problem - the man or the phenomenon.

On the night of August 6, no less than 300,000 Israelis thronged the streets of central Tel Aviv. Come the next day, local stocks took a pounding together with equities, worldwide, because of the U.S. downgrade. Among the shares hammered were ones belonging to IDB, the sprawling group that Dankner controls. Companies that everybody knows, whether Cellcom, Super-Sol, Netvision, Hadera Paper or the Nesher cement monopoly - all belong to Dankner. But while stocks in general had a horrible day, the IDB group's shares did worse.

One reason could be Koor Industries, which lost 30% of its value inside three months because of speculation in Credit Suisse stock.

Three years ago Dankner took a big gamble: He bought 3% of the Swiss bank Credit Suisse through Koor, borrowing the money to buy the shares from Citigroup and Morgan Stanley. At first the gamble went fantastically well: Koor sold stock, netting more than NIS 3 billion. But then Koor dipped into Credit Suisse again and this time, things did not go well. Credit Suisse's market cap fell hard and Koor had to borrow more money to prevent the banks from taking action against it. It borrowed NIS 700 million from its parent company IDB Holding and Discount Investment Corporation, a loan free of interest or collateral.

Yet the collapse of the IDB group's stocks during August wasn't just because of Credit Suisse. It was also because of a sense that the local street protests would spur the work of the "economic concentration committee" - a panel set up by the government to examine the ramifications of the fact that the economy is dominated by a handful of individuals. Once strengthened, the committee could lead to changes that are bad for Dankner.

IDB has two main sorts of holdings: in powerful monopolies and cartels; and in competitive areas. To ensure its power, money and ability to repay debt, IDB relies on monopolistic companies like Cellcom, Nesher and Super-Sol. With its companies that face competition - such as Makhteshim-Agan Industries, Israir and Elron - it's achieved mainly losses. (Makhteshim-Agan, an agrochemicals manufacturer, did have very profitable years under Dankner, but its situation deteriorated. It was sold to China for 30% less than the price IDB had paid for it. )

What has any of this to do with the middle class? Dankner's control over his business empire is through a pyramid structure, with IDB Holding at the top. In pyramids, ownership passes down through a chain of companies. The general public is invested in all these companies, whether directly or through mutual, provident or pension funds. But in all, the public remains a minority shareholder.

When IDB Holding and Discount Investment lend NIS 700 million to Koor - the money changing hands is thus also the middle class' money. That specific example demonstrates the disease of the pyramids in general and of Dankner's empire in particular. One group company lent money to another group company, a loan that no bank would have made, explains one market insider. "The pyramid structure turns the holding companies into the controlling shareholder's private bank," he said.

Seeking weak points

Dankner's method consists of two main elements: financial acrobatics and contacts. He is connected up and down the capital market and has ties in government, too. All his moves are perfectly legal - some if only by virtue of the adage that what isn't expressly forbidden, is legitimate. This also characterizes Dankner's method: He's good at seeing the weak points in the regulations and laws. If the supervisory mechanisms were stronger, some of his moves wouldn't have passed muster.

In the 1990s Dankner was a partner at a law firm that serviced the Dankner family, which consisted of six households. The leading member was Nochi's uncle, Shmuel. In 1997 the family bought 11% of Bank Hapoalim for $358 million, using a loan from Bank Leumi. The loan was backed by an agreement between the Israel Lands Administration and the family firm Salt Industries, to rezone land the company owned in Atlit as residential. This agreement is under criminal investigation, as elaborated below. No homes ever went up there, but the land's value shot up just based on the future intent, and that's what enabled the Dankner family to buy a stake in Bank Hapoalim.

That acquisition had a material impact on Dankner's future. He was named vice chairman of the bank and chaired its credit committee, through which positions he became deeply familiar with the capital market and with IDB, the group he wound up buying.

The huge loan from Leumi gave the family no end of headaches, leading to internecine conflicts and finally, separation of forces: In October 1999 Shmuel Dankner bought out Nochi Dankner, Shelly Dankner and their father Yitzhak Dankner from the family firm Dankner Investments. Nochi Dankner received $70 million.

In 2003, as Israel rallied from recession, the latter bought IDB from the Recanati and Carasso families. At the time, Dankner, operating through Ganden Holdings, didn't have the money to buy IDB, so he brought in partners. One was the Livnat family, owners of haulage giant Taavura. But he needed tens of millions of dollars more and brought in Mivtachim, a pension fund run by the Histadrut.

Mivtachim is supposed to be heavily conservative, yet it lent Dankner $54 million. Eyebrows rose in capital market circles.

Me and the boys

The Mivtachim loan bore high interest and also had higher priority, but Dankner had a convenient exit point after two years, without a fine, which he exploited.

At the time Mivtachim was chaired by Shmuel Avital, who pushed for the loan. Five years later he was named chairman of IDB company Maxima, a small company that produces and imports industrial gases. Avital's annual wage cost to the company was NIS 670,000 in 2009 - for a part-time position. In 2010 he received a quarter-million shekel bonus. He's also on the Hadera Paper board of directors.

Another key figure in the IDB deal was economist Dan Tahori, a Dankner crony from the early days. Tahori advised Dankner on the IDB deal itself, and also brokered another deal that helped Dankner buy IDB - along with Suny Electronics, a company belonging to Ilan Ben-Dov. Suny had invested $10 million in the Ganden group. So when Dankner bought IDB, he had a weight around his neck: Ganden. Founded in the mid-1990s, the company had lost money throughout. Personally, Dankner owned 47% of Ganden: He had IDB buy the company, which made the public a partner in the losses.

Despite public criticism, the transaction was done in October 2009. Dankner and his partners in Ganden Tourism were relieved of $50 million in personal guarantees. Over time it turned out that the company's evaluation by a third party, Yitzhak Swary, had been based on wrong assumptions - among them, that Ganden's subsidiary Israir would start making money.

My cousin Danny

Dankner's close ties with Bank Hapoalim also demonstrate the method. Some of the IDB group companies are clients of Hapoalim: IDB is one of the biggest borrowers in Israel. Dankner is one of the people closest to his cousin Danny Dankner, who was chairman of Bank Hapoalim until two years ago, before which he filled key positions at the bank. Let us now look at some decisions Hapoalim made about IDB.

At the height of the global economic crisis, as Hapoalim racked up losses on investment abroad, IDB company Koor was allowed to put off repaying the bank NIS 1.1 billion by four to six years. Danny Dankner was one of the bank officers that agreed to this. As was Irit Izakson, today a director at IDB Development.

Around then, Koor invested a billion shekels in Credit Suisse. At first, speculation in the Swiss bank went well. Later investment in it did not. Last month Koor had to borrow NIS 700 million from IDB to prevent the banks from taking the Credit Suisse shares and selling them at a huge loss.

In any event, Danny Dankner was ousted from Hapoalim by the Bank of Israel and today faces a hearing after the police recommended that he be charged with fraud. He was succeeded by Yair Seroussi, who was nominated by Danny Dankner. Seroussi had founded the Mustang investment fund together with Dan Tahori. Nochi Dankner had been one of the biggest investors in that fund, through Clal Insurance, Koor and Clal Hapoalim. When Seroussi joined Hapoalim, he left Mustang. But IDB company Clal Insurance is one of the biggest shareholders in Europort, which Seroussi chaired until recently and in which he's still heavily invested.

Last March, Nochi Dankner struck another deal with Hapoalim, during the acquisition of the Maariv publishing group through IDB company Discount Investment. Buying a newspaper gives Dankner a way to shape the public debate - including on IDB. Discount Investment CEO Ami Erel hadn't wanted to buy Maariv, on the grounds that it isn't a good investment: Maariv had been losing money heavily for years and would apparently have collapsed completely if Dankner hadn't come along.

What turned out is that Hapoalim forgave Maariv NIS 64 million, or about 60% of the money it owed the bank, as part of the whole Dankner takeover.

Irit Izakson aside, IDB shares 11 directors with various banks, eight of which joined IDB group boards after Dankner bought the group and, as mentioned, the IDB group is one of the biggest borrowers in the land.

Is the party over?

Nochi Dankner scrupulously cultivates government ties, too. Like other tycoons, he tends to hire former regulators. These include, among a host of others, Eyal Sulganik - former chief accountant of the Israel Securities Authority and current chief financial officer at IDB - and Shy Talmon, former accountant general, now CEO of Clal Insurance Enterprises.

In his five years with IDB, Sulganik has been instrumental in creating large capital gains for the group thanks to his deep familiarity with international IFRS accounting methodology, which he himself had promoted in his former regulatory capacity, and by pursuing aggressive accounting policies.

Dankner also maintains indirect government ties through his partners, like the Livnat family who, as mentioned before, helped him acquire IDB in 2003.

Several months following the acquisition, former Industry, Trade and Labor Minister Ehud Olmert slapped duties on Turkish cement imports at Nesher's request after it complained that Jordan, Romania and Turkey were dumping cement in Israel, charging less here than in their countries. Further light was shed on the family connection when Olmert was appointed chairman of the Avraham Livnat Group in 2010, and Avraham (Bondi ) Livnat wrote in a press release that the relationship between the Olmert family and his own began even before the state was founded and "would never be forgotten."

The ties between Livnat and Dankner deserve a closer look. Nesher, an IDB subsidiary, has a monopoly for producing cement. Nesher engages Taavura, which is itself a transport monopoly, to haul its cement. Monopolies, as everyone knows, push prices up - housing prices, in this case. If Dankner and Livnat weren't partners, it may be assumed that Dankner could have generated competition in the transport business, competition that doesn't exist at present. But then again, as mentioned, it is likely that he couldn't have gained control of IDB without Livnat's help.

Another facet of Dankner's system concerns his relationship with other stock market tycoons. Like them, he has holdings both in financial companies (Clal Insurance ) and non-financial companies (Cellcom, Hadera Paper ). Yitzhak Tshuva also has financial and non-financial holdings, and the financial companies of one invest in the non-financial companies of the other.

Cracks in the system

How long will Dankner's approach keep working? The first cracks in the system appeared back in 2009 following IDB's purchase of Israir from Ganden. This transaction drew the general public's attention to the problematic nature of Dankner's dealings - generally the subject of positive press coverage partly due to his philanthropic activities - and raised the level of criticism directed his way.

Dankner now faces two threats. The first comes from the downward spiral in global and local capital markets: Since his companies are structured as a pyramid, every drop in a company's value has an impact on the entire group. The second threat is from a tightening in regulations.

Dankner is already getting a taste of regulation. For instance, cellphone industry reforms initiated by Communications Minister Moshe Kahlon have cut into Cellcom's profitability. The Committee on Increasing Competitiveness in the Economy established about a year ago by Prime Minister Benjamin Netanyahu to examine concentration in the marketplace could go much further bringing fundamental change to the capital market. The Movement for Quality Government in Israel, MK Einat Wilf (Atzmaut ), and others have submitted comprehensive reports focusing on specific problematic cases like Dankner's.

It can only be hoped that the committee will recommend concrete steps, like separating between financial and non-financial holdings, placing restraints on forming pyramid-shaped business structures, and more. What does seem clear is that the more placards there are showing Dankner and Netanyahu side by side, the easier it will be for the government to make changes that ensure that there will be fewer businessmen the likes of Nochi Dankner in the future - and a larger slice of the pie for the anonymous public.

Another possible scenario for Dankner to see that his modus operandi doesn't suit the Israel of 2011. His delight in taking an active role in the philanthropic activities of the IDB Foundation indicates another side to Dankner's personality. Perhaps he, too, like so many politicians, will become transformed by the social protest: less involved with power, leveraging and finance - and more involved in business initiatives, building plants and contributing to the economy.