Mizrahi-Tefahot Bank, Israel’s third-largest lender, signed an agreement Tuesday to buy its smaller rival Union Bank of Israel for 1.4 billion shekels ($400 million) in a deal Mizrahi said would enhance competition by making it a stronger player.
Under the terms of the deal, which Mizrahi’s board approved late Monday, the bank will swap its shares for those of Union’s controlling shareholders — the Landau and Manor families, Yael Almog-Zackai and Shlomo Eliahu, who together hold 75% of the bank.
Mizrahi-Tefahot said it will seek to acquire the remaining 25% through an offer to the public.
The bank first said it was in negotiations to buy Union in July.
The deal values Union at 0.6 of its shareholders equity, which was 2.4 billion shekels at the end of June. That about matches Union’s market value on the Tel Aviv Stock Exchange, where its shares ended up 4.8% at 20.15 shekels. Mizrahi shares rose 2.4% to 63.47.
“This is a good deal not only for Mizrahi-Tefahot, which will be able to meet its strategic targets more quickly, but for the banking system in general and for retail and business clients in particular, because it will significantly improve Mizrahi-Tefahot’s ability to compete against the big banks,” Mizrahi Chairman Moshe Vidman and CEO Eldad Fresher said in a statement.
The Israeli banking industry is dominated by its top two lenders — Bank Leumi and Bank Hapoalim, which control about 60% of the market. Policymakers have been trying to introduce more competition through a variety of measures, including by spinning off the big banks’ credit card units in the hope they will emerge as lenders.
Mizrahi Tefahot vaulted into third place among Israeli banks thanks to its mortgage business, which has grown sharply amid soaring home prices. Union accounts for about 3% of all Israeli banking.
Nevertheless, the takeover is likely to encounter resistance, not only from Union employees but from some officials.
Bank of Israel Banks Supervisor Hedva Ber has signaled she will support the merger in the hopes of creating a third banking group on the scale of the big two.
But the Israel Antitrust Authority must approve the deal before it can go through. Antitrust Commissioner Michal Halperin will recuse herself from the matter and leave it to Ori Schwartz, the agency’s legal adviser.
Finance Minister Moshe Kahlon, who has made banking competition one of his signature projects, said he opposed the deal, citing the policy he advocated to spin off the credit card companies.
“The government’s policy is to expand competition, not reduce it,” he said at a conference in Eilat on Tuesday. “I have no authority in the matter, but my recommendation would almost certainly be to say it’s a mistake. If you join Mizrahi’s and Union’s mortgage businesses, we’ll see them controlling 44% of the market.”
Citigroup analyst Michael Klahr said he expected voluntary retirement programs to cost up to 500 million shekels, but that hurdles remained, including reaching a deal with Union’s workers, about half of whom stand to be laid off.
“The banks supervisor has publicly voiced her support for the deal but the antitrust commissioner may face pressure from politicians not to give her approval to the deal ... on the grounds that it will reduce competition in the local banking sector,” Klahr said.
Meanwhile Union Bank employees called a strike Tuesday after the takeover was announced. Hundreds rallied outside the offices of Melisron, a shopping mall owner and operator controlled by the Ofer Group, one of Mizrahi’s controlling shareholders.
“This merger is bad for the workers and bad for the public and only serves the interest of the strongest tycoons in the economy, who control the public’s money,” said a statement from Union’s workers committee. “We are making it clear today to the Ofer Group and the Bank of Israel: We won’t let you send 1,200 workers home.”
With reporting from Reuters.