Discount Bank in Bid to Buy Dexia Israel for $187 Million

The tie-up is likely to win approval by Dexia’s shareholders but could be blocked by the antitrust authority

Michael Rochvarger
Michael Rochvarger
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Lilach Asher-Topilsky, the CEO of Israel Discount Bank.
Lilach Asher-Topilsky, the CEO of Israel Discount Bank. Credit: Ofer Vaknin
Michael Rochvarger
Michael Rochvarger

In the second attempt at finessing a bank merger this year, Israel Discount Bank said Wednesday it had offered to buy Dexia Israel Bank for 670 million shekels ($187 million), a price tag Dexia’s board said was acceptable.

The offer follows a bid by Mizrahi Tefahot Bank to buy Union Bank, which was blocked by the Israel Antitrust Authority in May and is now subject to a court appeal. Discount had been competing with the much smaller Bank of Jerusalem to buy control of Dexia.

Discount, Israel’s third-biggest bank by market value, will also face regulatory scrutiny from the Bank of Israel and the antitrust authority. Sources said the central bank is likely to look on the deal positively but antitrust officials should prove a tougher obstacle.

Still, investors were impressed and Discount shares ended 3.3% higher at 13.05 shekels on the Tel Aviv Stock Exchange.

Dexia shares surged 8.9% to 707.40, still a considerable discount to the 758.59 shekels a share that Discount said it would pay. The two banks said they would launch negotiations now with the aim of a binding agreement by October 25.

If the takeover is approved, Discount said it would merge Dexia into its wholly owned Mercantile Discount unit. That would give the unit access to Dexia’s unique customer base of mainly local authorities while creating synergies with Mercantile’s retail business.

Under CEO Lilach Asher-Topilsky, Discount has turned around a flagging banking operation and is now armed with a 1-billion-shekel war chest for expanding operations.

Discount shares have climbed 30% this year, well ahead of the other banks, letting it recapture its traditional place as Israel’s No. 3 bank from Mizrahi Tefahot, whose stock has been pummeled by concerns over the cost of penalties connected to a U.S. investigation into how it allegedly helped clients evade taxes.

Still, Discount trades at just 0.93 times shareholders’ equity, the same as Bank Hapoalim but far less than the 1.06 for Mizrahi Tefahot, 1.04 for Bank Leumi and 1.03 for First International Bank.

Dexia, which doesn’t compete in retail banking but rather in public and municipal financing, had been controlled by the Franco-Belgian banking group Dexia SA. But in March it sold its 58.9% stake in the Israeli unit for 350 million shekels on the Tel Aviv Stock Exchange.

For Discount to succeed in its takeover bid, it will have to overcome three obstacles – approval by 75% of Dexia shareholders, by the Bank of Israel and by the antitrust authority.

Winning shareholder approval should be easy. The bank’s offer is a 17% premium on Dexia’s market value and is 10% more than its shareholders’ equity. Moreover, the price Discount is willing to pay is 12% above the price tag last March. Add in the 80 million shekels in dividends its paid in the interim, and Dexia shareholders can expect to see a 30% return in five and a half months.

Those shareholders include the investment houses Meitav Dash (7%), Halman-Aldubi (5.3%) and Psagot (5%), as well as the Local Authorities Center (6.5%) and Israeli-British entrepreneur Teddy Sagi with nearly 2.5%.

The Bank of Israel is likely to look favorably on the deal. It had approved by Mizrahi-Union plan only to be overruled by the antitrust authority.

Governor Karnit Flug and Banks Supervisor Hedva Ber fought Finance Minister Moshe Kahlon and others to let Discount keep its 72% stake in credit card issuer CAL at least until 2021 even as the bigger lenders Hapoalim and Leumi were forced under the Strum banking reforms to divest their credit-card units.

Antitrust regulators, however, may prove tougher. Asher-Topilsky would have liked to make a competing bid for Union – Israel’s sixth-largest bank – but didn’t think it would pass antitrust muster – a prediction that proved true when No. 4-ranked Mizrahi was turned down over concerns that the tie-up would undermine bank competition.

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