All That Glitters / What Lies Ahead for 2012

For some, 2012 will be the make-or-break year: They'll either find the means to raise capital and roll over their debts - and perhaps dilute some of the concentration committee's recommendations - or need to dismantle their pyramids.

Another wave of annual financial reports has passed. It brought the customary, repulsive show of companies by the dozen timing their release for the eleventh hour, in the hope that investors drowning in the sea of data won't notice the less-than-flattering news lurking in the deep recesses of explanatory notes. Here are some initial insights gleaned from the 2011 reports and a forecast for 2012:

1. It was a hard year for companies - though not for all and not equally. But while companies in the U.S. are reporting record-level profits and bank accounts burst with cash, most Israeli companies offer some type of rationalization of why their businesses haven't glittered. It turns out that nothing in life is coincidental: The reports of Israeli companies leave no doubt as to why the benchmark Tel Aviv Stock Exchange TA-100 index fell 20.1% in 2011, while the S&P 500 went up 1.6%.

Shoppers waiting for a Rami Levi Communications shop to open last December.
Emil Salman


2. The banks actually had quite a good year, even if their stocks didn't. Although the TA-Banks index dropped 24.6% in 2011, bank earnings themselves rose about 10% on average. The formula this time was: The more the bank stuck to purely banking activity, the more it earned - mostly from fees and financing margins from serving households and small and medium-sized businesses. And inversely: The more investments and non-banking activity, the less earned.

Looking ahead, the banks, their managers and their employees needn't worry too much, because Bank of Israel governor Stanley Fischer made his priorities clear last month: Ensuring the stability and profitability of the banks first, even at the expense of paying high fees and interest rates, and only afterward dealing with the public's cost of living.

3. Investment houses and insurance companies experienced an atrocious year. Everywhere they turned they got slapped down. Profits from their own investments, in their proprietary accounts, collapsed and gobbled up most of their profits from other activities. Profits from brokerage activities crashed due to plunging stock market trade volumes and the banks' growing dominance of this sector. Provident fund earnings were slashed due to public pressure to cut fees and profits from mutual funds.

The result: Midsize investment houses are scrambling to merge in a desperate attempt to survive through economies of scale. Insurance companies, in contrast, are up for grabs thanks to the concentration committee's recommendations. Forecast for 2012: No room for optimism unless the stock market climbs sharply and the hibernating public herd stampedes back into the fray.

4. Telecom companies nosedived. At last, under public pressure and thanks to Communications Minister Moshe Kahlon's consumer activism, competition in the cellphone market has opened up and the profitability of service providers plunged. It suddenly became clear that profits in this field are much harder to come by without coordinating prices and conditions, and even making money selling smartphones on credit isn't easy.

In 2011, the cellular market's first year of competition, two CEOs were replaced, one company stopped paying out dividends, there were two mergers and two controlling owners fell into a liquidity crunch. Conclusion: The companies proved severely incapable of adjusting to shock. Each one is reliant on monopolistic charges, and when the fat was extracted they couldn't cope. The cellphone operators are now paying the price of competition, reductions in interconnect fees, sales conditions on phones and for being the cash cows for business pyramids, while it isn't clear where their next growth engine will come from, if at all. The major communications stocks - Bezeq, HOT, Cellcom, and Partner - fell about 60% more than the TA-100 in 2011.

5. Food producers and retailers sustained the wrath of the social protest. The reports of the food manufacturers and retailers proved, despite the gut feelings held by some, that the social protest and rage over the cost of living did have an impact on the marketplace. Food companies were forced to lower prices, or moderate price hikes - meaning a cut in profits.

It was also shown that food manufacturers enjoyed higher profitability in Israel than in their overseas operations, strong evidence to support claims that the local market suffers from low competition. Nobody in the food industry has any reason to believe that 2012 will be better: Since food prices remain high - both in comparison to prices abroad and in relation to the disposable income of the middle class - and since consumer frustration will probably keep mounting, companies won't be able to go back to their regular "trick" of raising prices.

6. Real estate companies, at least those operating mainly in Israel, are on standby. While changes in the 2011 reports of real estate companies arose mainly from reappraisals and the implications of taxation changes brought about by the Trajtenberg Committee, 2012 reports will reflect market performance. The situation here isn't promising: Small and midsized companies are having difficulty obtaining credit, while customers sit on the fence waiting for prices to further decline. Transactions are few and margins are shrinking. For the past two years the formula was: The more activity in Israel and less abroad, the higher the profits. This year it could be the reverse.

7. High tech is blooming, for the meantime. The high-tech sector appears healthy, although not many high-tech companies are traded on the TASE. Fundraising, exits and dreams are all apparent in the private market, to a large extent thanks to advancing high-tech stock prices in the American market and oodles of cash being amassed by the giants in Silicon Valley. But caution is advised. Sales of tangible products are less impressive, start-ups are being sold without cultivating or fueling the growth of local industry, and in the New York stock exchanges there is already talk of a new bubble.

8. Energy and fuel: The dreaming is over. The long-term graphs of Israel's oil and gas partnerships show a fixed script: flatlined until 2009, leaps in the hundreds of percent until 2011, rising and ebbing throughout 2011 and stability since the beginning of this year. Now that the huge gas deposits have already been discovered, the industry is turning to the less exciting phase of building infrastructure and production facilities, with all the hardship and disappointments this entails.

True - another major discovery cannot be ruled out, like oil for instance, that would fire up the whole sector once again. But a realistic industry forecast will reflect prices based on production calculations, not dreams.

9. The holding companies and pyramids are trembling. Until recently the names Nochi Dankner, Yitzhak Tshuva, Ilan Ben-Dov, Idan Ofer and Lev Leviev elicited a good measure of respect. The companies under their control were the economy's largest, constituted a good part of the TASE's overall market value and attracted a large portion of the Israeli corporate bond market.

But no longer: Due to overleveraging, an excessive lust for acquisitions and managerial mistakes, many tycoons have landed in deep trouble. Some have already asked for, or completed, debt settlements, while others watch as their bonds trade at double-digit yields - meaning just one thing: The market isn't sure, and in some cases no longer believes, they can meet their liabilities. In their financial statements they presented enormous losses that often wiped out their capital equity, plunging them into deficit.

In their forecasts for 2012 the tycoons promise a better year - easy enough for them to say since after another year like 2011 none will own their companies any longer: They'll vanish from the scene and nobody will remember what they said anyhow.

For some, 2012 will be the make-or-break year: They'll either find the means to raise capital and roll over their debts - and perhaps dilute some of the concentration committee's recommendations - or need to dismantle their pyramids. How it actually turns out will depend on the fortitude of politicians called on to approve the concentration committee's recommendations, and the independent stance of bank managers and investment managers at institutionals who will be asked for growing amounts of credit. These three groups succumbed to them in the past, and it will be fascinating to see if this year anything changes.