Bottom Shekel / Slavering for More Humiliation

Investment managers fail their clients as IDB takes them for another ride

During his first days in the capital markets, Nochi Dankner took pride in avoiding insider transactions. But that changed long ago.

Last week the shareholder assemblies voted in favor of a deal between two companies belonging to Dankner's IDB Group. The Property & Building Group is buying the remaining half it didn't own in the HSBC Holdings headquarters in Manhattan from sister company Koor Industries, for $138 million. The deal, on which Koor made 74% returns on its investment in a year and a half, was approved - despite opposition by the investment houses Analyst, Meitav and IBI - after most of the institutional investors had received an opinion about the deal from the consultancy Entropy, paid for by IDB group money.

Segi Eitan - Nir Keidar - 13112011
Nir Keidar

This is not the first time an external consultancy has tipped the balance on an investment decision, even though the institutionals charge investors a pretty penny for their services. For that money, investors could expect the institutionals to do their homework properly.

Entropy wrote that the transaction price was fair, and thus satisfied most of the institutional investors. The problem is, that is an excellent answer to an irrelevant question. The fact that Dankner turned the main question into one of price attests to his success in manipulating the institutional investors. Empowering Entropy to rule on the issue constitutes dereliction of duty by the institutionals, and imposition of yet more costs on their clients. An institutional investor doing its job properly should have asked completely different questions and, to resolve them, wouldn't have needed the help of Entropy or any other outside agency.

The first questions are: why was the deal born? Who initiated it? And if the asset changing hands is an attractive one, why is P&B buying out its sister company and not vice versa? Was it Segi Eitan, the chief executive of P&B, who decided that, out of all the properties in the recession-stricken American real estate market - where prices have fallen by tens of percent in the last five years - this 5th Avenue building (which it already half-owned ) was the best way to maximize value for shareholders? Or was it Koor that initiated the deal, to improve its liquidity?

If the investment managers were to strain their memories a bit, they would surely recall the circumstances that brought the HSBC deal to life. Less than a month before the date the shareholders were summoned to vote on the deal, Koor had to borrow NIS 500 million from its parent company, Discount Investment Corporation, and IDB Development in order to stay in compliance with the terms of an NIS 2.8 billion loan it had taken from Citi and Morgan Stanley. It borrowed the money to invest in Credit Suisse. Koor's stock fell 36% in a week and yields on its bonds soared to double-digit territory, reflecting acute concern that the company would seek to restructure its debt. The Israel Securities Authority was forced to intervene, forcing the group to recognize an NIS 1.8 billion loss on its investment in the Swiss bank in its second quarter financial statement.

At this point, investment managers with P&B in their portfolios should have asked themselves where their duty lay. Should they do their best to create the best returns possible for investors, to buy them comfort in their old age, or should they serve as bankers providing liquidity to the IDB group?

Opportunity of a lifetime

The next questions the investment managers with P&B in their portfolios should have asked in this situation was whether buying the outstanding 50% in the HSBC headquarters is a nonrecurring business opportunity that they should seize. There is presumably reason why the controlling shareholder of a company would choose to sell an asset from one subsidiary to another, rather than auction it on the free market.

The last question, but not the least, is the controlling shareholder's history of insider transactions. Again, the answers aren't hard to find.

Dankner, who controls P&B and Koor, is responsible for one of the more nauseating insider transactions in recent years. In November 2009, Dankner and his partners in Ganden sold the controlling interest in subsidiary Ganden Aviation and Tourism to IDB Development for $1.2 million.

The deal was approved by a 98.8% majority of the institutional investors, who relied on an opinion they received from Poalim Sahar. That investment house was owned by Bank Hapoalim, which was the main creditor of Israir Airlines, the main subsidiary of Ganden Aviation and Tourism.

It is harder to imagine a more egregious conflict of interest. Yet the institutional investors accepted the opinion from Poalim Sahar.

The deal enabled Dankner and his partners in Ganden Aviation and Tourism to unload $49 million in personal guarantees. The IDB shareholders who wound up owning this bleeding asset were less fortunate. Since the deal, Israir has lost NIS 66 million, forcing IDB to inject NIS 163 million and to provide guarantees totaling NIS 330 million.

That fact in itself should make Dankner an unwelcome visitor to the offices of the institutional investors, unless, as singer Meir Ariel sang, when you've been screwed once, you slaver for more. The fact that most of the institutional investors are prepared to support Dankner in another insider transaction two years after he sold them shoddy stuff for a handsome price could attest that the Israeli economy is rather more concentrated than the IDB group leaders are prepared to admit.

It is ironic that, a day after the subservient institutional investors approved the deal, IDB revealed an opinion trying to prove with signs and wonders that the economy isn't concentrated after all.

Entropy may be an asset worth its weight in gold to people trying to cover their rear, to yield to the embrace of the controlling shareholders without compromising their reputation.

But Entropy is completely superfluous to any investment manager who eschews wasting his time in endless discussions of the merits of this or that insider transaction. He would assume that his investors' money is best placed in companies whose managers' sole motivation is to generate value for shareholders. He wouldn't be spending his time concocting ways to serve the interests of the controlling shareholders.