The Bronfman-Schron group began selling shares in Israel Discount Bank on Monday with the aim of divesting its 25% controlling stake in Israel’s third-largest lender.
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Matthew Bronfman, scion of the Canadian family that made its fortune in whiskey, and New York real estate mogul Rubin Schron have retained Citibank Israel to sell a 7% stake in the bank at a price reflecting a 7% discount on the stock’s NIS 7.10 closing price on the Tel Aviv Stock Exchange on Monday.
All told, the proceeds from the sale of the 7% tranche will reach about NIS 500 million. The two will be barred from selling any more of their remaining 18% for the next 120 days.
The price they are seeking represents about 58% of the bank’s book value.
The onset of the divestment means that the group will no longer be regarded as the bank’s controlling shareholders, even if they hold the biggest block of shares, under a directive from the Bank of Israel’s banks supervisor published in July.
Moreover, the controlling shareholders in banks are required to divest all the shares within a certain period of time once they begin the selling process. But regulators have never specified what the time frame is, in an effort to protect the seller’s interests by not creating a public deadline.
The Bronfman-Schron group’s decision to bail out of the bank provides further evidence of Discount’s problematic situation. The group sought over the past three or four years to find a buyer for the stake but is now being forced to sell it on the stock market at less than its traded price.
The banks supervisor would normally require Discount’s chairman, Yossi Bachar, to resign once the divestment process is underway, saying he is a representative of the controlling shareholders. However, the Bank of Israel is allowing Bachar to stay for now. Discount’s other board members will have to step down within six months and a public committee will choose new directors to replace them.
The Bronfman-Schron group bought the shares from the government in 2005, with the Finance Ministry hoping the new controlling shareholders would succeed where it had failed in making the lender more efficient and profitable.
In the years that followed, however, there was frequent management turnover. Discount remains the weakest of Israel’s big banks in terms of profitability, productivity and capital adequacy, the measure of a bank’s financial strength.
The workers committee at Discount is the most militant in the banking sector, and the bank has a culture that resembles a state-owned enterprise more than a private business. The Bronfman-Schron group’s biggest failure was its inability to effect a change in Discount’s corporate culture.
The bank’s low level of profitability forced it to systematically pare back its loan portfolio over the last two years in a bid to reduce its risk assets and improve its capital adequacy ratio.
Last week, Discount reported it earned NIS 276 million in the third quarter, up 25% from NIS 221 million a year earlier. Its core Tier 1 capital to risk-weighted assets rose to 9.3% at the end of September, from 8.6% at the end of 2012.
In the first nine months of this year, Discount enjoyed a 9% return on equity, a measure of bank profitability. However, the improvement doesn’t come from the bank’s day-to-day operations but from gains on the sale of stocks and bonds it holds, which boost its return on equity.
In addition, the Discount board decided to put its Bank Discount New York unit up for sale, with the proceeds to be used to shore up the parent bank’s balance sheet. It also decided to begin increasing lending again.
Potential buyers are now carrying out due diligence of the New York unit’s books before presenting offers.
Discount executives say the sale of the New York bank will enable Discount in Israel to increase its income while efficiency steps back home will increase profitability. But the divestment by the Bronfman-Schron group suggests that the controlling shareholders were not confident of the wait-and-see strategy.
Reuven Spiegel announced he was stepping down as CEO of the bank earlier this year, after failing to complete his program for reviving the bank. Lilach Asher-Topilsky, the head of Bank Hapoalim’s retail division and its deputy chief executive, was named in October as his successor. She will likely take over in April.