Concentration Recommendations Will Hurt Business, Claim Tycoons

Tycoons responded to position papers published by government's Committee on Increasing Competitiveness in the Economy.

Judging from the responses sent in by tycoons controlling the country's largest business groups, it would appear that the problems dealt with by the government's economic concentration committee don't concern any of their businesses, and all should be exempt from any of the proposed reforms.

The concentration committee, formally titled the Committee on Increasing Competitiveness in the Economy, published position papers on Tuesday that it received in the course of hearings on its draft proposals. These included documents submitted by or on behalf of Nochi Dankner, controlling shareholder and chairman of the IDB group of companies; Zadik Bino and his Australian partners in FIBI Holdings and Paz Oil; and Shaul Elovitch's Eurocom Communications, which controls Bezeq.

Nochi Dankner

Dankner appealed to the committee's compassion: "Allow me to express a wish: Each of us, in his endeavors, needs a supportive and sympathetic environment, and this includes businessmen," he wrote. "But to my regret, the prevailing attitude in Israel toward the business sector has been hostile lately. If only the committee would take care of this. You are definitely the people from whom a positive and supportive message to the business sector would be appropriate."

Dankner added that in these times of economic crisis, he doubts the committee's recommendations will strengthen the Israeli economy. Indeed, he would expect the country's business activity to suffer if the proposals are adopted.

'No exploitation'

In his letter, Dankner reiterated the position expressed by IDB before the committee was established: that Israel's economy is competitive, and there is no global precedent for seeking to limit economic concentration. He insisted that the panel's recommendations would neither increase competition nor lower the cost of living. He therefore urged the committee members to weigh the costs against the benefits, and at least to allow companies plenty of time to adapt themselves to the radical changes.

Dankner also claimed that IDB's business activity is quite different from the kind that people commonly - and mistakenly - attribute to pyramid groups. Since he bought the group and streamlined its structure, he said, the company is now focused, well-managed and dynamic and has diversified into non-overlapping business sectors. Moreover, it is transparent, in regulatory compliance and guided by strict corporate governance standards.

He has carried out just two insider deals at IDB, Dankner maintained. One was in 2004, when Ganden Holdings sold its stake in GTC, a real estate company, to Azorim Investment, Development and Construction, then owned by IDB. The second was in 2009, when Ganden Holdings sold Ganden Tourism and Aviation to IDB.

"Since I came to IDB, there never has been, nor will there be in the future, any controlling owner transactions conforming to the exploitation or milking doctrines attributed to pyramid companies," he wrote.

Bino: It doesn't apply to us

The committee's interim recommendations would require Zadik Bino to sell either his financial holdings in First International Bank of Israel (Beinleumi ) or his nonfinancial holdings in Paz. But he insists the recommendations don't actually apply to him at all.

Bino's position paper was submitted by attorneys Ephraim Abramson and Zvi Agmon on behalf of himself, the Liberman and Abeles families of Australia, and the companies under their control - FIBI and Paz. Its main argument was that the group should be exempt from separating its nonfinancial holdings in Paz from its financial interests in Beinleumi, because the concerns that prompted this proposal have no relevance to it.

The paper claimed that there aren't any significant business connections between Paz and Beinleumi, and that ownership in them is held separately. It also pointed out that both companies enjoy high levels of equity and little financial leverage. It suggested the committee add criteria relating to leverage in determining whether financial and nonfinancial holdings must be separated, since one of the main concerns behind this recommendation is that instability in nonfinancial holdings could spread to the financial side.

The committee also stated that holding both nonfinancial and financial companies creates the risk that resource allocation could become warped: The financial institution might divert credit to the affiliated company and block credit from its competitors. But the paper insisted there is no need to worry, because the Bank of Israel regulates the issuing of credit to related companies. Moreover, Beinleumi accounts for just 3.5% of Israel's credit volume, it said, too little to generate a diversion of resources or harm the economy's competitiveness.

Instead of mandating a split, it proposed, the committee should simply ban financial companies from giving credit to other companies under the same ownership.

Regarding concerns that financial companies might leak information about competitors of affiliated nonfinancial companies, the paper said this risk theoretically exists wherever cross-holdings of companies exist, whether financial or nonfinancial. The solution, it said, must encompass all cross-holdings in the economy and include, for example, complete separation between corporate officers of different companies.

The group also attacked the idea of making company size a criterion for determining the need to separate holdings, saying this has no basis in economic research. It was the state that sold it both companies, the group noted, and it received all the required regulatory approvals. It also argued that the sale of any of the group's holdings wouldn't affect the economy's competitiveness or stability.

The document ended with a veiled threat: that nothing in it detracts from the group's right to sue the government for any damage incurred by being forced to sell its holdings.

'Bezeq should be exempt'

The Eurocom group asked that Bezeq be exempted from recommendations concerning wedge companies (publicly-traded subsidiaries of other publicly-traded companies ). The law firm Fischer Behar Chen Well Orion represented the group on this matter.

Eurocom controls Bezeq through a chain of holdings that threads its way from Internet Gold to B Communications, which has a 31.1% direct stake in the phone company. As a result, Eurocom controls about one third of Bezeq's voting rights through an indirect stake totaling just 19.89% of its capital. The group insisted that the gap between the two figures is too insignificant to justify the concerns at the basis of the committee's recommendations for wedge companies, and that Bezeq should therefore be exempt.

The group pointed out that Eurocom's equity interest in Bezeq exceeds NIS 1 billion, representing most of controlling owner Shaul Elovitch's worth. It would therefore be unreasonable to assume he'd take the sort of unsubstantiated risks referred to by the committee in the chapter of its report dealing with wedge companies, the position paper said.

Bezeq operates in a regulated field, the group added, and therefore shouldn't be subject to rules concerning wedge companies. Furthermore, the alternatives suggested by the committee for controlling owners aren't relevant, it charged: The ownership stake can't be raised to 51% due to the enormous amount of capital this would require, and reducing the stake isn't realistic due to regulations requiring a minimum level for the controlling core.