New Tel Aviv Stock Exchange CEO Itai Ben-Zeev, until recently head of the capital markets division at Bank Leumi, would be most pleased if Bank Hapoalim and Bank Leumi ultimately choose to take their credit card subsidiaries public, rather than sell them to a single buyer.
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The two companies would be very welcome additions to the TASE’s roster starved for A-list companies. Isracard, which is 98%-owned by Bank Hapoalim, and Bank Leumi’s 80%-owned LeumiCard are big companies by Israeli standards, with shareholders’ equity of 7.2 billion shekels and 7.1 billion shekels (about $1.9 billion for each of them), respectively, as of the end of last September.
Both companies are profitable, with Isracard generating about 250 million to 300 million shekels annually and LeumiCard between 200 million and 250 million shekels. They generate returns on equity of 10% to 15% a year and would likely distribute dividends. This is the kind of thing that investors would happily welcome.
The banks would be delighted to keep the credit card companies under their wings, but under the banking reform legislation approved last year, they are being forced to divest them in the name of creating more competition in consumer lending. One way they can do that is by selling a controlling stake to a strategic or financial investor. The other is to list the companies on the stock exchange, which they can do anytime over the next three years. If they go the IPO route, the banks have the option of selling as little as 60% of Isracard and LeumiCard in the first three years and retain the balance of the holding in the fourth year. And with legislation being advanced in the Knesset, the cost of going public could be significantly reduced.
The banks are hoping to get sizable offers for the credit card companies and are dreaming of multiples higher than 10. However, with the onerous restrictions imposed by the Bank of Israel on who can buy the companies,the uncertainty surrounding interchange fees to be paid by businesses to the credit card issuers and questions about the ability of the spun-off companies to compete when they are out from under the banks’ umbrella, it’s hard to know whether there is anyone out there willing to pay the valuations sought by the banks.
Hapoalim and Leumi probably won’t be able to get their optimal price if the companies take the IPO route, but in the agreements they forge with the companies following the listing, they could collect higher prices for their services and for the capital they make available to the spun-off companies – and thereby obtain a certain degree of compensation for having to make them public.