Israel's Mizrahi Tefahot Bank in Talks to Acquire Union Bank

Bank told regulators it was in talks to buy 75% stake in the bank as well as the remaining 25% of shares held by the public

A Bank Mizrahi Tefahot conference room.
Tomer Appelbaum

Shares of Union Bank were up about 15% over the past two days as interest intensified over acquiring control of the bank.

On Monday, Mizrahi Tefahot Bank informed the Tel Aviv Stock Exchange that it was in discussions with the controlling shareholder group at Union Bank of Israel to buy the group’s 75% stake in the bank as well as the remaining 25% of shares held by the public.

If Mizrahi Tefahot does purchase Union Bank, it would become the country’s third-largest bank, after Bank Hapoalim and Bank Leumi and ahead of fourth-place Israel Discount Bank. Mizrahi would have a loan portfolio of about 200 billion shekels ($56.16 billion), compared to 270 billion shekels for Hapoalim (as of the end of March) and 265 billion shekels at Leumi.

In the past 15 years, Mizrahi has conducted several successful mergers and acquisitions, including the purchase of 50% of Bank Yahav and the merger of the Tefahot and Adanim banks with Mizrahi.

Mizrahi has failed, however, to obtain regulatory approval for a move that would put it into the league of Hapoalim and Leumi, through a merger with First International Bank of Israel (also known as Beinleumi) or through the acquisition of an insurance company.

Mizrahi has also exhausted its potential for growth over the past decade, notably through its mortgage business, in which it is considered the leading player with a 35% market share.

The purchase of Union Bank is seen as a rare opportunity in that Union Bank is biggest of the country’s three smaller banks that still remain independent. (The other two are Dexia Israel Bank and Bank of Jerusalem).

The rise in Union Bank’s share price began on Sunday, with a jump of 8.5% on an announcement to the Tel Aviv exchange that Union Bank shareholders — the Landau and Manor families and Yael Zakai-Almog —were expected to join Shlomo Eliahu in the sale.

The following day, on the news of the interest of Mizrahi Tefahot, the share closed up 6.3%, at 18.32 shekels.

Eliahu is Union Bank’s largest shareholder, with a 27.2% stake. He is under on orders from the Bank of Israel to sell his stake in the bank by October, as a result of his acquisition in 2012 of a controlling interest in Migdal Insurance.

Israeli law bars anyone from controlling both a bank and an insurance company, but Eliahu has been insistent on selling his shares at more than their market price, and up to now had not been successful in doing so.

After the share price increases of the past two days, Union Bank is trading at a market capitalization of 1.3 billion shekels.

Mizrahi Tefahot is proposing giving Union Bank’s shareholders stock in Mizrahi at a price that would not exceed 60% of Union Bank’s share capital.

If Mizrahi Tefahot moves forward in purchasing the shares of the bank based on Union Bank’s share capital of 2.4 billion shekels (as of the end of March), that would make the purchase price for the bank 1.44 billion shekels, a 15% to 20% premium over what its share price at the opening of trade on Sunday.

Hedva Ber, the supervisor of banks at the Bank of Israel, would be expected to approve Mizrahi’s acquisition of Union Bank.

In the past, she has spoken publicly in favor of the merger of medium-sized banks with smaller banks as a way of buttressing the standing of the country’s mid-range banks.

On the other hand, such a transaction would eliminate a bank from the country’s banking scene and reduce competition in the banking sector, something that could incur the opposition of Antitrust Commissioner Michal Halperin and Finance Minister Moshe Kahlon.

But with a market share of less than 3% of the assets of members of the public, it may be argued that Union Bank is not a real source of competition in the banking sector.