After the Exit, Kibbutzniks Debate What to Do With a Half a Billion Shekels

After selling its remaining share of Materna to Osem-Nestle last month, Kibbutz Maabarot's 500 members have to decide not only what to do with the windfall, but also what to do with their kibbutz.

Kibbutz Maabarot
Ofer Vaknin

On a recent visit, an impressive number of electric scooters are seen parked outside the Kibbutz Maabarot dining hall and along the nearby paths. They are driven not only by the elderly residents, but sometimes also by Filipino caregivers or by young people who like getting around this way.

The numerous scooters was the only visible status symbol at this small kibbutz in central Israel that last month sold its remaining 49-percent share in baby formula maker Materna to Osem-Nestle for 575 million shekels ($156 million). The kibbutz members were surprised to hear about the sale of the plant, which for decades had been the main industry of this community, east of Netanya. The decision to sell was made by the board of directors of the kibbutz-owned Maabarot Products, through which Materna was held. There was no general kibbutz meeting on the matter. The board’s decision was made purely for economic reasons – based on the belief that this was the optimum time for Maabarot Products to part with its Materna holdings. However, for the kibbutz, the sale marks a milestone that goes beyond the financial aspect.

Two weeks ago, the residents of Maabarot all declined to be interviewed about the deal. They had been warned by top officials on the kibbutz not to indulge the media’s curiosity. To date, the only response, from kibbutz secretary Amnon Abramov, has been that no decision has been made on what to do with the money received from the deal – which could have amounted to hundreds of thousands of shekels per member, if this were not a collective kibbutz (kibbutz shitufi).

Last of the collectives

But Maabarot is a completely collective kibbutz. Even in 2017, after two decades of privatization on many other kibbutzim, in Maabarot there are no differential wages, the communal dining hall still operates, and the members live off a budget that does not include special compensation for work. Maabarot is one kibbutz that fits the argument that only kibbutzim that maintain a thriving industrial plant can continue to operate as true collectives. Materna was one big reason Maabarot could sustain the collective model. Now that it has been sold, the question of privatization is liable to come up.

Kibbutz Maabarot
Ofer Vaknin

“The discussion of what to do with the proceeds from the sale of Materna is separate from the discussion of whether to privatize the kibbutz or keep it as a collective. That’s an ethical question, not a business question,” said one kibbutz member who agreed to talk about the subject. “You could possibly say that the sale poses a certain type of temptation that strengthen the beliefs some of them already held. There are young people who are worried about their future and want to invest some of the proceeds, and there are older people who might like to get more of the money right now for themselves and to share it with their children. It’s not a clear-cut situation either way.”

The sale also gives the kibbutz an opportunity to invest the money in one of the other kibbutz-held companies, such as Trima, which is held in partnership with Unipharm.

Kibbutz Maabarot
Ofer Vaknin

How much will the 500 kibbutz members receive?

Kibbutz Maabarot was founded in 1925 in Afula and established in its current location in Emek Hefer in 1933. It is home to 730 people, about 500 of whom are kibbutz members. Its 3,400 dunams are put to a range of agricultural uses. The kibbutz also operates a cattle shed in conjunction with Kibbutz Ha’ogen. But with all this, it still relies mostly on its different industries for survival.

The road to success

Materna packages at a supermarket.
Moti Milrod

In 1963, Maabarot Products was founded to manufacture milk substitutes for calves. In the 1970s, the company got into making milk substitutes for pets, with several successful brands, and then in the 1980s, it hit on its most profitable area – making infant formula under the brand name Materna.

“The Materna plant has been the life’s work of many on the kibbutz for the past 35 years. It’s not easy to part with a life’s work. It’s not just about money. But we live in a cold and cruel business world, and one has to do the best one can within that world,” said the kibbutznik.

“Materna basically founded this industry. Before, you couldn’t just go and buy milk substitutes. Before Materna, Similac had a little bit of sales in Israel, but it was only sold in pharmacies. Before long, Materna became a product that was sold in all the supermarkets,” says Yigal Galli, the former CEO of Maabarot Products.

Materna filled the vacuum for baby food products in Israel. Company reports show that, at the end of 2015, it held 55 percent of the market in baby formula, 69 percent of the market in baby cereals, and 41 percent of the market in baby foods (Gerber). For Maabarot Products and the kibbutz, Materna was the goose that laid the golden egg.

In 1993, some of the stock was sold when Maabarot Products had its initial public offering on the Tel Aviv Stock Exchange. Then, in 2008, came the exit: Osem-Nestle bought 51 percent of Materna stock for 248 million shekels ($67.2 million). “It took four years to complete the negotiations. It was a very important deal for Osem-Nestle, Galli said this week.

Last month, the second part of that deal came to pass: Maabarot Products exercised the option it was given in 2008 deal to sell its remaining 49 percent of Materna to Osem-Nestle, which ended up paying more than double the amount it did for the first part of the deal.

$60,000 for each kibbutz member?

Theoretically, if Maabarot Products were to distribute all the proceeds of the present deal as a dividend to its shareholders, and Kibbutz Maabarot decided to distribute all of the money, each of the approximately 500 kibbutz members would receive about 600,000 shekels. But to judge by the earlier deal, this is not all that likely.

After the first deal, Maabarot Products distributed 50 percent of the profits as dividends. Sixty percent of this went to the kibbutz, which put most of the money into members’ pension funds and into business investments. Only a sixth of the funds went into the kibbutzniks’ pockets. If the same system is followed this time, each member would see about $60,000.

“Nothing will change. The company would have been sold no matter what, it was just a matter of time,” one woman from the kibbutz whom we met outside the dining hall told us. At the local market, Materna was the only brand of baby products on the shelves. Kibbutzniks pay a lower price for it than the regular price paid by customers from elsewhere. But soon Materna could be sharing shelf space here with other companies’ products.

It’s not hard to see why the Maabarot Products board decided that this was the right time to sell off Materna. The 2008 contract stipulated that the value of the present deal would be determined based on the company’s performance – which has improved dramatically in the intervening years. In 2015, revenue from “human products” was 350 million shekels, up from 309 million in 2008. And in 2015, profits from Materna products stood at 63 million shekels, up from 42 million in 2010.

This market can only go down

The belief that this was a peak time to sell Materna is supported by the fact that the company’s future is hazy, and it faces many threats. In 2003, after the Remedia tragedy in which a number of babies were seriously harmed, and some died, due to flaws in that company’s baby formula, the field was left open to Materna. But the 2011 social protests laid the groundwork for moves to reduce concentration in the baby formula market.

Materna and Similac control 90 percent of the market in Israel. Consequently, prices are much higher here than in other places such as Germany, Britain and the United States, and regulators have taken note. In July 2016, the Knesset ministerial committee on legislation approved the advancement of a bill sponsored by Kulanu MK Rachel Azaria that would place baby formula products under regulation. The bill passed its preliminary reading in November.

Another regulatory threat comes from an area where the company has traditionally had control. For years, Materna and Similac paid hospitals to have new mothers use their products, on the assumption that they would continue using them once they left the hospital.

“All over the world, this is a very conservative market, controlled by just a few manufacturers. Mothers don’t switch products during the time they’re bottle feeding, and if they had a good experience, they’ll go back to the same product with their second and third child,” says Galli.

But in early 2014 the antitrust court issued an order requiring hospitals to offer new parents a choice between all the baby formula products under equal conditions.

Materna may also be facing stiffer competition than before. In 2011, Teva launched its Nutrition baby formula, and by 2016 it had 10 percent of the market. In August 2016, Shufersal launched Baby Shufersal formula, priced 30-40 percent lower than Materna. And SuperPharm has long been planning to launch its own baby formula. “Looking at the overall picture, Maabarot Products can see that the market can only go down,” one key player in the field told us.

What to do with the money

The kibbutz essentially traded in the goose that laid golden eggs on a yearly basis for a big one-time payoff, and now decisions have to be made on how to invest that money. Should it go into better housing for returning young members, into pensions for the older members, or into other kibbutz industries?

If the money is not invested wisely, future generations could end up yearning for the former asset that yielded a steady income. As one kibbutznik put it, “There’s no such thing as a rich kibbutz Bertolt Brecht once said that when you accrue money, it stinks, but when you spread it around, it acts as fertilizer. Nobody here is going to become stinking rich.”