Investors Get Shortchanged in Share Buybacks, Study Charges

Survey by BDO says controlling shareholders exploit greater access to information to buy stock from minorities on the cheap.

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The controlling shareholders of Israel's publicly traded companies take advantage of investor ignorance, buying up publicly held shares cheaply during market slumps.

The accusation comes from Pini Shmueli-Nisan, senior partner in the BDO consulting group and head of corporate finance at the BDO Ziv Haft accounting firm. He bases this claim on a study of purchase offers conducted through the Tel Aviv Stock Exchange since 2005.

"During market rallies there are many share offerings, but during slumps these are sharply outnumbered by share buybacks," he observes. "The conclusion is that controlling shareholders sell the public shares at high prices and buy them back cheaply."

In 2008, the year the global economic crisis hit and the blue chip TA-25 index lost nearly half its value, nine companies were delisted from through buybacks, while only four new companies issued shares to the public.

The trend continued in 2009 as the crisis deepened, despite the rally of the TASE. In the course of the year 14 companies made buyback offers while only four conducted initial public offerings.

In 2010, which the TA-25 index ended 16% higher, seven companies were delisted through share buyouts while 22 companies conducted IPOs. In 2011, when the TA-25 index fell 18%, 13 companies were taken private while 11 companies went public.

Buyouts come at nadirs

Until several months ago 2012 was considered a bad year for the market, with thin trading volumes and relatively low share prices. Nine companies were erased from the trading boards through buyouts, while only three were newly listed.

"Buyout offers tend to come when share prices are near their lowest levels for the year," Shmueli-Nisan points out.

One of the buyouts the study cited as an example of a controlling shareholder apparently taking advantage of minority investors was the delisting of Granite Hacarmel Investments earlier this year by David Azrieli.

His Azrieli Group offered to buy the share at a 20% premium over the market price, but the offer was in fact 31% below its one-year high.

Publicly held shares of Tambour, another Azrieli Group company, were bought out for 20% below the share's one-year high, a 10% premium was over the market price.

Muzi Wertheim's Central Bottling Company (Coca-Cola Israel ) acquired all the outstanding shares in water bottler Neviot at 31% below the share's highest trading price, reached the previous year. But the purchase price was 64% above the market price.

"This is a worrying state of affairs," says Shmueli-Nisan. "It shows that controlling owners have abundant information. They time their purchase offers to coincide with market slumps. As a result of a lack of sufficient regulatory instruments protecting the public they manage to snatch up companies and take them private at bargain prices.

"Low trading volumes and poor regulation on this matter play into the hands of controlling interests," Shmueli-Nisan goes on to explain, adding, "I think it's important for the Israel Securities Authority to intervene and set policies that will protect the investing public."

The BDO study indicates that not all companies take advantage of minority shareholders. ILDC Insurance Holdings was delisted after owner Eli Elezra paid a premium of 32% above the share's one-year high price. The controlling shareholders of Vardinon Textiles, meanwhile paid a 12% premium over the share's one-year high.

Lev Leviev, who controls Africa Israel Investments, paid a 6% premium for Negev Ceramics earlier this year, which was slightly higher than the average price in the previous half year.

Role of outside directors

It's important that outside directors, who are supposed to represent the public, solicit an unbiased appraisal to help determine the company's real value, Shmueli-Nisan says.

"One can understand controlling shareholders who decide that as a result of stiff regulation and low trading volumes the advantages they derive from owning a public company have declined to where it is a burden, but I believe [buying back shares in order to delist] should be done in a way that doesn't hurt the public," concludes Shmueli-Nisan.

Lev Leviev: Bought back Negev Ceramics at a 6% premium.Credit: Ofer Vaknin
David Azrieli, introducer of the mall to Israel. Credit: Eyal Toueg
Muzi Wertheim: Bought Neviot at a 64% premiumCredit: Moti milrod
Eli Elezra: Paid a 32% premium for ILDC InsuranceCredit: Ofer Vaknin

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