The Curse of the Winner

Who are those three smug gentlemen grinning from ear to ear, in utter self-satisfaction? They are the sellers, of course: the ministry of National Infrastructure, the Finance minister and the Government Companies Authority.

And who is that gentleman to their left, who can't quite conceal a sour note as gamely smiles for the camera? That is the buyer, of course: businessman Zadik Bino, owner of Paz, who doggedly pursued the same tenet throughout his whole career: buy on the cheap. Not on the top dollar.

The price that these dignitaries agreed on for 100% of the shares in Oil Refineries' Ashdod refinery, NIS 3.5 billion, took the entire business sector by shock. The price was far, far past expectations, which had been for around half that princely sum.

In tender argot, they call it the "curse of the winner": when you have an open tender with lots of contestants, there's a good chance that the winner will have paid through the nose.

The theory of the curse says that the expectancy of the value of the merchandise is roughly the average of the bids. The winner, if so, is the one paying more than the average, so there's a good chance he's paying too much.

It is possible that Zadik Bino, owner of Paz - the biggest fuel retailer in Israel - sees special value in the  Ashdod refinery, that Yitzhak Tshuva of Delek and Dudi Wiessman of Dor-Alon didn't see.

One day after Bino agreed to pay NIS 3.5 billion for the refinery, it turns out that the Ofer family now wants into Paz, granting some legitimacy to the high price Bino agreed to pay.

But one thing is crystal clear: you can't say that Bino buys businesses only for bargain prices any more. And you can't say that the state is selling its choicest assets to the fat cats for bowls of lentils.

The NIS 3.5 billion price tag for the Ashdod refinery is a coup for the treasury clerks, who over the years had willingly laid back for the rich and mighty, and had sold them state assets and franchises for peanuts.

Capital market animals surely remember that sewn-up tender in which the Liberman family (Bino's partners) bought Paz from the state in 1988. The state didn't even trouble itself to extract its enormous pile of cash from Paz first, and the Libermans got it for a song. But the privatization of the Ashdod refinery is something completely different.

A new view

The treasury achieved its coup re Ashdod because it ignored expert advice, which it itself commissioned, that Oil Refineries couldn't viably be split into two competing companies, based on the refineries in Ashdod and Haifa.

Until recently the chiefs of The Israel Corporation, which had owned 26% of Oil Refineries, claimed that the company couldn't be split because the Ashdod refinery was too small to be sustainable in the context of the Israeli marketplace.

It turns out that not only is the Ashdod refinery perfectly viable on its own: some of the wiliest souls in Israel are prepared to pay elephantine amounts for it.

Another reason for the success in privatizing Oil Refineries is that after a protracted and oft-violent process, the state managed to buy out The Israel Corporation's shares in Oil Refineries, for not much money.

The third reason is timing. In the last two years refining profits have been shooting up, rising by hundreds of percent, and the value of Oil Refineries quadrupled. For a change, the state got to sell an asset at the top, not at the bottom.

Learned how to do it

Government Companies Authority manager Eyal Gabbai did awfully with the sale of Zim to The Israel Corporation, for half-price. Now he's done beautifully, twice.

A year and three months ago he managed to sell the Bezeq phone company to two of the savviest buyers in the world, Haim Saban and Apax. He got a price of $3.2 billion for the company. Since then Bezeq's value has declined: Saban and Apax are starting to realize that whatever they got, it wasn't a bargain.

Then the state managed to sell its shares in Bank Leumi three months ago, to a highly experienced American investment fund, at a very, very full price. Cerberus agreed to pay NIS 17.50 per share, since when Leumi shares have been mainly sounding the retreat.

Bank Leumi stock

The professionalism and grit that the treasurymen showed in these three privatizations must now be re-directed to something else, and far more important: structural reforms.

The high price at which the state managed to sell its assets is an important signal regarding the talents of the treasury officialdom, and their ability to handle the tycoons.

But the really important thing is to create competitive market structures, that prevent government monopolies from turning into privately-held monopolies.

Usually officialdom has been cowed by big business, though the clerks won the battle to force the banks to sell their provident and mutual funds. Now they face a battle over introducing competition to the electricity sector. May they draw strength and perhaps even vision from their victory in privatizing Oil Refineries.