The Shekel Drops / Why Nochi Dankner Is Selling Super-Sol

Hint: He doesn't want to become the next Ilan Ben-Dov.

Why would Nochi Dankner want to sell Super-Sol, the biggest supermarket chain in Israel? The main reason to start the process - to start, because completion will take six years, if that stage is reached at all - appear to be financial.

Dankner's stressed. The debts owed by firms in his IDB pyramid of companies are too big relative to the cash flow his companies can be expected to generate.

Super-Sol - Emil Salman - 17102011
Emil Salman

How can one tell he's stressing?

One can read the papers and see that credit rating agency S&P Maalot downgraded IDB's credit rating, or that Bank Hapoalim now classifies the group's debt less favorably than before. The protests over the cost of living in Israel also hit the group. Granted, retail chains like Super-Sol haven't been hit as hard as dairy manufacturers, but they're a hair away from being targeted by boycotts too.

Super-Sol is a flash point. It dominates the retail market and has been able to afford to pay its executives bloated paychecks in the millions. Its executives are on trial for alleged abuse of the chain's monopolistic power. The chain charges more at its stores in small towns, where there's no competition, than in city stores. What good does its donation to a library in Kiryat Shmona do if the cost is borne by consumers? Moreover, the public today is far more sensitive to prices and this is depressing margins throughout the business scene.

Nor is compensation arriving from other IDB group branches. Reforms of the cellular industry hit another group company, Cellcom, and now new reforms taking shape thanks to the Trajtenberg Committee on the cost of living, and the economic concentration committee, will hurt the IDB group even more.

More signs of stress? Read the IDB group's financial statements, which, inter alia, showcase its ill-advised choice of investments. It has lost billions on its speculation in Credit Suisse stock; it has suffered a heavy loss on investment in Las Vegas property and in buying Israir; and Maariv, the publishing group that Dankner bought in April, is hemorrhaging money. The group is in a state of managerial distress.

Or just look at the charts of IDB group bonds. Yields have climbed as high as 14% as their prices drop, attesting that at least some market animals are worried about the group's capacity to repay in full, on time.

Now add the global financial crisis to this and you start to see why Dankner would sell Super-Sol.

A matter of faith

The capital market is cruel. When players smell blood in the water, they show no mercy; crises snowball. When a company's bonds start wilting on concerns that the company won't be able to raise more money - not from banks or pension funds, or due to concerns about management - the drop accelerates fast.

Corporate crises of this sort don't always end well. Dankner realized he's at the start of a potential slippery slope of the sort. He knows about appearances: He can't afford to be perceived as liable to default on debt. He has to cut back. He has to sell assets.

Kudos to him, by the way; he's selling to gain liquidity to pay debts - a move that not all tycoons have made. He didn't want to be the next Zehavit Cohen, the powerful chairwoman of food manufacturer Tnuva and investment bank Psagot, who was sent home. And even less so, he didn't want to be the next Ilan Ben-Dov, the tycoon that isn't paying the people back.

The market's brutality has another facet - that of adoring the strong and affluent. When you have such attributes, the market throws money at you. You get even stronger and richer. So, if in situation like Dankner's, you sell assets to repay debt, the market applauds. You embark on a process that will end in your being able to borrow more.

The sale of Makhteshim-Agan Industries to the Chinese that should close soon will bring IDB $1 billion and should have restored market confidence in the group's credit worthiness. But it evidently didn't do the trick. The market does believe the deal will close - Makhteshim-Agan has been trading at roughly its value in the deal for a while now.

The sale of Super-Sol should restore confidence. If the market buys the rather odd scenario of Dankner selling his retail chain to his partners at a bloated price, over years, despite all the conditions and contingencies, then IDB group bonds should skyrocket across the board.

Super-Sol stock should also skyrocket. It's lost more than 50% of its peak value on the Tel Aviv Stock Exchange.

Investors will gain from that rebound, to be sure. But it's nothing compared with what they would have earned if Dankner had sold Super-Sol after the economic concentration committee's recommendations are enacted into regulation.

How's that? The economic concentration's conclusions about the need to sever financial and industrial ties are puling. Only three tycoons - Yitzhak Tshuva, Zadik Bino and Nochi Dankner were affected. Only they have to sell some assets, but Dankner for instance can keep Clal Finance if he wants, and the Epsilon investment house too. Tshuva can keep either the Phoenix insurance company or the Excellence Nessuah investment bank.

But when it came to pyramidal holdings structures, the economic concentration committee bit down, in part bolstered by a Bank of Israel report saying that economic concentration is a cancer threatening the Israeli economy, milking investors and ruining the capital market. The Bank of Israel report says the controlling shareholders get much too high a controlling premium, which winds up impairing company value and, therefore, the public's investments. The report recommends that when a controlling shareholder sells his company and gets a control premium, minority shareholders must be given an opportunity to sell as well, at the same high price.

And there you have it. The report is phrased somewhat murkily, but the intent is that if Dankner sells Super-Sol at a bloated price, minority shareholders should be able to sell their shares at that opportunity, for the same bloated price. The upshot is that if the economic concentration committee's recommendations had been law, Super-Sol's buyers would have had to fork over billions more to the investing public. That in itself could be a reason to hasten to reach a deal.

The sale of Super-Sol is the second great drama in the Israeli food scene, after Tnuva capitulated to the power of public protest and fired Zehavit Cohen. The two summer 2011 protests (cottage cheese and the tent movement ), and the two committees (Trajtenberg and the economic concentration committee ) are changing the face of Israel's economy. And not only the economy. Some even think Gilad Shalit's return is not dissociated from the summer of discontent.

Not only governments bow to protest, it seems; tycoons do too. The "Occupy Wall Street" movement could yet wind up changing the world.