Bottom Shekel / Indecent Proposal

Nobel laureate Daniel Kahneman and his partner Amos Tversky coined the phrase "Anchoring Effect", which claimed that people cling to a certain numeric value just because it managed to take root in their awareness.

The existence of the Anchoring Effect has been demonstrated in any number of research studies. One particularly intriguing one showed test subjects a wheel of fortune that would stop at any number from 0 to 100. Then they were asked how many African nations belong to the United Nations: Is the proportion (in percent out of total nations) higher or lower than the number at which the wheel stopped? Then they were asked to estimate the proportion.

Astonishingly, the outcome was that the number shown by the wheel affected their estimates, though they all knew it was random. The higher the number the wheel stopped at, the more African nations the subjects suggested were in the UN. When the wheel stopped at 10, the subjects surmised that 25% of the nations in the UN were African. When the wheel stopped at 65, they surmised that no less than 45% of the UN nations were African.

Even when offered monetary incentives to get it right, the wheel had the same effect. The conclusion was that we adhere to numbers we hear. They are an anchor for our minds.

Could it be that Lev Leviev delved into investor psychology, and concluded that he should present Africa Israel's debt as uncollectible? Could the Africa Israel people be leaking the insulting details of their proposal in order to make it easier for investors to accept the next, somewhat improved offer?

Who knows. But one could recommend to the representatives of the bondholders that they stop the official negotiations even before they begin. They could spare themselves much aggravation and many cigarettes that way, not to mention tons of bourekas. Mainly, they'd save us all money.

Leviev's proposal is complex, but the bottom line is that he's suggesting replacing NIS 7.5 billion in debt with shares in Africa Israel subsidiaries (but only up to a holding of 50.1%), capital notes convertible into stock that matures only in 2020 (but even conversion wouldn't dilute Leviev to less than 56%), and new bonds maturing in 10 years. Leviev would stay in control of Africa Israel, and Africa Israel would stay in control of its subsidiaries - and he isn't offering a sou of his personal fortune.

Investors must reject his offer. Cut the rope holding that anchor in place.

Africa Israel's liquid and illiquid assets are worth around NIS 6.5 billion. If the company is liquidated, much of its debt could be repaid, even assuming onerous liquidation costs. We may assume that liquidations judge Varda Alshech wouldn't leave Leviev in charge unless he puts in fresh money.