Taking Stock / A Pea for Nochi's Thoughts

Two peas in a pod. That means two things that are indistinguishable, or at least very similar. Seen another way, they naturally belong together.

Peas are also one of the many products sold by Sunfrost, a muscular brand name in frozen veggies and foodstuffs but traditionally a weak performer when it comes to financial statements.

Since its flotation on the Tel Aviv Stock Exchange in December 1982, it has fed investors mainly bitter herbs and baloney, though neither is officially on its list of products. Yet in recent years, the frozen-foods company managed to thaw hearts on the market, though without the usual fanfare and PR campaign that normally accompany such recoveries.

On Sunday the company published its financial statement for the first quarter of 2004, presenting its 25th straight quarter of revenue and profit growth.

It netted NIS 6.5 million, comprising 20 percent return on equity. That high profitability may seem unremarkable to aficionados of Sunfrost frozen baby carrots, but it's quite an achievement for a company known mainly for losing money, terrible labor relations, and mainly lousy returns on investment.

One could think of several reasons behind the improvement that transformed it from a stock market dog to a roaring lion, but the main one is evidently that Tnuva bought it seven years ago.

Sunfrost foods is just one of the many companies to make their breakthrough only after being ejected from the Recanati family freezer, that is from the ownership and management of the IDB group.

Food company sold for peanuts

The transfer involved peanuts. Tnuva bought Sunfrost from IDB group company Clal Industries at a company value of only $12 million. Today Sunfrost trades at a market cap of $55 million.

The figures when it comes to Delek Group are a lot bigger. Until Yitzhak Tshuva snatched the company from the Recanatis at a company value of $400 million, the company was considered deathly boring, not only on the TASE in general but in the Recanatis' portfolio as well.

Yet since the Tshuva takeover, it's become one of the greatest sources of value on the exchange. Its market cap is $800 million, after having paid dividends of $300 million. For comparison, the entire IDB group today trades at a value of $640 million.

Even factoring in the huge dividends IDB has paid since Nochi Dankner acquired it in mid-2003, Delek has created more than double the value IDB did in the last seven years.

Iscar is an even more extreme example. For decades the Recanatis controlled the company in partnership with the Wertheimers, through Discount Investment Corporation. Until the late 1980s, Discount Investment held half its shares, but sold some, remaining with 25 percent.

Iscar was a perfectly good, profitable company under IDB's stewardship, but its breakthrough into the big times arrived as soon as the Wertheimers forced the holding company to withdraw. Today the company's value is estimated at $3 billion and then some. If the Recanatis had managed to hang on, Iscar would have doubled Discount Investment's value.

Salkind's victory

A less famous case, if only because it happened 15 years ago, is that of the Elco group. The market identifies Elco with Gershon Salkind, but he wasn't its only progenitor. Until the late 1980s, he had had a partner - Discount Investment again. Salkind managed to shed his partner at a ridiculous price and today the group trades at a company value of $330 million.

One of the reasons for Elco's surging value was a successful acquisition dating from 1991, when it bought Electra for $10 million. Salkind promptly split Electra into two companies - Electra and Electra Consumer Products. He groomed them, improved their efficiency and today the two are worth $475 million. Who sold Electra to Salkind? None other than Clal, the same IDB group company that had sold Sunfrost.

You can see much the same at Koor Industries, where companies under its wing languished, only to take wing after being sold. The most prominent example is Tadiran Communications, a marginal business in Koor's portfolio but five years after its acquisition by a group of investors led by its CEO, it's a powerhouse worth $400 million.

Looking back, it's easy to explain why Sunfrost, Elco, Electra and Delek languished under IDB, and flourish under new ownership. With Tnuva, Sunfrost received an infinitely more powerful distribution network. Elco joined a group with vast industrial know-how.

Delek passed into the hands of a ravenous entrepreneur who needed to return vast loans that were taken to buy it.

Each has its own story, but they all have something in common that leads to a single conclusion: great holding companies tend to stuff their portfolios with companies they don't know how to manage, and to which they can offer no added value. There are always exceptions to the rule, but history shows that an unfocused business concern lacking a direction and critical mass - a sprawling holding company that tries to stuff sundry vegetables and animals into its pea-pod portfolio - stands little chance of cultivating successful companies.

Nochi Dankner is the latest corporate star in Israel. He may believe that he, unlike the Recanatis, can nurture his widely diverse portfolio companies into giants. The market is smiling upon him, so far, which can't be doing anything bad for his self-confidence.

But he would do well to learn the lesson of history, and the vast number of mortals who are doomed to watch their portfolio companies take off only after being released from their unnatural linkage to dissimilar companies, and sold off.