Taking Stock / Barnea's Dud

Few journalists have as much influence in the political arena as Nahum Barnea. His opinions can make or break politicians. By the end of the month, his brother, Professor Amir Barnea, will have a rare opportunity to emulate his famous sibling, and shake up the capital market and banking establishment.

Amir Barnea is one of Israel's more prominent academics in financing. His analyses always attract attention, but this is the first time one of his appraisals has the potential to move the banks, the stock market, and some of Israel's most powerful tycoons.

But don't hold your breath. The leak Ma'ariv published Tuesday indicates that the economic scion of the Barnea bunch has no intention of making the markets twitch, preferring to leave the job of agent provocateur to his brother.

Barnea, the Amir one, is working on another appraisal of Bank Hapoalim, at the behest of the Dankner family, which holds 11 percent of the bank's shares through its company, Israel Salt Industries. Bank Hapoalim stock has taken a trouncing in the last year, dropping to a market cap comprising only 45 percent of its shareholders equity and 53 percent below the price listed in Salt Industries' books.

If Salt Industries were to adjust the book value of the shares to their market value, it would have to write down its investment by about NIS 1 billion. That would shift the company to a massive loss, and gouge a hole of hundreds of millions of shekels in its shareholders equity.

Even if Salt were to narrow the gap between book and market value by, say, a quarter, the results would be catastrophic, as the company financed its purchase of Hapoalim stock entirely through loans from Bank Leumi .

Any substantial writedown of the investment would dramatically worsen Salt Industries' financial ratios. It would force Bank Leumi to demand that the Dankners provide additional collateral.

The family lost hundreds of millions on investment in communications, and is in the throes of detaching from Nochi Dankner. In the family's current condition, the writedown could wind up killing its business empire.

The solution lies in an appraisal that could validate the book value of Hapoalim's stock, as listed in Salt Industries' statements. Some 10 months ago, the Dankners ordered an appraisal from Barnea, and he delivered the goods. He set Hapoalim's value, including a control premium, at NIS 16 billion - some 25 percent above the bank's shareholders equity at the time, and 75 percent above its market cap.

Investors on the Tel Aviv exchange were unimpressed. Hapoalim's share continued to sink. Barnea shrugged, "We'll meet again in two years," claiming it was merely a matter of time before the market acknowledged its mistake.

A mere six months have passed since Barnea's appraisal was published. But as Salt Industries prepares its 2002 statement, the Dankners are forced to ask Barnea to revisit his assessment.

What happened in that half-year? Not a little, and nothing good. Israel's economic crisis worsened; the banks' provision for doubtful debt increased; more big companies went belly-up; private consumption slumped; unemployment increased; Israelis sent more money abroad; and the fear of fiscal crisis grew.

Now Barnea has to decide. Do the principles and assumptions he made when penning his original appraisal still apply? Should they, and perhaps his methodology, be reassessed because of the deteriorating conditions?

Going by what he's been saying in the last couple of weeks, the answer is "No." In two public appearances, Barnea has insisted that the mistake is the market's, not his. We can, therefore, assume that he isn't about to substantially reduce his evaluation of Israel's biggest bank.

The Dankners aren't the only ones who would breathe easier. A substantial cut in Bank Hapoalim's value would be a bombshell that would rock the entire banking establishment and capital market. The Dankners aren't the only ones who borrowed money from the banks to buy bank shares. Some of the biggest borrowers in Israel are in the same boat: Eliezer Fishman, Arison Investments, Alfred Akirov, the Wertheim family, and the Ofer family.

All the above, and all the banks financing them have a clear interest in ignoring the shrinking value of their investment and collateral. If they can retain their faith that their shares are worth much more than their current value on the market, they wouldn't have to fork over more collateral. Nor would the banks be forced to set aside more doubtful debt provisions for these loans.

Nor would the pain have been restricted to the banks. If Barnea were to slash Hapoalim's valuation, dozens of investment companies and banks would have to recognize that the book value of investments and loans had become outdated. The cut would spark a tidal wave of writedowns among publicly-traded companies and banks.

Barnea would go down in history as the man who wrenched the mask off the business sector's face, taking down some of its biggest tycoons in the process.

Barnea knows that his appraisal will be examined with a microscope, and this, apparently, is why he's been "softening" the market ahead of its release. He has been admitting that the market doesn't believe the banks' books, that investors suspect there are time-bombs concealed in the banks' portfolios, and that there are heavy writedowns in the offing.

But, he hastens to add, the market's mistake is that it prices the banks by their asset value, whereas they should be evaluated by their capacity to make profits. Barnea believes that despite the recession, the two banks, Hapoalim and Leumi, can still generate handsome wealth by virtue of their duopolistic status.

In this era of open capital market and reforms which abolished the tax advantage of investing in Israel, has the duopoly's power remained unharmed? Won't three years of recession and climbing unemployment impact on their profits from retail banking?

Is it not time, after two years of economic crisis and collapsing share prices, to acknowledge that there is a new level of values on the capital market, and that ultimately, that new level will dictate the prices of new transactions, real deals that go beyond replacing apples with oranges?

Barnea hopes the answer to the above is "No."

Is he convinced of that? Would he bet his own money on buying bank shares at the prices he estimates them to be worth, in today's economy?

We can't say. We can only say that Barnea doesn't plan on being the man who rocks the market.