Taking Stock / Doing the Tshuva

Dov Tadmor was hopping mad.

That isn't how you do business, fumed the CEO of Discount Investment Corporation. Bank Hapoalim was our partner ("us" being the Recanati family) in Delek for decades. We had gentlemen agreements. It is unthinkable that one morning Hapoalim would get up and decide to sell its shares in Delek to an utter stranger behind our backs.

But Bank Hapoalim's chairman, Shlomo Nehama, says his conscience is clear. We told Tadmor we wanted to sell our Delek shares, he shrugged. We offered them to him, he dragged his feet, and the prices he offered were a joke. He figured he had us in the palm of his hand. So we sold the shares for Tshuva at the right price.

With hindsight, Tadmor understands his mistake. He should have grasped that when new hands took the reins at Bank Hapoalim, namely the Arison and Dankner families, the rules of the game would change.

Six years down the line, it's the IDB group's turn to "do a Tshuva," and this time it is the one springing the surprise.

Hello, Mickey?

Three months ago, Nochi Dankner, who bought IDB (which owns Discount Investment) in mid-2003, asked to meet with Mickey Federmann.

Federmann is IDB's partner in controling Elbit Systems. IDB owns 19 percent of Elbit Systems via Elron Electronic Industries, while the Federmann family owns 31 percent.

Elron and the Federmanns have a voting agreement granting each half the controling interest and a right of first refusal to the other one's shares. In other words, if Elron wanted to sell, it had to offer the shares to Federmann first.

Dankner got straight to the point. We want to sell our 20 percent in Elbit Systems, he said. It isn't synergetic with the rest of our business, and the company owes a ton of money to Bank Hapoalim, which the bank calculates as part of the giant IDB debt. Not convenient.

Dankner offered Federmann a deal: buy half our stake, 10 percent, and obtain full control over the company. We will keep 9 percent but you get control. The terms: even though you're only buying 10 percent, you pay us a control premium for the whole package, namely, for $120 million you get control.

Federmann said he had to think about it and went on vacation. When he got back, he told Dankner nice offer, interesting, but no thanks. Not on those terms.

Federmann did the Dov

Federmann had done a Dov. He hadn't understood that Dankner meant what he said - he wanted those shares gone. Federmann figured that Ami Erel, the leader of Discount Investments, was a close friend, so ultimately somehow it would all come out right.

He was wrong. Last week, at Nochi Dankner's home at two o'clock Wednesday morning, after just two meetings, Dankner shook hands with Hezi Hermoni, the chief executive of Tadiran Communications, and the deal was closed. Hermoni agreed to pay $200 million cash for the whole stake.

The next night, a few minutes after the agreement had been signed, the Tadiran people called Mickey Federmann and announced they'd bought the IDB shares in Elbit Systems and now they were partners.

Federmann went into shock. Tadiran Communications? Hezi Hermoni? What who where? Suddenly I am their partner? Before he'd had a chance to regain his composure, the very next morning, he took another body blow. Hermoni was granting interviews all over town announcing that Tadiran would make Elbit Systems perform properly.

Not only did Federmann find himself with a new partner he didn't want, but also that partner was already portraying him, the chairman of Elbit Systems, as being incompetent.

It was a double whammy: Dankner sold the shares over his head, and Hermoni's already dispensing lessons in management.

Federmann does his nut

Federmann grasped that his putative partnership with Hermoni wouldn't be anything like his gentlemanly relations with IDB, in the happy era of the Recanatis. Like Dankner himself, Hermoni is a savage in business, a ravenous one at that, and worse, he hails from the very same industry; he'll want to be involved in management, strategy, decisions! This is the man who'll be replacing quiescent IDB, which under the voting agreement has the prerogative to appoint the CEO.

Federmann suddenly realized he wasn't The Man at Elbit Systems any more.

And come Monday night he declared: Yes I am. I will exercise my right of first refusal, he announced, and hared off to Europe to find financing. Under his agreement with IDB, he has a 21-day window to bring $200 million to Dankner. And if he doesn't, he's in bed with Hezi, like it or not.

With hindsight, Federmann understands his mistake. If he had accepted Dankner's offer two months ago, he'd have assured himself of control for 60 percent of the price. He had not grasped that the situation had changed. He didn't understand that the new man in town at IDB, Nochi Dankner, wouldn't sit and wait for him. He had not learned Dov Tadmor's lesson from Delek.

Holding the right of first refusal is also a duty to stay alert. When your partner says he's selling, think carefully before refusing or indulging in delaying tactics. Otherwise, you're likely to wake up one morning and find somebody unexpected stirring your coffee.

Federmann had the duty to stay on his toes, if only because Nochi Dankner who gave him that right of first refusal was the same man who, six years ago, had been the deputy chairman of Bank Hapoalim, the bank that sold the controling interest in Delek to Yitzhak Tshuva, leaving the Recanatis stunned and in disarray.