Taking Stock / El Al on the Block

It's party time on the primary market. Institutional investors are snapping up billions of shekels worth of corporate bonds, on your behalf, paying interest rates that would have been considered a joke just a year ago. The mood is frothy and everybody is lining up to buy.

But if you look at your portfolio, you'll find at least one security that isn't there that the institutionals riding the wave of offerings did not buy for you. There is at least one unit, of bundled shares and options, which the entire marketplace deemed too expensive and risky when it first hit the floor.

The shares and warrants in question are El Al's, of course. Since its initial public offering, its stock has generated yields ranging from 100 percent to 400 percent for investors at its IPO, depending when they cashed out. If you personally bought at the offering and sold in the last month, you gained more than 300 percent.

Don't be sorry you didn't get in at the IPO. El Al is a high-risk company. Nobody has any idea yet whether it will be rehabilitated, or how. Its shares soared for the skies solely because the appetite for risky investments has bounded in the last half year, and El Al, an airline with a billion-dollar debt, zero shareholder equity and tons of warrants convertible into shares, is the flavor of the day.

Don't be sorry, because it's just a matter of time before institutional investors start buying you shares in companies of El Al's ilk, at ever-climbing prices. It is an unwritten rule on market that the higher prices go, the hungrier investors get, mainly if they're managing other people's money.

Any market novice can explain that privatization is the best thing for the economy. Every milk-faced babe in arms knows that Israel is privatizing left, right and center, and every gap-toothed youngster can tell you that the most successful privatization this year was El Al, which, after years of prattle, was finally floated on the stock exchange.

But can any of them explain exactly why El Al's privatization is so good for the economy? Can you? That is a tricky question indeed. Clearly, as a publicly traded company that has to operate transparently and publish its financial results, it is under pressure to streamline, improve and gradually change its corporate culture. But is that enough?

It is not. First, El Al is still a government company. Whether it becomes a privately-held firm traded on the Tel Aviv Stock Exchange depends on the Borovich group, which controls Arkia and other companies.

The Boroviches are seasoned businessmen. A great deal has to happen before they let Arkia take control of El Al. They will want to slash its workforce, they will want the banks to forgive debt, they will want a clear map to profits. And when they start to spell out their demands, only then can we know just what this privatization looks like.

Even after El Al really is privatized, that won't be the main thing, though it will be a terrific story, a real PR coup for the airline and the treasury alike.

The real story at El Al, like in the case of most privatizations, isn't the transfer of control from government to private hands. It is the structure of its business environment - monopolistic or competitive. Can the owners make money while running a tight ship and slashing costs, while offering better services and prices? Or can they score a buck only by trampling the competition through a monopolistic structure?

We already know part of the answer in El Al's case, at least from the perspective of Antitrust Commissioner Dror Strum.

Yesterday, Strum told Haaretz that the Civil Aviation Authority essentially receives diktats from El Al. "Too often we see that the state is led by the monopoly's owner," he said.

Referring to the Civil Aviation Authority's demand that German carrier Lufthansa cut its supply of seats on the Israel-Germany line, for El Al's benefit, he said, "Unfortunately, when privatizing El Al, the state took a step backward. Instead of creating competition for El Al, it perpetuated its monopoly."

So with all due respect to the slogan of privatization, remember that the privatization of itself is not the point. Sometimes it can be the chaff. The main point is what structure is being created in key sectors. And as Strum said, sometimes privatization merely perpetuates the rot.