Taking Stock / Flying High, and Higher Still

Whee! What a bash. We haven't seen the like since the gay Internet days.

On its first day of trade last Thursday, El Al stock and options flew up by tens of percent, leaving investors who'd bought at the airline's public offering with 77 percent profit. And, if you hung onto those shares on Sunday, you were rewarded by seeing your profit rise to 180 percent. Not bad for two days' work.

Nobody on the market expected the lumbering carrier's stock to skyrocket. Investors thought they were getting tickets to coach and found themselves in first class. It is little surprise that buyers are crawling out of the woodwork and triumphantly announcing they got in at the Initial Public Offering (IPO).

A profit of 180 percent on the issue of a government company, after two days of trade, cannot be dismissed. We will inevitably be hearing a great deal of carping and claims about the offering. In any case, we suspect the real lessons from the offering, and the charge skyward by its stock, are strongly counterintuitive.

1. El Al stock climbed 180 percent. It must be a better company than we thought.

No, not necessarily. Because of the sluggish demand, the company was taken public at a lowly valuation of $55 million. That is slight, indeed, for a company reporting annual revenues of $1.2 billion. But the price reflects the company's losses, the opacity around its future controllers, its towering debts, and its monopolistic, governmental organizational structure.

The climb in its market value from $55 million to $160 million in two days does not mean the markets learned something new and wonderful about El Al, or that investors suddenly saw how it could make profits.

The increase reflects the fact that enough people found El Al, at that low price, to be an intriguing gamble: maybe it can turn around its business. The company's diminutive shareholders equity, giant debts and broad scope of operations make its shares and options into risky vehicles that could yet experience sharp fluctuations.

The profile of its securities attracted strategic entities that - with a relatively small investment - could buy options to become involved in it, down the line. They were joined by hordes of speculators attracted by the gamble.

2. The institutional investors managing our money fell asleep on the job. They avoided the best IPO to hit the market in years.

Anybody who knows how the institutionals operate shouldn't be surprised. Their bureaucrats will always prefer to lose big money on investment in big, established, fashionable companies, rather than earn peanuts on investing in risky, unfashionable firms. Before making any investment, first they think how to explain matters if it fails.

El Al's offering took place in the glare of spotlights. It is hard to believe any institutional administrator would risk being pilloried for picking a stock that everybody had dubbed highly perilous.

But, in El Al's case, the institutionals' choice is defensible. The company is highly risky. Its future is unclear. It has no history of creating value. Local analysts know little about its market.

The fact that the offering has been, so far, a tremendous coup for investors does not necessarily mean the institutionals were unwise not to get in.

The El Al offering will inevitably long be remembered as exemplifying the poor management of the institutionals' assets. But the truth is, it was a small, unimportant offering. The place the institutionals make their big mistakes is the bond market, where they buy nonnegotiable bonds and assets, and have been losing hand over fist, sometimes billions that are hard to pin down.

3. The state lost out. It sold El Al for less than half price.

Yes, the treasury could have earned a few million dollars more, if it had sold the airline for the price at which it traded Sunday or on Thursday, instead of for $55 million.

But that sum pales into insignificance compared with the amounts it sank into El Al before the offering, directly and indirectly. It is nothing compared with the benefit it expects after the company's privatization, and is laughable compared with the benefit to the economy (if and when), assuming Israel's aviation industry becomes more efficient and competitive.

Here are a few more figures, for your edification. The state agreed to infuse $108 million into the compensation fund of El Al's workers. It forgave a $300 million debt and waived guarantees it held for loans (tens of millions of dollars more) extended to El Al to buy planes. That is where the state lost money, not on the airline's price tag.

4. El Al shares were sold to cronies at bargain-basement prices. The Borovitch family got it for peanuts.

Indeed, the word "family" is like a red rag to a bull, but we cannot yet say that El Al is a major prize. It could be, if the buyers manage to cure its ills and make it more efficient.

The Borovitch family, indeed, seem most likely, at the moment, to assume control, at a relatively small investment compared with the amounts it has put into other companies, such as Sonol, Tambour and Maman Cargo Terminals & Handling.

But the El Al offering was open to everyone, from the minnows to the sharks, and almost nobody bit. Where were the Ofer brothers, the Recanati clan, the Dankners, Yitzhak Tshuva, Benny Steinmetz, Lev Leviev or Eliezer Fishman - men famous for zeroing in on great deals with the state?

They were right here, in Tel Aviv, reading the prospectus and deciding not to touch the stock with a 10-foot pole. They may have made that decision because they have been battered by the markets and are leveraged up to the gills, or because they don't know a thing about aviation and didn't see a huge business opportunity.

5. Netanyahu proved he knows how to privatize.

Benjamin Netanyahu did, indeed, prove that he is determined to issue, privatize and sell, in any way, at any price.

But the question remains as to whether the privatization of El Al counts as a success. We have not discovered exactly how many hundreds of millions of dollars the state sank into it, directly and indirectly, for its privatization. We don't know when it will finally become, really, a privately owned firm, not a state-owned company. Mainly, we don't know when it will become genuinely competitive.

The labor of privatizing and rebuilding Israel's aviation industry has just begun.