Taking Stock / Shorting the Market

"IDB suffered from management problems in general, and now you see what happens when people who want to succeed come in - they institute change, they know what to sell and what to buy. It all depends on the vision of the management," said diamond mogul Lev Leviev in an exclusive interview with Haaretz. (June 28, 2004).

Leviev does not do business with Nochi Dankner, they just don't have any chemistry. But when we asked Leviev about IDB's performance in the last few years, he did not hesitate and had nothing but praise for the momentum Dankner has brought to the investment group.

On the capital market, there is also wall to wall consensus - Nochi Dankner has revolutionized IDB. Acting swiftly and firmly, he sold assets for hundreds of millions of dollars, withdrew dividends of about a billion shekels and increased the group's liquidity by billions.

Clearly, question marks over Dankner's ability to service the interest and principal payments on the massive loans he took to buy IDB are starting to disappear.

Dankner withdrew about a billion shekels from the company and repaid half his loans in less than a year. A year ago people wondered if buying IDB wasn't biting off too much - now bankers and big businessmen agree that Dankner is the king of the business sector.

So what's Dankner done, and what has he not done? He sold assets, mainly those he could sell at market value, and he raised money, mainly through debt and also at market prices.

Done, not done

Dankner shrank the management of IDB from three storeys of Azrieli Tower to two, but we won't know until next year if his management costs have substantially shrunk.

What Dankner has not done yet is lay out a clear strategy for IDB. He has convinced everybody he has verve, hunger, and charisma. But he hasn't proved that he has a new way, a clear path, that differs from what his predecessors offered.

That may be why after all the superlatives heaped on his head, it is surprising to learn that IDB has generated a 38 percent yield (including dividends) while the Maof-25 index has generated 43 percent. Meaning, Nochi is still performing under the market.

Ben Dov's way

People who know Dankner know he won't settle for the image of the man who bought IDB at the right moment, and rose with the market. As the manager of a holding company diversified in so many sectors, he will be measured by his ability to outperform the market. Not to rise and fall with it.

It turns out that somebody's betting on it. A week ago it transpired that Suny Electronic, which is controlled by Ilan Ben Dov, bought 4.8 percent of IDB's shares at an investment of NIS 140 million.

Buying IDB stock has traditionally been considered a good way to bet on the Tel Aviv Stock Exchange, or on the Israeli economy in general. So Ben Dov's investment looks like a logical way to gain exposure to the Tel Aviv Stock Exchange.

Ben Dov had hoped to become a partner in Ganden, the holding company through which Dankner bought IDB. Disappointed that Dankner didn't want him as partner, Ben Dov found a compromise, buying the IDB shares that could give him involvement in the group one day.

Here is the surprise: it turns out that Ben Dov isn't betting on the market, he's betting on Nochi Dankner. In parallel with buying the IDB shares, Suny sold NIS 140 million worth of Maof futures on the options market.

Market animals would say he's gone long on Nochi Dankner and short on the Tel Aviv Stock Exchange. He is betting that IDB will rise and the stock market will fall.

In short - Ben Dov doesn't care if IDB stock rises by 1 percent or 100 percent, if the market rises the same. He will only earn if IDB rises more than the Tel Aviv Stock Exchange.

That is a trickier prospect, as we see from the performance of IDB shares versus the Maof-25 index in the first year of Dankner's rule.