Taking Stock / Sound the Retreat!

The whole thing took less than a day. On Monday afternoon, treasury officials wrapped up the last details after two weeks of preparations.

The whole thing took less than a day.

On Monday afternoon, treasury officials wrapped up the last details after two weeks of preparations. As soon as trade had ended on the Tel Aviv Stock Exchange, Accountant General, Yaron Zelekha, advised 11 foreign investment banks of an overnight tender for 10 percent of Bank Leumi.

The contestants had 15 hours to name their price for 6.5 percent, in an irrevocable deal. They also received a 10-hour option, starting from that first deadline, to buy another 3.5 percent.

Between 7 A.M. to 8:30, six of the foreign banks filed bids for the 6.5 percent, which was worth NIS 1.15 billion on the TASE. Deutsche Bank won, offering NIS 12.60 per share, which was a tiny 1.4 percent below the stock's closing price the night before.

Deutsche didn't buy the shares to mull them over. On the spot its marketing people started making calls. Within 10 hours it had scattered the lot around the globe, selling 90 percent to foreign investors.

Meltdown in summer

There were three reasons for the state's success in selling the giant block of Leumi stock within 12 hours: timing, timing, and timing.

A rare window of opportunity had opened up for the state. Bank shares had risen to record highs, foreign investors were accelerating their acquisitions of Israeli stocks, and the global investment community is ravenous for investments in emerging markets like Israel.

The story brought to mind the last time the state sold a block of Leumi shares on the market. The finance minister was Silvan Shalom, the season was summer and the stench of financial meltdown was in the air. Bank Leumi shares were trading at a record low, and the treasury was straining at the seams to show some successes, any successes.

Its format was much the same. The state offered a 6 percent block. The difference was price. Yesterday the shares commanded a 15 percent premium over Leumi's equity. Then the state was proposing a 40 percent discount. This was the same deal at double the price. It's all about timing.

Zelekha, seize the day

The timing is perfect for Zelekha, too. This is his rare window of opportunity to seize the moment, declare momentous victory, and retreat.

He should retreat from the concept of handing out stock options for Leumi shares to the general public.

The concept had been based on "sharing privatization with the people," on "introducing them to the stock market." Or, to put it cynically, "to give them a present. Everybody loves presents."

From the get-go, the plan was misguided. There are no free lunches and that present received today would bear a price tomorrow. When the state gives away an asset for free, it waives the opportunity to reduce its gargantuan debts, on which it pays interest.

A dangerous idea

The more the idea developed flesh and bones, the more dangerously it loomed. The estimated cost of distributing share certificates to all the people of Israel mounted from month to month, and had reached a quarter-billion shekels and counting.

But Zelekha is nothing if not stubborn and he refused to bend. He continued to doggedly fight the cabinet and capital market elements who warned him the plan was not good.

This is his opportunity. He managed to pull off a coup, selling 6.5 percent of Bank Leumi within 12 hours. He should prepare to sell more. The terms of the tender allow him to return to the market in three months. At that rate he could get rid of the whole remaining 28 percent within a year.

What will the state do with the money it raised? Will it finance the huge costs of disengaging from Gaza?

Of course not. Israel's bookkeeping methods do not allow the government to reduce its budget deficit by selling government companies. Privatization can be used to finance the deficit, not reduce it.

Since the government is in a very convenient financial situation, in which it can easily tap markets in Israel and abroad for capital at low interest rates, the sell-off does not materially affect its deficit or ability to raise funding.

It will allow the government to scale down bond offerings and accelerate the process of reducing the national debt. It is not the kind of achievement that proffers a photo-op, but at the end of the day, reducing the national debt is the way for Israel to get closer to the countries we'd like to emulate.