Taking Stock / Strauss Hits the Market

Yesterday morning, Michael Strauss hit the Tel Aviv Stock Exchange for the first time with the opening day of trading for Strauss-Elite (TASE: ELEI). Five years after the Strauss family acquired control of Elite, Michael and his daughter Ofra completed the merger of the two companies into a single giant publicly traded entity.

Much has been written about the union, primarily the evaluations of the privately-held Strauss and concerns that Elite's shareholders were being forced to pay too much.

But the argument over the price may have been a distraction from the main point, which is that what matters isn't absolute value but relative value. In the year before the merger, Elite stock shot up 50 percent. Maybe the $420 million price tag that appraiser Itzhak Swary affixed to Strauss is excessive, but the stock market's price of $500 million for Elite isn't low either.

Far more important than price is the question about the merit of the merger. Can Ofra Strauss and Erez Vigodman turn the two companies with their two distinct brands into a single economic entity, capable of turning magnitude into might?

Danone not included

Although both companies have been controlled by the same family for the last five years, they have been managed almost completely separately, and not by happenstance. Strauss has minority shareholders, namely Danone. Elite has minority shareholders too, namely the general public.

Here's the kicker: Danone elected, for whatever reason, to stay out of the merger, while not exiting Strauss. As a result, Danone is keeping its 20 percent share of Strauss, while Elite owns the other 80 percent.

The existence of a powerful, opinionated minority shareholder will weigh like a ton of bricks on decision making at the merged company.

All the deals between Strauss and Elite will have to take place at market prices. And, for each decision regarding alliances or operation consolidation, whether in advertising, branding, production or distribution, Strauss-Elite will have to persuade Danone that it isn't being done at Strauss' expense.

To this day, Strauss and Danone have not explained why the French firm chose to stay outside the merger. If it's such a great deal, why isn't it good for Danone? Why does it prefer to keep its non-negotiable shares in a small privately-held firm, rather than exchange them for shares in a big publicly traded firm? And most important of all, is it a real merger if a minority shareholder holds half the operations hostage?

The real yield

Danone bought its Strauss shares in 1996. It invested $60 million for a 20 percent stake. Seven years later, Strauss is estimated to be worth $420 million after having distributed about $100 million dividends.

A yield of 70 percent in dollar terms looks pretty good, at a cursory glance. But over seven years, it works out to less than 8 percent a year. Danone's low returns on its Strauss investment are especially irksome given the handsome gains its bitter rival Nestle made with a parallel 1995 investment in another Israeli food company, Osem Food Industries (TASE: OSEM).

Nine years ago, Nestle spent $200 million for 50 percent of Osem. It has received $150 million in dividends, and today its shareholding is worth $550 million.

To use Swary's figures, the 70 percent the Strauss family generated for Danone in seven years compares with more than 300 percent that Osem leader Dan Propper created for Nestle.

Osem's stellar performance in recent years may explain the stock market's disappointment with the figures that Strauss presented prior to its union with Elite.

The test of the market

As a privately-held company, Strauss guarded its financials jealously. And when it finally bared its figures for the world to behold, it turned out that its publicly traded rival had been doing far better.

The merger of Elite and Strauss enabled Ofra to complete her total takeover of a group of companies that had been led for decades by her father and sister along with other family members. Ofra promoted the merger with all her strength, against the wishes of her father and sister, partly because she knew it would increase her independence.

But turning the companies into publicly traded ones exposes Ofra to the greatest test of all, that of the market. From now on, quarter in and quarter out, she will be pitting herself against Propper, the man who, based on Strauss' own financials, has proven to be Israel's food sector leader for the last 10 years.