The Bottom Line / Strong Hands for Bank Hapoalim

A series of transactions the Dankner family plans as part of the reorganization of its business holdings will be put to a vote Sunday at a general shareholders' meeting of Ellern. Ellern, which is controlled by the Shmuel and Avraham Dankner families, Rahel Elran and Orli Mor, plans to acquire control of three family companies: Israel Salt Industries, Dor Chemicals and Dankner Investments - for about $215 million. The deal has two main goals: to allow Nochi Dankner's family to sell its stake in the company so that it can, in turn, buy a controlling share of IDB and to enable the family members who maintain their Ellern holdings to cash in some of their shares of family companies and use the cash to pay off personal loans.

The Ellern deal is one of Israel's most complicated in recent years, and includes many elements that attract media attention, much to the chagrin of the Dankners.

The deal contains material that cannot lead any banker, regulator or investor indifferent. There is a big family that is breaking up its businesses, a struggle for prestige among the various generations and branches of the family, hundreds of millions of shekels moving from one pocket to another, and generous financing from the banks.

If the shareholders' meeting approves the deal, it can then be presented to various regulators for their approval. It seems that the most important review will be made by Supervisor of Banks Yitzhak Tal. The supervisor must review the deal because Israel Salt Industries is part of the controlling group of Bank Hapoalim, with an 11.7-percent share of the bank's capital. The deal would transfer the means of controlling the bank, since some of the controlling shareholders of Israel Salt Industries (led by Nochi Dankner) are selling their shares to Ellern.

The supervisor's challenge will be to check that the hands holding the reins of Bank Hapoalim are not weakened, but rather strengthened by the deal. This is not easy, mainly because the Ellern deal would expand the company's bank credit and reduce the personal loans of the Dankners. It also entails expanding the existing leverage of the Dankner family's investment in Bank Hapoalim shares during a problematic period for the economy and the bank. Ellern will have capital of only NIS 51 million versus a debt obligation toward the bank of NIS 4.7 billion, something the supervisor will have to review.

At the same time, two strong financial groups - FIBI (16.3 percent) and Merrill Lynch (5.7 percent) - are invested in Ellern, which strengthens the company's ownership structure. It may also be the case that the securities held by Ellern are worth more than the values shown in the balance sheets, as senior company officials have claimed.

If this deal had been put together two or three years ago, it probably would not have encountered serious obstacles. But it appears that the current state of the economy and the supervisor of bank's sensitive position (Trade Bank, Industrial Development Bank) mean that the deal will be closely scrutinized and many more guarantees and obligations toward Bank Hapoalim will be demanded from Ellern's controlling owners to ensure that Israel's largest bank will remain in strong hands.