The Dankners and the Deal

Members of the Dankner family have been asked often in recent years if they are concerned about their ability to repay their immense loan from Bank Leumi that enabled them to buy controlling interest in Bank Hapoalim in September 1997. In the first few years, they radiated eternal optimism. Hapoalim dividends continued to flow and were sent directly to Bank Leumi; Bank Hapoalim's return on equity continued to rise; and the transaction was an unmitigated success. Even in the last few months, as the dividend well has dried up and return on equity has been sharply eroded, the Dankners haven't shown any signs of distress. The conditions of the Leumi loan, which enable them to finance interest payments by means of bridging loans, have helped them sleep at night and not worry about delays in making interest payments to Leumi.

Yesterday, it became clear that the Dankners have another reason not to panic despite their NIS 1.6 billion debt to Leumi. Israel Salt Industries (ISI), which owns 11.6 percent of Hapoalim and which the Dankners maintain majority ownership, reported that it is holding talks to sell 33.33 percent of company equity for $90 million to Yossi Maimon.

The stock-for-cash deal provides an indication of the transaction's true objective: to improve liquidity and the Dankner's ability to repay their debt to Leumi. The money will be used not only for interest payments, but also for repaying some of the loan principal, thereby reducing future interest payments.

The deal values ISI worth at $180 million before money. Another facet of the deal would grant Maimon the option to purchase up to 13.33 percent of the remaining company shares, which would give him the same ownership share as that of the Dankners. In light of the division of ISI shares among various members of the Dankner family, the theoretical possibility exists that Maimon will link up with one or more family members and gain control of the company. But a well-placed source in the Dankner family claimed this was simply not possible, due to already existing voting agreements among family members.

ISI is a subsidiary of the Arison-Dankner Group, which gained control of Hapoalim in September 1997. The group financed its investment in the bank through $358 million in credit issued by Bank Leumi. As part of its agreement with the bank, the group committed to pay interest on the loans from dividends received from Hapoalim. At the end of this year's first quarter, the balance of the loan came to NIS 1.153 billion, linked to the index, at a fixed average interest rate of 5.34 percent, as well as NIS 329 million in unlinked shekels, at a variable interest rate ranging from prime to prime plus 0.95%.

Over the years, annual interest payments have ranged between NIS 50 million to NIS 90 million. But in the past few months, the company has not made any interest payments and is now about NIS 30 million in arrears. There has been a real escalation in the costs of both loans. The index-linked loan has been swelled up by the steep increase in the index, which has risen 4.9 percent since the start of the year. And the shekel loan has been devastated by the Bank of Israel's high interest-rate increase - from 5.3 percent to 10.6 percent - since January 1.

ISI's higher debt-financing costs, coupled with the possibility that Hapoalim will not be issuing substantial dividends in the next year or two, puts further pressure on ISI Industries, stretching its ability to service its debt to Leumi. The $90 million that ISI is to receive will relieve much of the pressure on the Dankners.

Only Danny Dankner, who serves as (the paid) deputy chairman of Bank Hapoalim, has gained any material benefit from the deal. This does not mean, of course, that the investment in Hapoalim has not greatly enhanced the status enjoyed by the family in the local business world. Nohi Dankner, for instance, who has served as chairman of the credit committee of Hapoalim's board of directors for several years, is set to purchase control of IDB, at least partly due to the know-how, connections and skills he acquired in his current position. The reasonable conditions of the loan that ISI received from Leumi also reflect the Dankners' stature as majority owner of the largest bank in the country.

Maimon's assumption of part ownership of ISI will have some interesting side effects. He is giving ISI a higher price tag than indicated by its stock-exchange value. ISI's main assets are its holdings in Bank Hapoalim and the company's landholding in Atlit and Eilat. The lands serve as collateral for the credit that allowed it to buy the Bank Hapoalim shares.

In this year's first quarter, the balance-sheet value of ISI's share in Bank Hapoalim was NIS 1.726 billion at a time when the stock market valued it at approximately NIS 1.1 billion. This wide gap could force the company to declare a reduction in the value of its investment in the bank, wiping out some shareholders' equity. So far, it has not done so, since the company is relying on assessments by analysts who believe the market value decline is only temporary, and therefore, does not require it to declare a reduction in company value.

The high price tag placed on the company by Maimon is likely to help members of the family to assess the worth of the holdings of Nohi Dankner and his family in ISI. This is relevant due to Dankner's expected imminent exit from the company. Dankner has agreed to buy control of IDB, and in order to gain approval of the transaction, he will have to break off his links with Hapoalim and liquidate his investments there. To that end, Dankner is discussing the sale of his share in ISI to other family members.

The Dankners-Maimon deal may place a price tag on the value of Nohi Dankner's holdings in ISI, but it does not put any cash in his pocket. Apparently he will have to wait until Maimon decides if he plans to realize the option to purchase 13.33 percent of ISI equity, a move that would be financially remunerative for shareholders, making it easier for them to release Nohi Dankner from the company.

If the deal goes through, it remains to be seen how Maimon will fit in with Bank Hapoalim's board of directors. After five years of relative harmony among the original purchasers, a new factor is entering the picture - one that will curtail the influence of the Dankner family.

The five-year no-sale period imposed on the majority shareholders in Hapoalim will come to an end in September. Is Nohi Dankner's expected departure and Maimon's possible arrival a first sign of the breakup of the original ownership nucleus at Bank Hapoalim? Time will tell.