The Most Important Stock in Tel Aviv

A personal loss of a quarter-billion shekels is one way to demonstrate the importance of embracing the index rather than stock-picking.

NIS 84 billion. That's how much Israel Chemicals is worth on the Tel Aviv Stock Exchange. Market veterans may rub their eyes in amazement but it's true: The company is worth well over $24 billion. Could this be the same company that had been under government control just 12 years ago?

Grizzled market vets still remember how Ted Arison agonized over buying ICL from the state back then, at a company valuation of a billion dollars, and finally decided it was too pricey. They still remember how Tel Aviv's investment managers snubbed the company when it was floated in 1992, arguing that the Government Companies Authority was being greedy and had overpriced the cumbersome beast, again demanding more than a billion dollars. Yet here we are just over a decade later and it's worth 25 times as much.

Sounds all too familiar - it's just another example of the Ofer family buying a goose that lays golden eggs from the state for a pot of lentils. Right?

Not at all. Study the company and its history and you find a different tale. Actually, the one who bought the controlling interest in ICL from the state in 1995 was another billionaire entirely, Shoul Eisenberg, since deceased. Eisenberg, the founder of The Israel Corporation, made his fortune dealing in arms and international trading. No less than two laws have been named after him and his company - the Eisenberg law and The Israel Corporation Law, each granting him extraordinary exemptions from the tax that other mortals must pay.

Eisenberg died in 1997 and following a battle over his estate, his son Erwin assumed control of The Israel Corporation and its affiliate, ICL. The younger Eisenberg was clammy to the Israel Corporation empire, though, and lost little time trying to sell it. A rival company to ICL, the Potash Corporation of Saskatchewan, was gearing up for a takeover when up popped the Ofers and closed a lightning deal, buying the controlling stake in Israel Corporation for $330 million.

Erwin Eisenberg took the money and moved to London. We can only hope for the sake of his health that he hasn't been keeping track of the company's share price in Tel Aviv, or he'd realize that the shares he sold for $330 million are worth $5.25 billion yesterday, after the company paid dividends of $100 million to shareholders.

One can accuse the state and its officials of stupidity, malice or corruption when they sell a precious asset to some passing tycoon for peanuts, only to discover it was a potential gold mine. But of what sin could Erwin Eisenberg be accused?

Before we continue in our search for somebody to blame in the astonishing story of ICL, let's get a grasp of the figures involved. The state sold its shares in ICL for about a billion dollars. Yesterday those shares are worth more than $24 billion. If we assume that under government management the company wouldn't have done as well, it's still a massive theoretical loss to the taxpayer, anywhere from NIS 50 billion to NIS 70 billion.

But any such analysis is pure indulgence in hindsight. No businessman or analyst or manager can really predict at any given point in time how the world potash market will behave, and that's where ICL makes most of its money. Every two or three years some shareholder decides it's maxed out and sells his shares in ICL, only to see them soar to stratospheric heights.

After the state sold ICL according to a company valuation of a billion dollars, 4% of its present value, and after Erwin Eisenberg sold the controlling interest in The Israel Corporation (which owned 53% of ICL) for a tenth of its present value, it was the turn of Yuli Ofer to make the mistake of his life. At the end of 2002, Sammy and Yuli Ofer decided to split up their businesses and take separate paths. They agreed that Sammy would buy Yuli out of Israel Corporation, leaving Yuli with mainly their real estate operations. Since Yuli sold his Israel Corporation shares to his brother, their value has climbed between sevenfold to tenfold, thanks mainly to ICL. Sammy has become one of the richest people in the world. Yuli hasn't.

Mozes makes a mistake

As 2005 began, it was clear that ICL stood before one of the best periods in its history. World demand for potash soared skyward as the Chinese and Indian economies boomed. When ICL's market capitalization passed NIS 25 billion, its CEO at the time, Akiva Mozes, decided it was the right time to exercise his stock options, convert them into shares and sell the shares. He sold 4.8 million shares for NIS 15 each and made NIS 71 million.

Who could know the company's business better than Mozes? Who could possibly have had a better sense of when to sell? Yet the moment this ultimate insider decided to exit, ICL's stock price started to skyrocket, rising wildly at speeds not known before. As of mid-day two days ago, ICL's share price was just under NIS 67, which means, Mozes lost more than NIS 50 on each share he sold. Multiply that by the number of shares he shed and you get a quarter-billion shekels, all theoretical profit that he'd have made if he'd had more faith in the company he runs and in its market.

Akiva Mozes' gargantuan loss of profit from his hasty exit can't and shouldn't be any comfort to Israel's taxpayers, who lost far more when the state sold its shares to private investors for less than 5% of the company's present value. But it does go to show that it's easy to be wise in hindsight and that nobody, but nobody, thought a decade ago, or five years ago, or even a year ago, that a company like ICL could end 2007 with net profit of $536 million and predicted profit of $1.9 billion for the year 2008. Nobody thought that demand from India and China would turn the world potash companies into gold mines quadrupling their profit in such a short time.

The most obvious beneficiaries of ICL's rise are Sammy Ofer and his son Idan, who own 54% of The Israel Corporation, which owns 52% of ICL. The potash boom of the last decade has increased their personal wealth by some $4 billion. Unlike the state, unlike Yuli Ofer, unlike Akiva Mozes, they didn't get off the ICL train. But you can't argue that they foresaw the future any better, because they own only 28% of ICL (they own 54% of Israel Corporation which owns 52% of ICL).

So if they aren't the main beneficiaries, who are? The investors on the Tel Aviv Stock Exchange, that's who, people who own the stock directly or through their provident and mutual funds. Together Israel Corporation and ICL are worth some $35 billion, second only to Teva Pharmaceuticals. That's more than the next seven stocks on the list, which consists of banks Hapoalim and Leumi, Bezeq, Makhteshim-Agan, Perrigo, Partner Communications and Cellcom.

ICL's weight on the TA-25 index is 9.5% - the same as it was three years ago. The Israel Corporation's weight is presently 7%, up from 4.5% three years ago, during which time the company's stock rose about 300%, while ICL rose about 500%.

Or, in English, during the last three years the TA-25 index rose 68% but if we deduct the "potash effect," meaning the returns of ICL and Israel Corporation, we find that the TASE didn't do quite as well as one thought. Its surge was due less to Israel's economic boom or hi-tech hi-jinks and more to the only natural resource Israel has, potash mined at the Dead Sea, the right to which the state sold to private businessmen.

If until now you didn't understand the great risk of stock-picking rather than investing by indices, now you do. Any investment manager who failed to respect the Potash Effect, or who scorned holding companies like Israel Corporation, probably didn't beat the market in the last three years.

If you're some sort of Warren Buffett or hedge fund manager with a strange talent for picking stock market winners, fine. If you're like the rest of humanity, you're better off with indices. If Akiva Mozes couldn't tell how well ICL would do, and missed taking home a quarter-billion shekels, you probably couldn't have known either.