Antitrust Authority to nix Mizrahi-Union Bank merger

Mizrahi Tefahot

The parties will be summoned to a hearing before the final decision is announced.

The Israel Antitrust Authority will officially bar the merger between Mizrahi Tefahot Bank (TASE:MZTF) and Union Bank of Israel (TASE: UNON) next week. Israel Antitrust Authority representatives held meetings last week with the parties in the deal and explained their main arguments against approving the merger. The parties were also summoned to a final hearing before the ruling. Representatives of the controlling shareholders in Union Bank are likely to attend the hearing on Thursday, while Mizrahi Tefahot Bank representatives will appear next week. Summons to a hearing are issued only in cases in which the Antitrust Authority intends to disallow a merger. It is believed that there is little chance of the Antitrust Authority changing its mind after the hearing. The Antitrust Authority said today that no decision had been taken yet in the matter.

The parties in the merger have already realized that the Israel Antitrust Authority will probably rule out the merger. The Union Bank controlling shareholders plan to appeal the decision to the Restrictive Trade Practices Tribunal, and have already begun preparing their appeal. They plan to demand an urgent hearing in the matter, because it is by no means sure that Mizrahi Tefahot Bank will be willing to go through prolonged legal proceedings; it may prefer to simply withdraw from the deal. Furthermore, since the agreement with Mizrahi Tefahot Bank was signed, Union Bank has been in a state of uncertainty, which is having a negative impact on its business and employees. A prolonged proceeding will aggravate the stagnation, and is liable to worsen Union Bank's already mediocre results.

The merger between the banks was regarded as one of the most sensitive issues confronting the Antitrust Authority in recent years, although Union Bank is only Israel's sixth largest bank with a market share of less than 3%. Political opposition to the merger is strong, led by Minister of Finance Moshe Kahlon and Minister of Economy and Industry Eli Cohen, who assert that the merger will reduce the number of players in the market and harm competition in an already over-concentrated market. The Bank of Israel, on the other hand, believes that the merger will strengthen Mizrahi Tefahot Bank in its competition with the two largest banks, while Union Bank in any case is currently contributing nothing to competition. The Bank of Israel has also agreed to relax its future capital requirements for the merged bank. Antitrust Authority legal advisor Uri Schwartz, who will decide the issue, is under pressure, because a conflict of interest bars Antitrust Authority director general Michal Halperin from dealing with the issue.

The Antitrust Authority plans on rejecting the merger for a number of reasons, including a comprehensive probe that revealed that Union Bank was contributing to competition; its share in recruiting new customers was significantly higher than 3% in certain geographic areas. Furthermore, both Union Bank and Mizrahi Tefahot Bank are significant players in credit to the diamond industry.

Union Bank share price down, Mizrahi Tefahot Bank share price up

The capital market is already pricing the deal's cancelation, having pushing Union Bank's share price down 13% over the past month (when reports of difficulties posed by the Antitrust Authority in approving the merger began).

"Globes" reported yesterday that a paper prepared by consultant company Entropy recommended approving the merger, and warned of the consequences should the merger not be approved. "Failure to accept Mizrahi Tefahot Bank's offer to purchase and continuation of Union Bank's independent activity is liable to cause substantial damage to shareholders. If the offer to purchase does not go through and Union Banks continues its independent operations, its value will plunge," Entrophy wrote in its paper.

Shlomo Eliahu, who holds 27% of Union Bank's shares, is obligated to sell them because he also holds a controlling interest in Migdal Insurance and Financial Holdings Ltd. (TASE: MGDL). The sale of these shares on the market can only augment the downward pressure on Union Bank's share price.

Another possibility under consideration by Union Bank's shareholders is a deluxe liquidation of the bank: selling some of its assets, selling its valuable real estate properties, and gradually closing down its other activity. For the owners, this scenario may be preferable to selling the bank's shares on the stock market at rock bottom prices. At the same time, such a maneuver requires approval from the Bank of Israel. It is one thing for the Bank of Israel to support a merger that will strengthen a medium-sized player; approving the complete liquidation of Union Bank, however, is another and much more unlikely matter.

On the other hand, the effect on Mizrahi Tefahot Bank of canceling the merger with Union Bank is negligible. The bank's share price has climbed 5% in the past month, similar to the rise in the banking index. "The effect of the merger on the bank's activity is fairly negligible. The banks is being acquired at a fair price, and the main advantage of the acquisition is the accounting profit that Mizrahi Tefahot Bank would have posted, because it was to have acquired Union Bank for less than the latter's shareholders' equity. The investors in the Mizrahi Tefahot Bank's share are therefore rather indifferent to whether or not the merger takes place," a capital market source said."

Published by Globes [online], Israel business news - www.globes-online.com - on May 22, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

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