Apax and Tnuva: NIS 3.8b return; NIS 0 tax

Eli Tsipori

Or how Israel's tax laws transfer wealth from the many to the few.

Any minute now, the headlines tell us, the deal will be closed for the sale of control in Israel food monopoly Tnuva to Chinese food giant Bright Food, that country's third largest dairy products manufacturer. It isn't over till it's over, signed and sealed, but even if the deal is delayed, postponed, or collapses, what will be signed and sealed is one of the most shameful chapters in the Israeli privatization story, whether it’s a matter of a sale by the state or by the kibbutzim and moshavim (collective settlements) as in the case of Tnuva.

This is a chapter that more than anything exemplifies a process of transfer of wealth from the many to the few, not by virtue of any exceptional talent, but thanks to the possibility of buying a company for peanuts, squeezing it, extorting consumers, and selling it at a dream profit. There's nothing like the numbers for telling the big story of inequity in Israeli society.

NIS 3.9 billion This is the value at which Tnuva carried out the "privatization" process in January 2008. The process was pushed through high handedly by Arik Reichman, then the big boss at Tnuva. It was fairly complicated, because Tnuva was a cooperative, with 640 shareholders, kibbutzim and moshavim with little understanding of finance. Tnuva itself was a monopoly with low profitability in relation to its sales.

There were five bidders for control of Tnuva: the Markstone Fund, the Apax fund, Meir Shamir, Igal Ahouvi, and Lev Leviev's Africa-Israel Investments Ltd. (TASE:AFIL). Zehavit Cohen, Office Head of Apax Partners Israel, was the most determined. She did the rounds of the kibbutzim and moshavim, formed close ties with Reichman, and, as someone who understood finance very well indeed, examined the financial statements in depth and realized how large the potential was.

Although Africa Israel bid $25 million more in the auction, Reichman decided to go with Cohen. He later said that the people at Tnuva had formed the impression that Africa Israel was careless and not serious, and, out of concern for their baby and its future, chose Apax and Zehavit Cohen. With the wisdom of hindsight, it can be seen that Reichman chose correctly, because shortly afterwards Africa-Israel got into difficulties and had to make a debt arrangement, but the question is different: why was there no pricing process with the aim of extracting the highest price possible? That, after all, is the aim of any seller: to squeeze as much as possible out of the buyer.

The deal went ahead in the following format: 23.3% remained with the kibbutzim and moshavim, and Apax brought in an Israeli partner (Meir Shamir) so that the fund held control of Tnuva (56%) and Mivtach Shamir, controlled by Shamir, held the remainder (20.7%).

NIS 8.5 billion (more or less) This is the value being talked about with the Chinese a nice gain, and we'll shortly see how nice. How was it achieved? Zehavit Cohen claims that Apax instituted a cultural, organizational and operational revolution in Tnuva. "This was a revolution that could have led to collapse in another company. Everything was done with precision, with a scalpel." My take is much simpler: you buy cheaply, extort the consumer, extort the state, leverage the company, leverage the deal, and come out with a huge profit.

NIS 2.6 billion This is the amount of the dividends that Tnuva has distributed since it was removed from the control of the kibbutzim and moshavim. If you add that to the valuation of the company in the deal with the Chinese, the result is that the value of Tnuva tripled within six years. Do you know of another food company that has risen in value so amazingly in such a short time? The share price of Osem Investments Ltd. (controlled by Nestl? SA (SWX:NESN)) (TASE: OSEM), for example, has risen 116% since the beginning of 2008, while Strauss Group Ltd. (TASE:STRS) saw its share price rise 30% in the same period. Tnuva's value rose 185%.

But these numbers are of course completely inaccurate. Apax and Shamir did not put in NIS 3 billion, their share of the deal. The took a loan, a routine procedure in an acquisition deal, what is known as "leverage".

NIS 1.8 billion This is the loan taken by the special purpose vehicle that Apax and Shamir set up in order to buy control. This loan was meant to have been repaid in February this year. With such collateral (shares in Tnuva) it is no danger of course, and so it was rolled over until early February 2015. Part of the rollover terms was that the early repayment commission on the loan was cancelled. It will probably be repaid early if the sale deal goes ahead.

x 5 This is Apax's true return on its investment. Roughly speaking, this is the calculation: Apax Partners and Mivtach Shamir invested NIS 3 billion between them, NIS 2.2 billion coming from Apax. The equity invested by Apax, after discounting its share of the loan, comes to NIS 900 million. As a result of the deal with the Chinese it can expect to receive some NIS 4.8 billion, and out of this it will repay its share of the loan, which stands at roughly NIS 1.6 billion. It is thus left with NIS 3.2 billion. Add to that its share (gross) in the dividends, some NIS 1.5 billion, and you get a total return of NIS 4.7 million on an investment of just NIS 900 million, or more than five times. In absolute terms, a profit of NIS 3.8 billion. Astonishing!

NIS 0 Even more astonishing is that this profit is not taxable. At a 25% capital gains tax rate, the amount of tax payable could have reached nearly NIS 1 billion (including taxation of dividends, which does not apply in this case). Instead, Apax Partners will pay the State of Israel nothing at all, because foreign funds are altogether exempt from tax on their investments in Israel. This sweeping tax exemption comes from the school and doctrine of Prime Minister Benjamin Netanyahu, for whom being super-accommodating and fawning vis-a-vis foreign investors is the name of the game. Such an attitude is quite understandable in relation to Intel, which is a completely different story a story of employment generation, an innovation engine, and the provision of extensive and fertile ground for entrepreneurship. But it's completely impossible to understand it in the case of Apax. This is a foreign fund that came in for a limited period, to make a killing, and only to make a killing, with no interest in anything else whatsoever: not the workers, not the consumers, and not the suppliers. The phenomenon repeated itself, only in a worse way, at Bezeq Israeli Telecommunication Co. Ltd. (TASE: BEZQ). There, the Saban-Apax-Mori Arkin consortium milked the telecommunications monopoly, milked the consumers (through Pelephone, and still through the landline division), laid off hundreds of employees, and exited with a huge killing and with 0% tax (apart from Arkin). What is that if not a transfer of wealth from the many to the few?

2011 This was the year of the social protest, when it seemed as though Tnuva was a beaten company, humiliated and submissive. A series of investigations led by "Globes" and its consumer affairs reporter Ilanit Hayut exposed the distortions in the milk market and the inflated prices, leading to the "cottage cheese protest". But the way of the world has not changed. Tnuva recovered, and its operating profitability improved. True, it had not regained the peak of 2010, but that will now be Bright Food's problem, if the deal goes ahead.

The hypocrisy We hear voices these days opposing the deal with the Chinese, and ask ourselves where they were when Apax was a partner in acquiring Bezeq; where they were when it bought control of Tnuva; and where they were when it bought control of Psagot, the largest investment house in Israel. Then, they applauded the foreign fund, danced around it, and gave thanks for its entry into the Israeli economy. Most of them have now changed their spots. They have become "socially aware", preach against the inequality in Israel, and suddenly also oppose the sale of control to the Chinese, ostensibly in the name of Zionism.

To my mind, Apax is much worse than Bright Food, and if the Chinese do the job that their compatriots at ChemChina have done at Makhteshim Agan, then Tnuva falling into their hands can only be a good thing. Netanyahu should look at the distorted results of Bezeq and Tnuva in order to understand what damage they have caused the public, under the cover of fine slogans about foreign investment and suchlike. A foreign fund, and a foreign investor with an Israeli odor (Saban), raked in billions, squeezed customers, threw employees on the scrapheap, and were rewarded with zero tax. Hallelujah!

Published by Globes [online], Israel business news - www.globes-online.com - on May 4, 2014

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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