How FIMI came to dominate Israeli M&A

Ishay Davidi illustration: Gil Gibli

The cash-rich private equity fund has become a potential buyer for almost any company being sold.

Several key processes have radically altered the pattern control in Israeli business in the past few years. It started with the tycoon-controlled leveraged holdings groups that collapsed one after the other, had stopped competing in asset acquisition deals. Then, the regulators began taking their toll and scared off potential investors from abroad (perhaps excluding Chinese investors who were already used to this). Finally, the Promotion of Competition and Reduction of Concentration Law forced remaining holding companies to busy themselves intensively with "folding up" layers, reducing debt, and realizing holdings in insurance companies and investment houses.

In the past few years, the vacuum left by the tycoons has been filled by the private equity investment funds, which have found themselves either sole contestants, or competing with each other, for the acquisition of control of factories and companies. The most prominent of these funds is clearly the cash-rich FIMI Opportunity Funds, which has become a potential buyer for almost any manufacturing company, as well as other companies, in which the controlling interest is for sale.

Only in the past month, FIMI has been said to be in advanced talks to buy security services company G4S Israel (formerly Hashmira) for NIS 350-400 million, as well as talks to buy sweeteners and starches producer Galam from Kibbutz Maanit for NIS 300 million. At the same time, the fund is reportedly promoting a stock exchange offer for sale of the shares of maritime logistic company Overseas Commerce, at a valuation of NIS 400-450 million. FIMI itself has officially announced its agreement to sell the controlling interest (70%) in aircraft component maker H. R. Givon Ltd. for NIS 300 million (a deal that gives it a return of up to three times its investment).

These various deals exemplify FIMI's key role in the Israeli business today. In the past four years, the fund has invested a cumulative $1 billion in acquiring control of manufacturing sector companies in Israel, an average annual investment of NIS 1 billion.

In the past year, FIMI has invested even more, NIS 1.3 billion. Among other things, paid the shrinking holding company Clal Industries and Investments (TASE: CII) NIS 480 million for the controlling interests in veteran industrial companies Hadera Paper Ltd. (TASE: AIP; Pink Sheets: HAIPF) and Bet Shemesh Engines Ltd. (TASE: BSEN), and invested a further NIS 90 million in a Hadera Paper capital raising round. In addition, it acquired half of the shares of robotics and automation company Unitronics Industrial Automation for NIS 110 million and invested additional NIS 230 million in gaining control over Moshav Ram-On's Polyram plant, which produces raw materials for the plastics industry.

FIMI-3 is a world leader in terms of return

This year, FIMI marks 20 years since its foundation, with assets under management valued at $3.2 billion (equaling the market cap of the 13th largest company at the Tel Aviv Stock Exchange). FIMI Founder and Chief Executive Officer Ishay Davidi says that since 1996, FIMI has acquired control of 82 companies and has sold 52 of them, with a transaction volume of over $4.5 billion, while generating outstanding return for investors in the fund.

In a recent convention, Davidi talked about FIMI-3, which was launched in 2006 and invested in several companies in that year and the following one, before the 2008 global crisis arrived. "We entered one of the world's most complex crises, but we did so with a very low leverage level, and while focusing on our basic parameters and the results are clear and speak for themselves," he said.

Davidi added, "In comparison with the global average of funds of the same vintage as FIMI-3, it has attained an annual return of 25% compared with a 7% global average, and an investment multiplier of 2.6 compared with a 1.4 global average. These figures put FIMI-3 in first place in the world, which is far from trivial. The global private equity market is a $4 trillion market and the studies that put FIMI-3 in first place, globally, have been made by several objective international research entities."

All of FIMI's funds have been ranked among the world's top five (each during its period of activity) by international research companies following the private equity fund sector.

At present, FIMI is leading no less than 30 companies, 12 of which are publically traded (Gilat, Ormat, Bet Shemesh Engines Ltd., TAT Technologies, Rekah Pharmaceutical Industry, Tadir-Gan, Unitronics, Magal, Ham-Let (Israel-Canada) Ltd., C.Mer and Polyram). These holdings turn FIMI into the leading force in Israel's industrial sector and one of the market's largest employers. Companies controlled by FIMI currently employ over 18,000 people and operate 50 production plants in Israel and several dozen abroad, some of which have been acquired under FIMI's leadership in order to expand the companies' deployment and their fields of operation.

Exclusive talks with FIMI in most deals

Besides Davidi, FIMI's managerial team consists of senior partners Gillon Beck and Eldad Ben-Moshe, as well as partners Ami Boehm, Ron Ben-Haim, Amit Ben-Zvi and Chelly Pardo.

FIMI made its opening shot in 1996, with a $150 million fund raising round for its first fund and a $200 million round for FIMI-2. In 2005, it raised $300 million for the FIMI-3 fund; in 2008, it raised $510 million for FIMI-4 and in 2012, a further $850 million for FIMI-5. The two first funds had already completed their investment period. All investments in FIMI-3 have also been realized, other than the holding in Inrom and, as mentioned, the fund yielded a 25% annual return. The FIMI-4 and FIMI-5 funds are yet to complete their life cycle, and have been yielding an average annual return of 30% in the meantime.

These funds were joined by FIMI-6 in 2016, which raised the enormous sum of $1.1 billion, following substantial oversubscription by investors in Israel and abroad. Acquiring control of Bet Shemesh Engines was the fund's first investment.

This cash ensures that Davidi will be able to continue being a dominant player in any new deal that arises in the next few years. At the same time, the 30 firms he already controls ensure that FIMI managers will be searching for buyers for the older part of their existing portfolio.

As mentioned, developments in Israeli business in the past few years have put leveraged holding companies out of the picture. As a result, the main bidders in acquisition deals are either commercial companies attempting to grow through acquisitions, or private equity funds that see a potential for value creation by beefing-up the operations of the acquired company.

FIMI's main advantage is that thanks to its successes in the past and its status as Israel's leading fund, sellers usually choose to negotiate the sale of their asset exclusively with it, without holding a tender involving all potential buyers. Sources in the sector say that this privilege enables FIMI to forego deals in which the seller decides to hold a tender in order to maximize the value he obtains.

This situation is not expected to change in the next few years. Israeli private equity funds, FIMI foremost among them, will continue to be key players in merger and acquisition activity; while the large international funds, which tend to carry out leveraged acquisitions, will continue bidding for local giants such as Tnuva Food Industries, Keter Plastic Ltd. and Netafim.

Davidi's formula

For the managers of Israel's investment funds, such as FIMI Opportunity Funds, the name of the game is enhancing companies. The funds that who continue to show results will also enjoy a flow of new, attractive offers. In the Pisgat Tel Aviv 100 summit, held by the Calcalist newspaper last month, Davidi said that during a period of global upheavals and due to the inability to predict them, FIMI managers ask themselves two main questions: what companies are worth buying in an unpredictable macro environment, and what is the right way of managing them in this environment.

In his talk at the summit, Davidi explained that FIMI deals with macro-level uncertainty by focusing on micro-level data, that is by looking specifically at the companies themselves. "Since FIMI was founded, we have always focused on the companies themselves, in order to enhance them and produce strong companies capable of overcoming crises," he said.

He said that the experience of the fund's managers proved that there were important criteria for company success and strength, namely: committed, high-quality workforce, investment in research and development and advanced equipment, creativity, thinking outside the box, strong cash flow, the existence of growth engines, low leverage levels, and broad in terms of geographcai and sector diversity.

Davidi added, "Even when we set out, as part of this process, we made a decision which does not resemble any other private equity fund in the world. FIMI has some of the world's lowest leverage levels. For comparison, private equity funds globally have a leverage level of about 50-60%. During the past twenty years, we at FIMI have had an average of 10%, even less in the past ten years.

"This is a very significant difference. Our ability to build robust companies, capable of withstanding upheaval and changes enables us, even when we make mistakes or do not predict some of the things that happen, to make a change and be able to face the upcoming crisis. We acquire control over firms and focus on realizing their potential, in order to prepare them for any, even the worst, scenario."

The tycoon era ends: the death of leveraged holding companies

The rapid rise in the power of the private equity funds, primarily FIMI, occurred in tandem with the rapid collapse of the leveraged holding companies, which generated most of the large acquisition deals in the market during the previous two decades.

The businesses of most of the tycoons who headed these companies have failed during the past few years, putting them out of the game: Nochi Dankner (IDB), Eliezer Fishman (Jerusalem Economy), Lev Leviev (Africa-Israel), Yosef (Yossi) Maiman (Ampal - American Israel Corporation), Joseph Greenfeld (Kardan NV), Ilan Ben-Dov (Suny), the late Motti Zisser (Elbit Imaging Systems), David Wiessman and Shraga Biran (Alon Group). All of them experienced a collapse in their businesses, debt arrangements and some have even got entangled in personal debts. The sole survivor of this generation of tycoons, Delek Group Ltd. (TASE: DLEKG) controlling shareholder Yitzhak Tshuva, has been acting to sell his holdings in the past few years and focus solely on the energy market.

The place of the tycoons has been taken by private equity funds - FIMI and other funds, such as Fortissimo Capital, Tene Investments, Sky Fund, Viola Private Equity and Kedma Capital. Viola Private Equity Founder and General Partner Harel Beit-On recently told "Globes" G Magazine that this was a global phenomenon. "The global financial crisis has led to a sale of assets, which itself led to a rise in the status and function of private investment funds. As a result, their presence has been felt much more in the past five-six years," he said.

The disappearance of the holding companies: Israel joins the world

Beit-On added, "In Israel, the holding group model persisted longer than in the rest of the world, where these companies had begun disappearing in the mid-1970s. There was no advantage in having insurance, industry and transportation businesses under the same roof. This characterized underdeveloped markets, because there was an advantage to access to capital from prior businesses. There is no capital availability problem in the modern world. If you have a worthwhile investment or project, you can raise the money for it.

"Companies have shifted to a focus on a specific field while, at the same time, a model of investment funds and sources of capital for these investments has developed. The change is reflected in financial results. On average, businesses controlled by private equity have better business performance than businesses whose management is hidden in the headquarters of holding firms."

Published by Globes [online], Israel business news - www.globes-online.com - on August 22, 2016

© Copyright of Globes Publisher Itonut (1983) Ltd. 2016

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Ishay Davidi illustration: Gil Gibli
Ishay Davidi illustration: Gil Gibli
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