21 years after Israel’s bank share manipulation crisis, which brought Israel Discount Bank (TASE: DSCT) under state control, the bank has been sold to a US consortium headed by Matthew Bronfman. That is a fact. Was the deal a success or a failure? That question will be bounced back and forth, with calculations of percentages, the Black and Scholes Option Pricing Formula, and other mathematical equations. In order to answer this question, however, it might be best to abandon efforts at exact calculations, and consider the alternative to the conclusion of the negotiations the failure of negotiations, and the end of the process without a sale.
An examination of this possibility leads to the conclusion that the sale of Discount Bank was necessary, and that now was the best time, even if some expected a higher price.
”Discount Bank was sold at an appropriate price, within the range of the valuation we commissioned,” says MI Holdings (State of Israel Properties) chairperson Michal Abadi-Boyanjo, in her first interview since a privatization agreement was reached for the bank. “I’m very satisfied that the process ended in a sale. The bank’s privatization isn’t measured just by the price, but by the effect of the entire sale on the bank, and on the entire banking system. The price isn’t the most important thing. It is important; we didn’t intend to sell at any price. However, all the consequences of the fact of the sale should also be taken into account - not just the price.”
The price may not be the sole important factor, but the price is what caused the unplanned conclusion of the entire process. Under the original plan, the accelerated process that began six months ago should have ended on the day when the bids were submitted with the announcement of the consortium making the highest bid as the winner. There was a similar timetable for the possibility of a single bidder, which eventually happened: submitting of a price bid, short negotiations, and a declaration of the winner and the sale of the bank on the same day.
What actually happened, however, was that a particularly low bid of less than NIS 1 billion for the 26% controlling interest in the bank was submitted two weeks ago on Tuesday. This bid reflected a value for Discount Bank of less than 60% of its shareholders’ equity. It led to ten days of long and intensive negotiations that more than once were on the verge of breaking up. The negotiations spanned continents, with first the sellers, and afterwards the buyers, being present in the US. Matthew Bronfman, for example, began the negotiations in Israel as a twice-divorced single man, and finished them in the Caribbean on his honeymoon, following his third marriage.
”It’s a pity Daniel Strauss left”
”Globes”: What did you feel when you opened the envelope with the first bid disappointment?
Abadi-Boyanjo: ”Yes, I was disappointed, but I recovered fairly quickly, and realized that prolonged negotiations still lay ahead.”
How much did you expected to initial offer to be?
”I expected more than was written there, but negotiations have their own rules.”
The bid was low because there was only one bidder. Wouldn’t you have gotten more if there been two bidders?
”The bids might have been higher had there been two consortia, but I can’t say. What I can say is that competition has different rules than a sale to a lone bidder. In view of the final result, I think that had there been competition, things would have looked different in the initial stages, but the final result would have been similar. We maximized our ability to obtain a fitting price, and we got the deal to where it would have been with more than one bidder.”
How did it happen that the Daniel Strauss consortium, the last bidder to withdraw, eventually submitted a bid?
”After withdrawing, Daniel Strauss sent us a letter proposing that if the process did not end in a sale to the Bronfman consortium, he would buy Discount Bank for 70% of its shareholders’ equity. This offer was questionable; it was less than we expected to get, and it was by the Strauss consortium as originally composed: 50% ownership by investment institutions, which the Bank of Israel’s rules and the tender terms did not allow. That’s what made the Strauss consortium withdraw from the tender.”
Why did you let a group as strong as the Strauss consortium withdraw only a few days before the tender? Had they remained in the tender, the whole picture would have been different, and perhaps the final result, as well.
”As I said before, I think that with two groups, the initial bids may have been higher, but the final result would have been similar, after we made the most out of the situation with a single bidder. Regarding the Daniel Strauss consortium, I want to say that I very much regret that it left the process. You shouldn’t say ‘We allowed them to go.’ A bidder must want to stay, but gaps emerged between what they wanted as the structure of their holdings and what was possible. It was impossible to close that gap.
”We did everything to keep them in the process. The consortium was estimable: both Strauss and his partners. In the end, however, the gaps could not be bridged, and I’m very sorry that he left. I believe, and I hope, that we’ll see this consortium make other investments in Israel. Strauss is determined to invest here, and went a long way in the Discount Bank tender, but it didn’t come off, which is a pity. I hope he makes other investments here.”
Why did you create a new privatization mechanism, in which the state will receive more money if the bank earns 11-13% on equity?
There were many innovative features in Discount Bank’s privatization: a single candidate, which had not happened in previous sales of banks; two payments, with most of the payment in cash, and the rest after three years; and the upside mechanism that you asked about. Another unique feature was that the bank was in the throes of a recovery plan, which made the process different. In the current state of the bank, the state wanted to maximize the price it would receive. This mechanism enabled us to do that.”
Maybe you didn’t want people to say that you sold the bank cheaply.
”Nothing in the privatization process was done because of what people would or wouldn’t say. The goal was to sell the bank in a fitting manner, and we found a number of mechanisms to bridge the gap between what we sold and the potential value of the asset being sold. The lower limit of the return on equity that was chosen (11-13%) is very close to where the bank is right now, while the upper limit is close, for example to Bank Hapoalim’s return. That’s a realistic goal for Discount Bank; it’s not out of reach.”
United Mizrahi Bank tried twice to take part in the tender: once in May 2004, when all the other participants registered, and after Strauss withdrew, leaving a single consortium. Why didn’t you open the tender to it?
”The process of selling Discount Bank was open to every suitable group, whether local or foreign, according to predetermined criteria announced in advance. Questions about Mizrahi Bank should be directed to the Bank of Israel, not me.”
Discount Bank’s 6,000 employees were not included in the celebrations of the sale of the bank. The bellicose Discount Bank workers committee, headed by old warhorse Riki Bachar, for years the terror of potential buyers for the bank. Bachar was one of the main reasons why the bank was not sold before. He gave Discount Bank an image of unsteady and difficult labor relations, creating a feeling that anyone entering the bank would experience problems with its workers.
Twelve days ago, when the Bronfman group submitted its price bid, the Discount Bank workers closed the bank down completely for three days, to give the purchasers an idea of what awaited them, despite a promise of an unprecedented privatization grant of NIS 250 million and a guarantee that work rules at the bank would remain valid for five years after privatization. One outstanding issue is the question of a five-year ban on selling the bank’s assets. This was part of the tender terms, but the workers are demanding that it also be included in the agreement with them. The timing of the privatization grant is also open. The workers claim that the Ministry of Finance has retracted previous agreements.
Can problems with the workers disrupt the privatization process after agreements have already been reached?
”No. We have a meeting with the workers, and we’ll make every effort to come to an agreement on the issue. There are agreements on the matter with Histadrut chairman Amir Perez and Minister of Finance Benjamin Netanyahu, and we’ll act according to those agreements. I want to say that privatization is good first and foremost for the workers, and they understand that.”
Does that fact that the buyer has only passed the preliminary Bank of Israel examination, not a full examination, constitute a risk?
”No. We believe that the preliminary process presages final approval with a high degree of certainty.”
When will ownership pass to the Bronfman consortium?
”About May or June, I think.”
Then you’ll be free to handle the privatization of Bank Leumi. Perhaps now, after you have succeeded in selling a controlling interest Discount Bank, you should abandon the idea of distributing Bank Leumi shares to the public for free, and look for a consortium to buy the controlling interest in the bank.
”No. Bank Leumi is in the middle of a common process being led by Ministry of Finance Accountant General Dr. Yaron Zalika, and there are no plans to change it.”
Rare experience in privatization
Abadi-Boyanjo, 38, is a refreshing surprise in the privatization of Discount Bank. She has been at MI Holdings for only eighteen months, after being Ministry of Health director general. She has no background or experience in privatization and banking. But Abadi-Boyanjo, who has earned degrees in economics, law, and accounting, surprised them all. With infinite patience, she led the process, defusing innumerable mines and overcoming endless difficulties along the way. She led Discount Bank, which the state has been trying to get rid of for so many years, all the way to a sale.
Abadi-Boyanjo modestly turns aside compliments, while unhesitatingly sharing the credit with many partners, as if making an Oscar acceptance speech: “I want to mention first of all Netanyahu, who demonstrated determination all the way. Every privatization should have such minister of finance. Netanyahu was the main engine pushing privatization. Zalika handled the price negotiations with the buyer, and made the sale at a suitable price, despite all the difficulties.
”I also want to mention my partner in the process at MI Holdings, general manager Yitzhak Klein, who contributed greatly out of his precious experience in privatizing banks. Not many people are aware of it, but the process didn’t begin in May, when the consortium arrived; it began over three years ago. It was Klein who prepared the process, contacted the investors, and built all the foundations on which the sale rested.”
What about the Bank of Israel, which has already delayed several privatizations?
”Certainly. The Bank of Israel is the key anchor of the whole process, particularly its authorization of rapid preliminary approval of consortia and its commitment to the process, which included a large assignment of personnel. Supervisor of Banks Yoav Lehman; Avi Eckstein, his deputy, and, of course, former Governor David Klein, are deserving of gratitude.”
Published by Globes [online] - www.globes.co.il - on January 25, 2005