A year has passed since David Ezra, one of Israel's wealthiest businesspeople, was caught at Ben Gurion airport with €500,000 cash in his suitcase. He had not declared the money in advance to the authorities, as required, and many eyebrows were raised. Ezra is chairman of fish and meat import and production company (TASE: NTO), one of Israel's largest food companies, and in the four years prior to the airport incident he had accrued nearly NIS 1 billion from selling shares and dividend payments. For Ezra, €500,000 was small change.
Several days after the airport incident, it was published that it would likely end in a fine. Ezra's lawyers pointed out that tax as required had been paid on the cash and that it was being taken abroad to pay the contractors building his vacation villa in Greece. When questioned on the matter by the authorities, Ezra said that he did not know where he was supposed to declare the money when leaving the country.
While this unfortunate affair was quickly forgotten, another more threatening affair has been developing in recent weeks that may become much more expensive for Ezra, compared with the symbolic fine he probably paid in the suitcase with cash affair.
A veteran institutional body in Israel's capital market claims that it is possible that the sale of shares, which put hundreds of millions of shekels into Ezra's pocket, was allegedly "subsidized" by Neto Holdings, at the expense of shareholders, by providing preferred trading terms to a poultry supplier related to the buyer of Ezra's stake.
The claims come as Neto Holding's share price has fallen 50% over the past year, giving a market cap of NIS 328 million, and the share price of its subsidiary Neto Malinda (TASE: NTML), which undertakes the Group's main business activities, has fallen almost 70% since April 2022, giving a market cap of NIS 1.4 billion.
Neto Holdings was founded before the establishment of the state and began trading on the TASE over 40 years ago under the name of Meir Ezra (David Ezra's father). The company is engaged in producing, importing, marketing and distributing food products including brands such as Tibon Veal, Williger, DeliDag, Three Bakers, Magic, and Rich, and alongside its meat, fish, cheese and pastry products it also provides non-food products such as tin foil, disposable plates and silverware, wipes and candles. The Group had revenue of more than NIS 4 billion last year.
However, the weakness in the company's share price over the past year reflects the deterioration in Neto's business results. Although the company recorded 14% revenue growth in the first quarter of 2023 (over NIS 1.1 billion), due to an increase in revenue from marketing poultry and meat imports in the local market, gross profitability fell to just 10% for the second straight quarter, compared to the over 13% to which investors were accustomed in previous years (at the beginning of the previous decade, this figure even stood at 17%-19% of sales).
The reasons for the erosion in profitability compared with last year was, according to management, the depreciation of the shekel against the dollar as well as the absorption of some of the price increases that were not passed on to consumers. The quarterly net profit was cut almost in half to NIS 12 million.
All this happened after, in a deal completed in September 2021, Ezra sold about half of the controlling shares in Neto Holdings at a record price. In the deal, 23% of his shares were sold to the Nur Yaska, a company owned by David Matsa for NIS 273 million - double their market value. It was a 'high-tech' exit in a traditional industry, which raised questions.
On the buyer's side, it is on the face of it an unfortunate deal. The share price of Neto Holdings is currently 72% lower than the price Matsa paid for David Ezra's shares, so it is a loss on paper of about NIS 200 million.
However, documents recently submitted to the court raise questions about the connection between the generous premium paid in the deal and preferential trade terms allegedly granted by Neto Malinda to the Matsa family poultry slaughterhouse, which supplies Neto with chicken products.
"It is true that 2021 was an exceptional year for the food business, due to the consequences of the Covid pandemic," claims a source in the capital market, "but the sale of Neto Holdings shares at a huge premium over the market price raised suspicions of crooked behavior. This is probably what recently upset market officials."
Now there are those who claim that the deal included elements that benefited the buyer and harmed Neto's shareholders. In recent weeks, the veteran capital market activist, Dr. Yehuda Shenhav, through Adv. Lior Lahav, submitted a request to the court to approve the filing of a derivative application in the name of Neto Malinda against the directors led by the chairman David Ezra, managers of Neto Holdings and Matsa's Nur Yaska.
The application is over losses allegedly caused to Neto Malinda, following expansion of its activities with a poultry supplier owned by Matsa's brother, Gabriel, as well as additional damages in connection with the advance of payments to that supplier. According to the application, these are deals requiring approval as unusual transactions in which the controlling owner, Ezra, has a personal interest.
The application claims, among other things, that an increase in the purchase of poultry from the Matsa family, "Was expressed in a sharp fall in the gross profit rate of Neto Malinda." According to the application, this matter shows that Neto Malinda's involvement in the purchase of the poultry "was not undertaken on market terms", and that the supplier "received preferential trade terms." This was allegedly to compensate the Neto Holdings share purchaser Nur Yaska for having bought shares at a huge premium.
More Gemel demands to see documents
Several days later More Gemel and pensions filed a request to see the documents so as to examine the submission of a request for a derivative suit, and to order the company to hand over various documents in connection with the expansion of its activities with the poultry supplier from the Matsa family and the sale of Neto shares by Ezra to Nur Yaska. More states in the petition that the minimum it is entitled to "amounts to NIS 177 million reflecting the minimum excess consideration of the controlling owner received when he sold his shares to a supplier of Neto Malinda."
In the petition filed in the Beersheva District Court by Advs. Ra'anan Klir, Alon Binyamini and Adi Kaplan from Erdinest, Mor Gemel (which owns Neto Malinda shares worth about NIS 100 million) claims a possible connection between the deal in which Ezra sold Neto shares to Matsa at a major premium on the market price, and the expansion of the contract between Neto Malinda and the Matsa family poultry supplier.
The petition states, "The expansion deal was put together before Ezra received the full consideration for the shares he sold to Matsa. Thus, it is possible that the funds that Neto Malinda paid to Matsa Poultry, by virtue of the expansion deal, were used for a payment by David Matsa to Ezra. In other words, it is possible that Malinda paid out of its own pocket for the shares that the controlling shareholder sold, to a substantial supplier, and all its serious implications."
According to the lawyers, Gabriel Matsa's deal with Neto Malinda is "a puzzling deal that expanded activity by hundreds of millions of shekels, and gave him additional generous benefits. All in a way that caused real damage to the company, in the form of a sharp drop in profitability and an increase in financing expenses." It is also claimed that the deal was made "under preferable trade conditions in favor of Matsa Poultry, in a strange way, with substantial advanced payments by Neto Malinda."
The petition describes the process by which Neto Malinda's operating profitability was eroded, falling from a record level of 5.6% at the end of the Covid pandemic, which greatly benefited the food industry, to 2.8% in December 2021. Since then, profitability has been gradually eroded to a only 0.6% in the fourth quarter of 2022.
"The decrease in profitability in the domestic market in 2022, was mainly due to expansion in the field of marketing kosher poultry, where profitability is smaller," explained Neto Malinda in its financial reports for 2022. According to the lawyers, the supplier that brought about the fall in Neto Malinda's net profitability was Matsa Poultry.
Cash machine for one of the strongest families in the industry
Adv. Amir Dolev from Meitar law offices said on behalf of the Neto group, "Neto Malinda received a number of requests filed against it. Neto is studying the requests and will file its response to the court. Neto is certain that there is nothing serious in the requests."
When you add the sale of the shares to Matsa to the exercising of additional shares and dividends distributed by Neto Holdings group in previous years, you discover how much the food business has become a well-oiled cash machine for David Ezra and his family. Over a period of just three years, between 2019 and 2021, Ezra saw about NIS 900 million flow into his pocket, and as of today the Ezra family still owns 24% of Neto Holdings shares, through a trust whose beneficiary is his son Adi (married to model Bar Refaeli).
Even before the sale of the controlling shares and the Covid pandemic, which set up two dream years for Israel's food business, the Ezra family had gained the status of one of the strongest families in the industry.
David Ezra (73) serves as the chairman of the board of directors of the company, which since the deal with Matsa has been managed without a controlling owner. He has been leading the business for decades alongside the veteran CEO Ami Goldin. His salary cost last year amounted to about NIS 3 million.
Published by Globes, Israel business news - en.globes.co.il - on July 9, 2023.
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