Israel Pyramid Rules Turn Insurers Into Buyout Targets: Real M&A

By Sharon Wrobel on May 10, 2012

Israel’s proposed regulations requiring simplified corporate structures are giving foreign private-equity firms the chance to acquire some of the country’s biggest insurance providers at a bargain.

Clal Insurance Enterprise Holdings Ltd. and Phoenix Holdings Ltd. (PHOE1), the country’s second- and third-largest insurance companies, are likely to be sold as the government aims to limit pyramid structures to three public layers, said DS Securities & Investments. Clal and Phoenix, owned by Israeli billionaires, are trading below the value of their net assets and are cheaper than 96 percent of similar-sized life insurance providers in the Middle East and Africa, according to data compiled by Bloomberg.

Insurers will be attractive targets with Israel’s economic growth surpassing 4 percent in seven of the last eight years and the number of people paying into insurance plans increasing since mandatory pension contributions began in 2008, said DS Securities. Prime Minister Benjamin Netanyahu, seeking to boost competition, will give conglomerates four years to comply with the new rules. With about 12 percent of the companies in the TA- 100 Index having to put assets for sale, the deals may start to lure private-equity firms from KKR & Co. (KKR) (KKR) to Silver Lake and Carlyle Group LP, said Kedma Capital II LP.

“The big insurance companies are on the shelf and that’s where you are going to see the first moves,” Gilead Halevy, founding partner of Tel Aviv-based Kedma Capital and general partner at KCPS Private Equity fund, said in an interview. “The market will have to open up to new entrants and the natural choice will be private-equity funds.”

Coalition Agreement

The Israeli cabinet on April 22 approved the recommendations of the committee on economic concentration that also include reducing cross-holdings in financial and industrial businesses. The cabinet appointed its own committee to prepare the legislation necessary to implement the recommendations, according to the Finance Ministry.

A coalition agreement announced on May 8 canceled early elections, enabling Netanyahu’s government to move forward with regulations to increase competition, said Terence Klingman, senior analyst for international clients at Psagot Investment House Ltd. in Tel Aviv.

Delek Group Ltd. (DLEKG), controlled by billionaire Isaac Tshuva, is likely to sell Phoenix to comply with the rules and hold onto other investments in oil and natural gas exploration, said Meir Slater, an analyst at Tel Aviv-based DS Securities. The Netanya, Israel-based holding company owns about 53 percent of Phoenix.

‘Classic Example’

IDB Holding Corp. (IDBH), the Tel Aviv-based company controlled by billionaire Nochi Dankner, will divest Clal to adhere to the regulations, said Slater. IDB, which owns 55 percent of Clal, has a holding structure of five public layers, according to Ron Alkon, an analyst at Epsilon Investment House Ltd. in Tel Aviv.

“Clal Insurance is a classic example of one of the first companies that could be an attractive target for foreign investors,” Yossi Efrati, head of investments at Hachshara Insurance Co. in Tel Aviv, said in a telephone interview. “The insurance sector in Israel has growth potential as long-term savings are expected to expand.”

Representatives for IDB Holding and Delek Group declined to comment on whether the units are being sold or what price they may fetch in a sale.

IDB Holding’s previous talks with Permira Advisers LLP regarding the potential sale of its stake in Clal ended in September. The holding company is seeing renewed interest in the insurance company, including from Permira and others, Israeli daily Calcalist reported April 1.

Underperforming Stocks

“Deals like the sale of Clal Insurance (CLIS) didn’t happen before as there might have been a gap in the price expectation,” said Kedma Capital’s Halevy. The new holding company restrictions “now may close that gap.”

In the last year, shares of Clal had fallen 37 percent through yesterday while Phoenix dropped 25 percent as the insurance companies’ 2011 net income declined by 97 percent and 83 percent, respectively, data compiled by Bloomberg show. Both have underperformed Israel’s benchmark TA-25 index that lost 12 percent in the last 12 months through yesterday.

Worth almost 7 billion shekels ($1.8 billion) in 2007 before the worst financial crisis since the Great Depression, Clal had a market capitalization of about 3.2 billion shekels as of yesterday. That’s about 0.86 times the value of its assets minus liabilities.

Book Value Discount

At 2.2 billion shekels, Phoenix is trading at 0.85 times book value. Both Clal and Phoenix are cheaper than 22 of 23 other life insurance companies in the Middle East and Africa with market values of at least $100 million, data compiled by Bloomberg show. The median price-to-book multiple for the industry is 2.8.

Clal rose 0.6 percent to 57.82 shekels in Tel Aviv today, while Phoenix gained 1 percent to 8.796 shekels.

Clal may fetch between 1 and 1.2 times book value in an acquisition, while Phoenix may sell at a ratio of 0.95 to 1.15, Slater said. The companies are appealing even beyond low price tags, he said.

With a population of 7.8 million, Israel is among the youngest in the developed group of countries with relatively few citizens over 60, according to a population report from the Organisation for Economic Co-operation and Development. More than 85 percent of the population will be of working age through 2050 versus an average of 76 percent in other OECD countries.

“The growth potential of Israel’s insurance sector, in particular in pension and life insurance funds, is boosting the attractiveness of these companies as target acquisitions,” Slater said in a telephone interview. “Israel’s economy, which is expanding at a fairly solid pace, will provide a growth engine for the sector.”

‘Cheaper Prices’

Facing a four-year deadline, Israeli companies will probably have to sell at lower prices, which will lure foreign investors, said Pinhas Rubin, chairman and senior partner at Gornitzky & Co., a Tel Aviv-based law firm.

“We are talking about a compelled sale of companies, which means that buyers are from the outset in a better position to negotiate prices,” Rubin, who deals with mergers and acquisitions and represents the country’s largest conglomerates such as Delek Group, said in an interview. “Deal activity is likely to pick up fast because the closer we get to the four- year deadline the more pressure there will be on those companies to sell and the cheaper prices will get.”

Blackstone Group LP (BX) (BX) has already expressed interest in investing in the nation. The world’s largest private-equity firm is in preliminary talks with Avgol Industries 1953 Ltd. (AVGL), an Israeli manufacturer of nonwoven fabrics, for a possible acquisition, according to a March 6 statement.

Private-Equity Buyers

New York-based BlackRock Inc. (BLK) (BLK), the world’s largest asset manager, is considering offering its institutional customers investment tools that will allow them to take advantage of opportunities in the Israeli economy, Israeli Finance Minister Yuval Steinitz said in an e-mailed statement today.

“The new regulations will reduce the potential pool of local buyers because of the separation demand of cross holdings,” Rubin said. “Foreign buyers will have a clear advantage since they are not bound by these rules.”

Bigger private-equity firms such as New York-based KKR, Silver Lake, and Washington-based Carlyle (CG) (CG) are interested in investing in the Israeli market, said Halevy of Kedma Capital.

Kristi Huller, a spokeswoman at KKR, and Gemma Hart, a spokeswoman for Menlo Park, California-based Silver Lake, said the firms don’t comment on deal speculation, when asked whether they are considering making acquisitions in Israel.

Ownership Changes

Chris Ullman with Carlyle didn’t respond to a telephone call or e-mail seeking comment.

“A lot of ownership will change hands,” Ron Lubash, co- founder and managing director of Markstone Capital Group, a Tel Aviv-based private-equity fund, said in an interview at Bloomberg’s headquarters in New York this week. “Structural changes open up a significant number of opportunities for various types of investors. Private equity is a useful tool in a structural change, but not only, there will be other investors that will flock into some of these companies.”

Israeli private-equity deals in the first quarter were valued at $115 million, the weakest quarterly period in two years, according to the IVC-GKH Private Equity Survey. While the committee’s recommendations aren’t yet driving more transactions, investment opportunities will increase if the rules are formalized into law, Rick Mann, managing partner at Tel Aviv-based law firm GKH, wrote in the report.

‘Harsh Regulation’

“We expect significant activity in mergers and acquisitions going forward,” Leonard Rosen, chief executive officer for Israel at Barclays Plc in Tel Aviv, said in a phone interview. “Investors have grown more and more comfortable in Israel.”

Netanyahu’s new coalition gives him the powerbase needed to push through reforms including the corporate regulations.

Such “harsh regulation” is not healthy for the economy because it favors investment by foreign private-equity firms, which are temporary and do not add to the stability of companies, said Gornitzky’s Rubin.

Fitch Ratings last month maintained the country’s foreign currency debt rating at A and the local credit rating at A+, saying that continuing growth outweighed concern Israel will attack Iran’s nuclear facilities.

“Our clients outside of Israel worry about the geopolitical risk, but the quality of Israeli companies, many of them global leaders, has helped overcome that,” said Limor Beker, Israel Manager of Bala Cynwyd, Pennsylvania-based private-equity firm Hamilton Lane Advisors LLC in Herzliya. “We expect to continue to be a selective buyer alongside our clients and fund managers.”

‘Feeding Frenzy’

Hamilton Lane, which operates 11 offices globally, manages $1.5 billion in private-equity investments of institutional bodies in Israel.

The committee’s recommendations aim to target the nation’s 10 biggest corporations, which comprise 41 percent of the value of listed companies, according to Finance Ministry data. Some 20 families control 25 percent of the listed companies and 50 percent of the total market share in the Tel Aviv Stock Exchange, one of the highest concentrations among developed economies, the Bank of Israel said in its 2009 annual report.

In addition to Clal and Phoenix, the new rules may force Israeli businessman Zadik Bino to decide between divesting Paz Oil Co. (PZOL), the maker of petroleum-based products that also operates convenience stores and develops real estate, and First International Bank of Israel Ltd., the country’s fifth-largest lender, according to Erez Dam-Och, head of the trading desk at Tel Aviv-based Meitav Investment House Ltd.

A representative for Bino Holdings, which owns a stake in Paz Oil, and FIBI Holdings Ltd., which owns a controlling stake in First International Bank, declined to comment on whether a decision has been made on the units when contacted by telephone today.

“Tighter regulation and new rules on corporate pyramid structures will turn Israel into a feeding frenzy for private- equity funds,” said Psagot’s Klingman. “It is a buyer’s not a seller’s market.”

To contact the reporter on this story: Sharon Wrobel in Tel Aviv at

To contact the editors responsible for this story: Daniel Hauck at; Katherine Snyder at; Claudia Maedler at


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