As Israel’s largest holding companies struggled to refinance debt during the global financial crisis in 2009, Nochi Dankner was expanding, buying stakes in French retailer Carrefour SA, HSBC Holdings Plc’s Manhattan building and Credit Suisse Group AG. (CSGN)
Now, as his IDB Holding Corp. struggles under about 2 billion shekels ($514 million) of debt, he’s selling, not buying. He arranged an equity investment of as much as $100 million from Argentine businessman Eduardo Elsztain and sold an insurance company to a unit of Warren Buffett’s Berkshire Hathaway Inc. (BRK/A) for $221 million. His list of challenges grew yesterday when Danker said the Israel Securities Authority is investigating him for involvement in securities fraud.
Ranked by the Israeli daily TheMarker as the third most influential person in the economy in 2009, behind Prime Minister Benjamin Netanyahu and central bank Governor Stanley Fischer, the 58-year-old Dankner has seen his shares plunge 61 percent this year, hitting a record low on June 14. The combination of unprofitable investments and regulations to boost competition prompted IDB to disclose on Aug. 31 that it may not remain a “going concern.”
“When the 2009 crisis hit, he looked untouchable because his companies were cash cows in industries with little competition,” said Gilad Altshuler, co-chief executive officer of Altshuler-Shaham Group, a Tel Aviv-based investment firm managing about 30 billion shekels. “When regulation was introduced, it began to hit him hard and his companies were left unprotected.”
IDB shares declined 10 percent, the biggest drop since Feb. 26, to 13.65 shekels at the market close today in Tel Aviv. IDB’s 5.1 percent bond due in December 2020 lost 4.85 shekels to 21.38 shekels, down from a high of 133.40 shekels on Oct. 21, 2010 and up from a low of 16.98 on Sept. 4. The company’s bondholders announced today they will meet next week to authorize trustees to start an insolvency process if a debt settlement is not reached. The benchmark TA-25 stock index slipped 0.8 percent today.
The investigation relates to the issuance of shares and options, according to an e-mailed statement by the ISA. Dankner said the inquiry was initiated by the regulator and that he was confident his actions had been legal, according to an e-mailed statement.
Even before the probe, Tel Aviv-based IDB Holdings’ market capitalization had dropped to 586.7 million shekels at the end of the second quarter from 5.06 billion shekels at the end of 2010, according to data compiled by Bloomberg.
While about 60 Israeli companies are listed on the Nasdaq Stock Market and the country is home to more startup companies per capita than the U.S., the concentration of wealth has created growing discontent as 20 families control about 50 percent of the stock market’s value.
Dankner, the scion of an Israeli family that made its fortune in table salt and real estate, has been among the hardest hit. Under his management, IDB accumulated holdings from telecommunications to cement.
He purchased Netanya, Israel-based Cellcom Israel Ltd. (CEL), Israel’s largest mobile service provider in 2005. The company is the worst-performer on the TA-25 Index this year as the government introduced more regulation aimed at boosting competition in the industry.
Dankner joined fellow tycoon Isaac Tshuva in a Las Vegas hotel development of as much as $8 billion in 2007. The following year, Dankner’s Koor Industries Ltd., based in Tel Aviv, bought $1.1 billion worth of shares in Credit Suisse AG.
Netanyahu’s government is demanding that holding companies simplify corporate structures after a government committee called for cutting debt risk and boosting transparency as well as competition. Conglomerates will need to reduce cross-holdings in financial and industrial businesses.
IDB owes about 2 billion shekels to banks and bondholders and has 200 million shekels in cash, the company said in an Aug. 31 earnings statement, which included the “going concern.” Standard & Poor’s Maalot responded by cutting the company’s bond rating to CCC from BBB-.
IDB reported its second-quarter loss widened 44 percent to 1.27 billion shekels. In a letter to employees and made public by e-mail, Dankner said Sept. 1 that IDB had enough money to survive “close to a year.”
IDB is seeking a “significant” loan from a foreign financial institution and may merge with its Koor Industries Ltd. (KOR) unit, the company said in an Oct. 24 filing with the Israel Stock Exchange.
At the peak of the U.S. housing bubble in 2007, IDB Holdings posted what was then record revenue of 34.8 billion shekels with 1.2 billion shekels in profit. In an interview with Bloomberg in November of that year, Dankner said that while he was a great believer in the Israeli economy, “our expansion must be overseas.”
IDB Development partnered with Tshuva to build a hotel- casino in Las Vegas inspired by Tshuva’s Plaza Hotel in Manhattan. Hampered by the global economic collapse which froze construction in the strip, today the site is an empty lot. The developer has written down the value by more than 40 percent, according to IDB, which has since been in talks with creditors to settle the debt.
Dankner’s bet on Zurich-based Credit Suisse has also soured. IDB’s Koor Industries bought a 3 percent stake in the Swiss bank in 2008, profiting as Credit Suisse’s shares rallied the next year.
The European sovereign debt crisis wiped out 59 percent of the bank’s market value after 2009, creating an investment loss that prevented the unit from paying dividends, Dorin Zelnir- Palas, a corporate bond analyst at I.B.I.-Israel Brokerage & Investments Ltd. in Tel Aviv, said Oct. 23 in a telephone interview.
IDB Holdings controls IDB Development Corp., which has stakes in three major holding companies. For the past decade, each unit sent dividends up the corporate chain, helping the parent company expand. As subsidiaries including Discount Investment Corp. (DISI) cut dividends, IDB lost a source of funds and its ability to pay back debt. Discount reduced its payouts to 180 million shekels in 2011 from 2.08 billion shekels in 2007.
In April, the Israeli Cabinet unanimously approved recommendations to increase competition and reduce Israel’s high cost of living. The Committee on Increasing Competition in the Economy called for ceilings on how many subsidiary companies an ownership group can maintain in a pyramid structure. Existing conglomerates will be limited to three levels of listed subsidiaries and their units, while new groups will be limited to two tiers.
IDB said in an e-mail response to Bloomberg questions on Nov. 14 that Dankner has tried to collapse the pyramid structure and he plans to continue with that policy going forward.
One of Dankner’s most profitable companies, Cellcom, lost 5.12 billion shekels in value in 2011 as lower-cost operators Hot Telecommunication System Ltd. (HOT) and Golan Telecom Ltd. moved into the market after Communications Minister Moshe Kahlon spearheaded regulations to enhance competition in the industry.
“A new wave of regulations started to hit almost every IDB holding,” said Zelnir-Palas.
Cellcom’s stock has since climbed 82 percent from its July 23 record low of 20.16 shekels as investors bet the drop was overdone.
Dankner began his career as a commercial lawyer. After returning from a trip to Tibet, he started Ganden Tourism in 1995, named after a Tibetan monastery. In 1997, he helped organize a group including Ted Arison, founder of Carnival Corp., and New York-investor Michael Steinhardt, to buy a $1.4 billion controlling stake in Bank Hapoalim Ltd., Israel’s second-largest lender by assets, from the government.
Two years later, after a dispute with his family, he sold the stake he inherited in Dankner Investments Ltd. and invested in real estate. In 2003, at the height of the intifada Arab uprising against Israel, Dankner led a group that bought IDB.
In 2009 he sold his closely-held Ganden Tourism to his publicly-traded IDB. Shareholders filed a lawsuit against IDB’s management seeking 480 million shekels in damages for “breach of trust, lack of common sense” in approving the deal. IDB says shareholders approved it and the claims were baseless.
Dankner is now reducing his holdings. He sold a unit of Clal Insurance Enterprise Holdings Ltd., based in Tel Aviv, to Omaha, Nebraska-based Berkshire Hathaway on Aug. 19 and gave up control of newspaper operator Maariv Holdings Ltd. and Clal Industries and Investments Ltd. (CII) He’s in talks to sell Yokneam, Israel-based Given Imaging Ltd. (GIVN), the maker of a pill-sized diagnostic camera.
“He’s working around the clock every day of the week trying to think out of the box,” Nir Hefez, an adviser and former director of media and communication to Netanyahu, said in an interview Oct. 31. “He went to Argentina, to New York. Every few weeks he has a new idea.”
To contact the reporter on this story: David Wainer in Tel Aviv at email@example.com