Israeli companies, such as Delek Group Ltd. and IDB Holding Corporation Ltd., will need to simplify corporate structures after a government committee called for reducing debt risk and boosting transparency.
The committee on economic concentration recommended today that companies limit their pyramid structure to no more than three public layers and proposed a four-year deadline for corporations to comply with the new rules. In addition, they will need to reduce cross-holdings in financial and industrial businesses. The recommendations now go to the Cabinet for approval.
“This report is not intended as an attack on the private sector,” Bank of Israel Governor Stanley Fischer said at a Jerusalem press conference with Prime Minister Benjamin Netanyahu and Finance Minister Yuval Steinitz. “We rely on the private sector, while making sure it works efficiently without exerting undue influence on the business sector.”
If implemented, companies including billionaire Isaac Tshuva’s Delek Group, Nochi Dankner’s IDB Holding and the Ofer family’s Israel Corp. will have to sell assets and merge business activities. 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.
“The recommendations will lower the risk of highly-leveraged companies and reduce their power in the economy while strengthening the influence of minority shareholders,” said Noam Pincu, real estate and holding companies analyst at Psagot Investment House Ltd. in Tel Aviv. “The new rules will force companies like IDB to sell their financial businesses and Delek to sell their insurance business.”
Discount Investment ended negotiations in November to sell Shufersal Ltd., Israel’s largest grocery chain, to Isralom Properties Ltd. and England’s Noe family after they were unable to meet possible government requirements endorsed by the concentration committee.
Shares of IDB Holding, which controls the country’s biggest mobile-phone operator Cellcom Israel Ltd. through Discount Investment, have lost 68 percent in the past 12 months. The benchmark Tel Aviv-25 index has declined 15 percent.
“The divestments of companies will bring dynamism and change of ownership thereby increasing competition in the economy, and reduce prices,” said Glenn Yago, senior director at the Milken Institute, a U.S. economic think tank.
Hundreds of thousands of protesters demonstrated in Israel last year calling for more affordable housing and lower prices for food and other consumer products. Netanyahu said today that the high level of concentration in the economy stymies competition. In response to the protests, he appointed a committee led by economist Manuel Trajtenberg, which recommended a series of measures.
In December, Israel’s Cabinet voted to exempt Internet purchases of goods for personal use from customs duties as part of the package of measures aimed at reducing the cost of living.
Tshuva’s Delek Group, which owns the country’s fourth-largest insurer Phoenix Holdings Ltd. and has stakes in natural gas businesses and in debt-ridden Delek Real Estate Ltd., has dropped 16 percent in the past 12 months. Only 6 percent of the companies listed on the Tel Aviv benchmark index are more leveraged than Delek, according to data compiled by Bloomberg.
“This process of industrial reorganization may lift the number of companies listed on the Tel Aviv bourse, increase liquidity and boost foreign investment as a result of greater transparency,” said Milken’s Yago.