Born In Israel, Issued On Wall Street

With the Tel Aviv bourse in meltdown, IPOs flock to New York

Run through a list of the hottest stock offerings to come out of Israel so far in 1996, and you'll notice that the lead managers are all top Wall Street firms. Israeli companies mostly bypass the Tel Aviv market when it's time to go public, making a beeline for New York. Until now, the 100 Israeli stocks that trade abroad have been almost exclusively high-tech or export-oriented. Now, domestic retail giant Blue Square Israel Ltd. is about to follow suit. Israel's biggest store chain picked Merrill Lynch & Co. to issue $100 million worth of stock in a deal expected to be priced on July 31.

It's not hard to see why. Tel Aviv's once-vibrant stock market is in meltdown. The Mishtanim index has plummeted 15% in July and is down nearly 20% year-to-date. Trading volume in recent weeks has averaged around $20 million, about one-fifth the level of the early 1990s. Daily volume in New York of shares in Israel's Teva Pharmaceutical Industries Ltd. is greater than the total turnover of the Tel Aviv bourse. "Our entire market has basically emigrated to New York," says Jacob Burak, president of Evergreen Group, a leading Tel Aviv investment bank.

Israeli stock investors who got burned in 1994 and 1995, when interest rates began heading north and several insider-trading scandals broke, have never returned en masse to the market. The loss of confidence was aggravated this spring by the election of Prime Minister Benjamin Netanyahu, which fueled political and economic uncertainty. So even though Israeli stocks listed in the U.S. are declining along with the Wall Street correction, companies have little alternative to raising funds abroad.

Blue Square will be the first non-high-tech company to tap Wall Street's placement clout, but it's unlikely to be the last. The major New York firms can rustle up far more demand for clients' new stock, and thus garner better issue prices, than the issuers could ever get back home. "The U.S. is tending to be a natural market for Israeli stocks," says Stephen Marquardt, a Merrill managing director in London.

According to Bank of Israel, the percentage of funds raised by Israeli companies abroad has been rising since '93, the last boom year for the Tel Aviv market. In the first five months of 1996, 72% of the $795 million in Israeli initial public offerings was raised abroad. The figure for the year could top $1.2 billion, more than double the 1995 level.

CROWDED FIELD. More and more Wall Street players are cashing in on the trend. Until this year, Lehman Brothers Inc. had the dominant position in the Israeli market, as it was first to open an office there in 1993. But Lehman now faces fierce competition. Smith Barney Inc. opened a Tel Aviv branch in late June. Prudential Securities, Alex. Brown & Sons, Montgomery Securities, and Robertson Stephens have all signed partnership agreements with local companies in the past year.

The new Israeli government is expected to take action soon to stabilize the Tel Aviv market. The Israeli Finance Ministry is considering easing regulations for new share offerings, allowing pension funds to invest more in stocks, and distributing options in state-owned companies and banks to the public. But market watchers agree that such measures won't get quick results. For now, Wall Street and other foreign markets will keep grabbing Israel's plums.

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