Israel's Deal Of The Year?

A Bank Leumi windfall is good for the government, too

Israeli Prime Minister Benjamin Netanyahu just got a big break. The decline of the Tel Aviv stock market had hovered like a black cloud over his plans for a massive privatization of state assets over the next few years. Although the government is expected soon to announce a timetable for selling off such crown jewels as El Al, Bezeq Telecom, and Israel's two biggest banks, Netanyahu and his ministers have been gritting their teeth as the bear market wears on and on.

Enter Chief Executive Galia Maor and Chairman Eitan Raff of Bank Leumi. Together, they have pulled off Israel's deal of the year. On July 31, Bank Leumi, one of the crown jewels in question, signed a letter of intent to unload its controlling interest in Migdal Insurance Co., Israel's biggest insurer, to Italy's Assicurazioni Generali. The price tag: a lofty $330 million, or three times market value. Besides getting the high bid from the Italians, the Maor-Raff team has piqued interest in Leumi's assets from other investors and nailed down a tax break on the spin-off. "It's a textbook case that will be studied at business schools," says Zeev Holtzman, president of Tel Aviv investment bank Giza Ltd.

Since Bank Leumi is 80% state-owned, the government will be the biggest winner in the Migdal sale. When the time comes to privatize the bank completely, the rich price it got for the insurance assets will boost what the government can fetch for the rest. Says Daniel Carraso, director of Israel equity research at UBS Ltd. in London: "It adds 13% to our estimate of the bank's value." Indeed, Leumi's publicly traded shares were up 14% on the news.

What originally set Maor and Raff in motion was a new law requiring banks to unload any major holdings in noncore businesses, including insurance, by Dec. 31. But the duo have turned the task into a potential windfall. Not satisfied with the Migdal deal, Maor simultaneously asked for bids for a stake in Africa Israel Investments, the Bank Leumi subsidiary that owns 50% of Migdal and whose businesses include real estate and tourism as well as insurance. If she gets a better offer for Africa Israel than the Migdal deal, Leumi will kiss Generali goodbye and go with the highest bidder.

TAX-FREE. As of Aug. 11, five bids had come in for the Africa Israel stake, including offers from Las Vegas-based Sheldon Adelson and London financier Bernard Schrier. So far, none has topped Generali's offer for Migdal. But Maor, who has been called the Iron Lady of Israeli banking, may have launched a bidding war that could send Leumi's share price even higher.

There's icing on the cake. Maor and Raff persuaded Knesset members to pass a special tax-law amendment exempting Leumi from taxes in the event of a spin-off of its insurance holdings. "Whatever way you look at it, the Generali deal is a landmark transaction," says Ronald Lubash, a Lehman Brothers Inc. managing director and head of its Tel Aviv office. Even if Maor settles for Generali's $330 million, the Israeli government will have her to thank for substantially increasing the value of its holdings in Bank Leumi.

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