Foreign Funds Circle Israel Companies Up for Sale, Official Says

Funds from the U.S., Europe and China are showing interest in dozens of Israeli companies that will be forced on to the auction block by state efforts to increase competition, a government official said.

Shufersal Ltd., the country’s largest supermarket chain, and Cellcom Israel Ltd., its biggest mobile-phone provider, are among about 40 companies likely to be sold or merged, Morris Dorfman, deputy head of the National Economic Council, said in a Feb. 2 interview. The sales are required by a law passed in December to loosen the grip conglomerates have on the economy.

“We are seeing a lot of interested investors,” Dorfman said. Many are from the U.S., some are from Europe and there are “a lot of Chinese,” he said, without identifying the funds. “I sit with people every week.”

Dorfman referred to a 2009 Bank of Israel report that said about 20 families in the country of 8 million people control 25 percent of the listed companies and 50 percent of the total market share on the Tel Aviv Stock Exchange, one of the highest concentrations among developed economies.

Efforts to weaken the conglomerates got a push from mass protests in 2011 against the cost of living, which has been driven higher by the concentration. The protests helped Finance Minister Yair Lapid’s newcomer Yesh Atid party become parliament’s second-biggest faction on a pro-middle class platform.

Investment Appeal

The effort to dilute the conglomerates’ control dovetails with a stepped-up Israeli campaign to attract foreign investors, in particular Chinese. Prime Minister Benjamin Netanyahu led a trade delegation to China last year and at Davos last month appealed to foreign investors to put money in his country.

Subsidiaries of big companies such as billionaire Isaac Tshuva’s Delek Group Ltd. and IDB Holding Corp. are dominant players in an economy whose growth is projected to outpace both the U.S. and euro area this year and next. The stability of the Israeli economy, and its fundamentals, make it attractive to foreign investors, said Rafael Gozlan, chief economist at Tel Aviv-based I.B.I.-Israel Brokerage and Investment Ltd.

“Assets are being sold, not because they are distressed, but because of a structural change,” Gozlan said in a telephone interview yesterday. “You are buying not because of a crisis here, but because there is a desire to boost competition in the economy.”

Geopolitical considerations send Israel’s credit risk higher than it would be otherwise, though short-term crises, such as foundering peace talks or even war, historically tend to have a short-term impact on the economy, he said.

Consumer Savings

It will take time before the increased competition translates into consumer savings. The new law gives companies four- to six years to pare their pyramid structures to no more than two publicly traded tiers.

It also limits cross-holdings in financial and non-financial companies. That means London-based Apax Partners LLP will have to sell either Tnuva Food Industries Ltd., Israel’s largest food manufacturer and distributor, or Psagot Investment House Ltd., Dorfman said. Israeli businessman Zadik Bino will have to choose between control of First International Bank of Israel Ltd., the country’s fifth-largest lender by assets, and Paz Oil Co. Ltd., which owns gas stations and an oil refinery, he said.

Streamlining the pyramidal structure may in itself make some companies more attractive to investors, Dorfman said.

“We talked to big U.S. funds and they said that they didn’t understand the structure of the many layers,” he said. They were also put off from investing in the conglomerates “because the incentive of the company wasn’t to maximize value to shareholders,” he said.

“Once this process starts, we are likely to see more investment by foreign funds,” Dorfman said.

Before it's here, it's on the Bloomberg Terminal.