Unintended Consequences Risk $4.4 Billion Flight: Israel

Israel risks losing 15 billion shekels ($4.4 billion) from the Tel-Aviv Stock Exchange because of efforts to limit control of the economy by the country’s wealthiest families.

About 20 families control half of Israel’s publicly traded companies, among the highest concentrations in the developed world, according to a Bank of Israel study. Protests since 2011 against the rising cost of living spurred a regulatory push to encourage competition. The so-called concentration law, passed in December, prohibits businesses from owning both financial and non-financial units while also limiting corporate pyramids to two layers of listed companies.

With the new rules applying only to companies quoted in Israel, some are likely to respond by delisting, Hani Shitrit Bach, head of the Listing & Economic Department at the bourse, said in a July 6 phone interview. Companies that already have shares on another exchange are among those most likely to quit Tel Aviv, including Cellcom Israel Ltd., B Communications Ltd., Gazit-Globe Ltd. and Internet Gold-Golden Lines Ltd., she said.

“The situation is absurd,” Shitrit Bach said. “It will cause immense damage not only to the exchange but mainly to Israeli investors. This is not what the legislators intended. It must be changed.”

Property developer Gazit-Globe has shares in U Dori Group Ltd., a real-estate company that controls U Dori Construction Ltd. Behind Gazit-Globe is Norstar Holdings Inc., whose largest shareholder is businessman Chaim Katzman.

Studying Implications

Internet Gold, through its B Communications unit, is the biggest holder of Bezeq Israeli Telecommunication Corp., the nation’s largest landline operator. Internet Gold is controlled Shaul Elovitch’s Eurocom Group, one of Israel’s largest holding companies.

The law gives companies at least four years to comply. Gazit-Globe isn’t “considering delisting from the Tel Aviv stock exchange now,” Katzman, its chairman, said in a June 27 interview at the company’s office in Sao Paulo. While B Communications is studying the implications of the law, it hasn’t made any decision, Chief Executive Officer Doron Turgeman said in a June 2 phone interview.

Tycoon Nochi Dankner, whose family made its fortune in table salt and real estate, had to cede control of IDB Holding Corp. earlier this year. Through his privately held Ganden Holdings Ltd., Dankner held stakes in IDB Holding, which in turn held a stake in IDB Development Corp.

IDB Development holds shares in Discount Investment Corp., which owns stakes in Cellcom Ltd., Israel’s largest cellular operator, and Shufersal Ltd., the country’s biggest supermarket chain. IDB Development is now owned by a group including Argentine businessman Eduardo Elsztain and Mordechai Ben Moshe. The company declined to comment.

Notice Period

“In general, it is possible that dual-listed companies that are part of a pyramidal structure will delist from the Israeli stock exchange and in this manner be outside the scope of the new law, but this is only one of a number of courses of action that they may take,” a Finance Ministry spokesman said in a July 7 e-mailed note to Bloomberg.

The four dual-listed companies make up about 2 percent of the value of Israel’s 750 billion-shekels equity market, the bourse said. The companies could exit with just three months’ notice to the regulator, Shitrit Bach said.

Gazit-Globe was down 1 percent this year at the close in Tel Aviv, while Internet Gold advanced 9.2 percent and B Communications gained 9.3 percent. Cellcom had dropped 17 percent year to date. The benchmark TA-25 Index advanced 3.5 percent in 2014 compared with a 5 percent gain in the MSCI World Index.

Burdensome Regulation

“A delisting from Tel Aviv in some cases could hurt the valuation of the company because it will no longer be part of the benchmark TA-25 or TA-100 indices, and that could mean that local institutional investors who are significant players in these shares may be less inclined to own them,” Gilad Alper, a senior analyst at the brokerage unit of Excellence Nessuah, which manages the equivalent of $20 billion, said by phone yesterday. “If their delisting happens, it would be another nail in the coffin of a seriously troubled stock market.”

Out of 24 companies that voluntarily left the exchange from January 2013 through April of this year, 12 exited because of the concentration law, the bourse said in a July 2 statement.

While Israel has more active startups per capita than any other country, according to IVC Research Center, which tracks the high-tech industry, the benchmark TA-25 Index has just one technology stock. Mellanox Technologies Ltd. left last year, citing burdensome regulation. Trading on the exchange plunged to the lowest level in five years in April.

While four companies have held initial public offerings on the bourse this year, total listings have dropped to 485 companies at the end of June from 508, the bourse’s data show.

“If the trend of falling volumes and the lack of new company listing continues, there is a risk for the continued existence of the bourse,” Flato said.

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