Chinese Bidders Circling Israeli Insurers Face Regulatory Hurdleby
Fujian Yango seeks to succeed where Fosun International failed
Implied premium of 56% has little impact on Phoenix shares
Israeli traders have reason to doubt the latest attempt to acquire Delek Group Ltd.’s insurance unit will succeed.
In the past two years, four foreign companies from Hong Kong to New York have tried to buy controlling stakes in Delek’s Phoenix Holdings Ltd. or its competitor Clal Insurance Enterprise Holdings, only to have the deals fall through. While the latest attempt, a 1.85 billion-shekel ($480 million) bid from Chinese Fujian Yango Group, represents a 56 percent premium to Phoenix’s share price, the stock has barely risen as analysts from Bank of Jerusalem Ltd. to Leader Capital Markets Ltd. say the plan risks a similar fate.
The main holdup for most transactions is that Israel’s regulator is reluctant to hand control of citizens’ savings to foreign companies whose local financial disclosure requirements may fall short of its standards. At the same time, both Delek and Clal’s parent, IDB Development Ltd., must find buyers to comply with rules requiring them to either divest their units to private investors by 2019 or offer them to the public on Tel Aviv’s struggling bourse.
“Investors don’t really buy this,” said Meir Slater, the Tel Aviv-based head of research at Bank of Jerusalem, who rates Phoenix at market perform. “Past attempts have shown that the Israeli regulator doesn’t want the controlling holder of an insurance company to be Chinese, as the transparency of these companies is problematic.”
The Capital Market, Insurance and Savings Department will only approve the purchase of an insurance company to entities that successfully pass a thorough examination that assesses criteria including reliability, integrity and financial strength, an Israel Ministry of Finance spokesman said by e-mail.
Shares in Phoenix have gained 3.5 percent to 9.09 shekels as of 11:10 a.m. in Tel Aviv since the accord with Fujian Yango was announced on July 3. Should the Chinese company pay 1.85 billion shekels for all of Delek’s 52.3 percent stake, that implies a price of about 14.2 shekels per share, according to Bloomberg calculations. Bank of Jerusalem’s Slater has a target price of 11 shekels.
The stock has fallen almost 30 percent in the two years since Delek first started negotiating a sale with an earlier bidder, New York-based Kushner Funding LLC. A $460 million deal with Shanghai-based Fosun International Ltd. also collapsed in February.
“I’m not getting very excited about a deal for Phoenix until it happens,” said Alon Glazer, a vice president of research at Leader Capital Markets in Tel Aviv. “The regulator is not saying no to everyone, but is requesting higher demands from Chinese bidders.”
China’s Macrolink Holding in January walked away from a deal to buy Clal from IDB Development Ltd. because of regulatory uncertainty.
The finance committee of Israel’s Knesset, the country’s parliament, opposes the purchase of Phoenix by a Chinese company and asked the regulator to consider halting the deal, according to a transcript of a July 12 meeting.
“The sale will create an absurd situation in which, for 1.8 billion shekels, the Chinese company will control more than 160 billion shekels of the Israeli public’s savings,” Zehava Galon, leader of Israel’s Meretz party, said at the meeting. “Chinese companies are placed at the bottom ranking for good governance and corporate governance.”
Chinese investors have been successful in other industries. Xio Group, a closely held investment firm, bought Israel’s medical-laser technology company Lumenis Ltd. last year for about $510 million in cash. Bright Food Group Co. acquired dairy producer Tnuva Food Industries Ltd. in a deal that valued it at more than $2 billion.
Fujian Yango is set to complete due diligence on Phoenix within a month before deciding whether to seek regulatory approval. The Givataim, Israel-based insurer is trading at 0.54 times book value, compared with an average multiple for the industry of 0.87, according to data compiled by Bloomberg.
Delek’s experience of failed deals may mean a better chance of success this time around, according to Glazer of Leader Capital Markets.
“Delek must now better understand the demands from the regulator,” he said.