July 28, 2021

20% of Stock Exchange companies are managed without a control core. Who has fared better and who not so well?

In the last five years there has been an increasing trend towards companies without a control core in the Israeli capital market – inter alia due to the Law on Reduction of Concentration in the Economy, and controlling owners who incurred heavy debts  ■   Senior capital market figure:  “There is no single answer to the question of which is the winning model  – with or without a control core”.

Published on 28.07.21

Some recent moves in the Israeli capital market have shed a spotlight on what happens in large financial and real companies – which have become companies with no control core.  These are companies whose largest shareholders are institutions and private investors.

Among these moves we can mention the increase of hundreds of millions of shekels in the holding of Alfred Akirov (controlling owner of Alrov Real Estate & Hotels) in Clal Insurance, with the possibility of taking control;  the struggle for control of Paz Oil between the group led by Leumi Partners and Shikun & Binui; and management changes in Isracard, Partner, Discount Investments (DIC) and its subsidiaries.

25% of the aggregate value of Companies in the Stock Exchange

Until 10 years ago the existence of public companies with no controlling owner was less common in the Israeli capital market, and was more typical of markets in the USA and Europe.  However, over the past five years this situation has reached the Israeli capital market, and to a considerable extent – where almost 20% of Stock Exchange companies (excluding foreign and dual companies) have no control core.  The aggregate market value of these companies is already approaching 25% of the aggregate value of Stock Exchange companies.  The list of companies without a control core also includes three banks – Hapoalim, Leumi and Discount – that are under close supervision by the Bank of Israel.

Have they cracked it?

“There is no single answer to the question of which is the winning model – with or without a control core.  We have seen there is an advantage to a controlling owner like Zadik Bino in Paz, while others such as Shari Arison in Poalim, Shaul Elovitz in Bezeq and Eduardo Elsztain in IDB contributed nothing, and sometimes even damaged their  companies,” said a senior capital market figure.

He continued: “On the other hand, control by directors must be examined on a case-by-case basis.  For example, in Teva there was nobody who could stop the move by Erez Vigodman (who was CEO from 2014 to 2017) for the leveraged acquisition of Allergan.  In Paz, ego games between the CEO Yona Fogel and the Chairmen Yitzhak Ezer and Avraham Bigger damaged its regular operations and its value.  Izzy Cohen and Danny Naveh were unable to improve Clal Insurance.  And in Isracard, the former chairman Eyal Deshe and the outgoing CEO, Ron Wexler, also failed to meet shareholders’ expectations.  There are also cases where the personal interests of chairmen to keep their position clashed with the interests of shareholders – and that has to be prevented.”

Another senior capital market figure adds: “On the other hand, Ilan Yisraeli, CEO of Danel;  Itzik Aberkohen, CEO of Shufersal;  Gilad Yabetz, CEO of Enlight Energy;  and Dudu Zabida, CEO of Mivneh Real Estate, show that dominant managers, who know how to initiate and build creative and important moves, and to translate them into action on the ground – are successful at creating value for their shareholders and themselves.”

There are a number of reasons for the trend of turning companies in Israel into companies with no control core.  For example, the Law on Reduction of Concentration in the Economy, in which one of the main clauses refers to separation between material real holdings and material financial holdings – has played a part.

Alfred Akirov, controlling owner of Alrov Real Estate:  recently increased his holding in Clal Insurance.   Photo:  Ofer Vaknine.

As a result of this, for example, Bino preferred to remain controlling owner of Beinleumi Bank, and from September 2016, waived his control of Paz, which is involved in the fields of energy, retail, real estate and infrastructures.  Bino spread his Paz shares on the Stock Exchange.  Since Bino left Paz, there has been unrest among the company’s management on the issue of future strategy, together with internal power and ego games.  To these is added a drop in profitability and in share performance (which is down by over 25%) following the Covid crisis.  The current Paz CEO is Nir Stern, and the chairman is Harel Locker – and he is actually the strong man in the company and the one who will recommend the identity of its new investors or controlling owners.  Of course, he has a clear interest in choosing the offer of the group that in his assessment is the most likely to leave him in his job.

Dismantling the pyramids

The Anti-Concentration Law also states that business pyramids must be dismantled leaving no more than two public layers.  This meant that Gav Yam, which was formerly part of the IDB Concern, became, at least on paper, a company with no defined control core.  Gav Yam which is managed by Avi Yakobovich, is one of the strongest real estate companies in the branch, and is traded at a value of NIS 6.7 billion.  The chairman is Eldad Fresher, formerly CEO of Mizrachi Tefachot Bank.  Behind the scenes there is a struggle for control of Gav Yam between its two largest shareholders – Property & Construction (44.6%) and Aaron Frenkel (29.3%) – with an option for Frenkel to increase his holding to 36%.

Ran Oz, CEO of Isracard.  The shareholders hope he will bring about a change in the business results and share performance.  Photo: Pazit Oz.

Another factor leading to companies with no control core is the problem of personal debts among highly leveraged controlling owners, such as Eliezer Fishman, who in early 2016 lost control of the real estate company Jerusalem Economy Ltd. (which has since changed its name to Mivneh Real Estate).  The company is currently operating without a controlling owner, but with a dominant private shareholder, David Forer (17%).  A number of large institutional bodies have holdings in the company, including The Phoenix, Harel, Menorah, Clal and Meitav Dash.  

In recent years the management of Mivneh Real Estate has implemented a series of operational and financial improvements, and carried by the tail wind of the rising real estate market – its market value has already reached NIS 8 billion.  Mivneh is an example of a success story of a company with no control core.

In December 2019, Clal Insurance became a company with no control core.  This was after Elsztain, who at that time controlled IDB Development (which held the controlling shares of Clal Insurance), failed to obtain a permit to control Clal from the Supervisor of the Capital Market, Insurance and Savings, Moshe Bareket, and also failed to find a buyer – who would be able to overcome the hurdle of the Capital Market Authority and also pay a price that reflected the economic value of Clal Insurance.

In 2020 the large shareholders in Clal – Eyal Lapidot, Mori Arkin and Alfred Akirov – together with the chairman at that time, Danny Naveh, tried to have the CEO Yoram Naveh removed and replaced with Ronen Agassi, a senior official in Bank Leumi.

Yoram Naveh fought against his dismissal, using all the ammunition at his disposal, while enjoying support from Bareket.  Ultimately, Danny Naveh lost this battle, and in 2020 was replaced by Haim Samet.  Yoram Naveh meanwhile remained in his job, and under his management Clal is showing signs of improved profitability, mainly in the area of investments – which has led its market value to rise to NIS 4.5 billion.  It will soon be interesting to see whether Akirov will indeed take control and increase his holdings beyond the 15% he is permitted, or whether he will wait for completion of the financial round and an exit with a nice profit.

The cash needs of DIC, which until October 2020 was controlled by Elsztain, forced it in July 2020 to disperse its remaining holding of 26% in Shufersal, the largest and strongest food retailer in the economy, for NIS 1.5 billion.  In this way, Shufersal, which is traded at a market value of NIS 6.7 billion, finally became a company with no control core, as it expands into the fields of pharma, banking and finance.  The power of CEO Aberkohen has increased over the years, to the extent that he was the dominant element behind the choice of Yaki Vadmani as chairman of the company, rather than a dominant figure such as Yiftach Ron-Tal, former chairman of the Electric Corporation, who was recently appointed chairman of Migdal.      

Tamar Yassur, chairwoman of Isracard.  The share is unable to fully exploit its enormous potential.  Photo:  Motti Milrod

Without a control core, but with large shareholders

A few months ago, DIC also became a company without a control core, at least in legal terms, although it has large shareholders, who exploit the loophole in the anti-concentration law and direct its moves, and in fact control it.  This refers to the Mega Or real estate company controlled by Tzahi Nachmias (29.9%) who is the chairman of DIC, and Elco Holdings (29.9%), which is controlled by the brothers Mikey and Danny Salkind.

Alongside them, thee are some shareholders who are well known in the capital market, including Rami Levy, David Fattal, Hen Lamdan, Sefi Zvieli.  Meanwhile, the new partners have been unable to improve their investment, although it has still only been a short time.

In March 2020, the Strum Law on increasing competition in the banking system made Isracard – Israel’s largest credit card company – a company without a control core.  This was after Hapoalim tried unsuccessfully from 2017 to early 2019 to sell it to a strategic entity, and ultimately in April 2019 they issued 65% of it on the Stock Exchange at a value of NIS 2.7 billion.  

Bank Hapoalim had a chance to sell its remaining holdings (33%) in Isracard to the American investment group Blackstone, but at the bank they preferred to strengthen Isracard, and distributed these shares to Hapoalim shareholders as a dividend in kind.

Harel Locker, chairman of Paz, the strong man in the company.  Photo:  Tomer Appelbaum

Since it was issued on the Stock Exchange, the Isracard share has brought its shareholders zero yield, and it appears to be unable to exploit the enormous potential of its advantage over its competitors in terms of the number of credit cards, access to businesses, and the data it holds on its customers.  At present, the Isracard shareholders are hoping that chairwoman Tamar Yassur and the new CEO Ran Oz will bring about the desired change in the business results and performance of the shares.

Partner also has no controlling owner

At the end of 2019 Partner also became a company with no control core, after the controlling owner at that time, Haim Saban, transferred his controlling shares (27%) back to the Hong Kong investment giant Hutchison, which previously controlled Partner.  The shares were transferred to Hutchison after Saban refrained from injecting further capital in order to recycle the loan of NIS 1.1 billion which had to be repaid or recycle to Hutchison by January 2020.  Saban’s decision derived from a negative gap of NIS 300 million between the value of the shares he held and the size of the loan.

Subsequently, the shares were transferred to a receiver on behalf of Hutchison, Adv. Udi Sol, and Osnat Ronen was appointed chairwoman of Partner to replace Adam Chesnoff, who held the position on behalf of Saban.  Recently, Avi Zvi has been appointed CEO to replace Itzik Benvenisti.

Hutchison sent out feelers to the Ministry of Communications on the possibility of obtaining a permit for control of Partner.  However, for various reasons, including China-USA relations, it was decided not to proceed.  As a result, at a time of its choosing Hutchison will sell these shares, whose market value is estimated at NIS 700 million.  In view of the challenging situation in the communications branch, finding a buyer who will pay a premium for control of Partner will not be simple.