Is a wave of control struggles on the way to flood the Tel-Aviv Stock Exchange?

Aharon Frenkel recorded profit for himself of more than a billion shekels in the struggle for control of Bayside, which was no surprise. Sometimes, control struggles in companies are divorced from their economic values. People who seek to control any company whatsoever are often prepared to pay a price that is higher than the market price, and solely that they will succeed in reaching control.

For the most part, a struggle over the control kernel is an aggressive one, in which people buy shares in a company both on the Stock Exchange as well as of it, in an attempt to obtain more than 50% of its shares, or in certain cases – less than that since the control kernel does not necessarily require holding more than 50% of the shares.

The 1980s was the golden decade for takeovers in the USA. They understood that apart from a meteoric rise in the share price of a company that they were trying to take over, there is not a lot of logic involved in an economic war like this. The "poisonous poll" was invented for this purpose. This is an option that is given to all of the shareholders in a company, which is only exercisable on condition that any shareholder whosoever, does a hostile takeover, and becomes a shareholder with a holding in excess of a particular rate.

In such an event, all of the shareholders, apart from the shareholder who has caused the event, are entitled to purchase extra shares in the Company in accordance with a pre-determined formula and at a lower value than the market value, and thus prevent the takeover. The "poisonous pill" has almost disappeared from the stock exchange scene in the USA in recent years, primarily because of criticism by some of the institutional bodies in the country and by active shareholders, such as Carl Icahn, who made his fortune from hostile takeovers and company liquidations.

Alfred Akirov, who is seeking to gain control of Clal Insurance. Ofer Vaknin

And here we are, witnessing the start of a phenomenon of control struggles in Israel, which has only grown in the past year. There are two main reasons for this. The first reason is that there are now less controlling interests in the public companies, and in the absence of "poisonous pills" mechanisms, it is easier for the rich to execute takeovers. The second reason is that the Israeli Stock Exchange is a new market for most of the players, and therefore there is an inherent potential for a big profit. Clal Insurance is an example of this. Alfred Akirov is seeking to gain control of the company, but this requires the Insurance Authority's approval, which makes the struggle more complex. This regulatory restriction has not stopped Clal's share price from rising by 56% in the past year, where the insurance index (the comparative index that Clal Insurance in included in) rose by 42%.

The following are some of the main control struggles on the Stock Exchange in recent years – and what became of them.

The struggle over DIC

On May 7, 2020, it was published in the economic press that Tzahi Nachmias, the controlling interest in Mega Or, was trying to take control of DIC. Nachmias collected NIS 50 million on the capital market, constituting 6% of the Series N bonds that had been issued by the sister company, IDB Development, which had gone into a downward spiral because of debts of 2.05 billion shekels that it is unable to settle. It was clear in the capital market that Eduardo Elsztain was on the way to losing control in the Company, after having invested 3 billion shekels in it during the 8 years in which he was in control.

Tzahi Nachmias. Pushed Frenkel out of Bayside. Vered Pitzarski

Nachmias internalized that if he were to obtain a significant position in the Series N debt, which has a lien over the shares in DIC, he could receive significant chunks of it in the event of the holders of the debt calling for immediate repayment.

At the time, DIC, a holding company, controlled 26% of the shares in the Shufersal retail company and 47% of the shares in Cellcom, the telecommunications company. However, it was clear to everyone that was really interested that Nachmias was the real estate in the Group's holdings – 74% of the shares in Property & Building, which controlled Bayside, the real estate giant.  In practice, when a liquidator was appointed for IDB Development by the Court, Nachmias succeeded in getting what he wanted and by way of a direct offer. He submitted an offer to the Court for the purchase of 70% - 82% of the shares in DIC in accordance with a value of 1.35 billion shekels. On November 20, Hagai Brenner, the District Court Judge in Tel-Aviv approved the sale of DIC to a group of investors headed by Mega Or and controlled by Nachmias.

The struggle for control over DIC

Photograph: Ofer Vaknin

The start of the struggle: May 7, 2020

Who started the struggle? Tzahi Nachmias, the controlling interest in Mega Or, who tried to take control of the Company, which was controlled by Eduardo Elsztain.

The end of the struggle: November 20, 2020

How did the struggle end: Hagai Brenner, the District Court Judge in Tel-Aviv approved the sale of DIC to a group of investors headed by Mega Or.

The shares' performance during the period of the struggle: an increase of 63%.

The performance of the comparative TA 125 Index during that same period: an increase of 4.6%.

The struggle over Bayside

The path taken by the group of investors – which Tzahi Nachmias organized (which included Rami Levi and the brothers Danny and Mikey Salkind) – to win control of Bayside, got into difficulty. On July 29, 2020, it was published in the press in Israel that the billionaire for Monaco, Aharon Frenkel, had begun to collect shares in Bayside, the real estate giant, which he began to gather together in the second quarter of 2020, when the shares in the real estate company fell sharply as a result of the Corona crisis.

The control struggles are worth it to the shareholders- the change in the shares' performance by comparison to the relevant indices

Discount  TA 125

Bayside   TA Real Estate
Arena Group TA Real Estate
G.P. Global Power  TA 125

While Nachmias was competing opposite Eduardo Elsztain for control in DIC and Property & Building was forced to reduce its holding in Bayside from more than 50% to 29.9% as a result of the Concentration Law – Frenkel cooked up the takeover move behind the scenes. By investing  2 billion shekels, he gathered together 37% of the shares in Bayside. Half of the investment was financed by a loan from Harel. Frenkel's plan was to put his private assets in Europe into Bayside and to expand its activity in Easter Europe as well as entering into activity in the petroleum field.

The lack of focus worried Nachmias' group, and their response did not take long to come. In the middle of April 2021, Property & Building acquired 15.1% of the shares in Bayside from Clal Insurance, Meitav Dash and a number of private investors, for consideration of 940 million shekels. The transaction brought Property & Building to a holdings threshold of 44.5% of the shares in Bayside.

Later on in the year, the parties continued a creative struggle for control, which reached the regulator and the Court, on a claim that Nachmias' group has created a prohibited pyramid. The struggle ended in a giant transaction in which Property & Building will acquire Frenkel's shares in Bayside for overall consideration of 3.1 billion shekels.

The struggle for control over Bayside

Photo: The President's Conference

The start of the struggle: July 29, 2020

Who started the struggle? Aharon Frenkel, who began to gather together shares in Bayside on the capital market.

The end of the struggle: December 26, 2021

How did the struggle end: It was agreed that Property & Building will acquire Frenkel's shares from him. Frenkel closed the round with a profit of 1.25 billion Shekels.

The shares' performance during the period of the struggle: an increase of 135%.

The performance of the comparative TA Real Estate Index during that same period: an increase of 127%.

Thus Frenkel, who had claimed all along that he had come to Bayside for the long-term, closed the control struggle within a year with a profit of 1.25 billion shekels. This profit joined a dividend of 80 million shekels, which Frenkel had made for himself from the fight over control in Aeronautics, the UAV manufacturer. This struggle ended at the beginning of 2019, when the company was sold to Rafael and Avichai Stolero.

Nachmias' group knows that to build up a company such as Bayside in today's zero interest era will take a long time. On the other hand, the assessment was that the sale of the control in Bayside to Frenkel would lead to the liquidation of DIC and therefore the Group decided that it would take the gamble on the investment, primarily because of the high quality projects that Bayside is involved in, which are expected to generate a handsome yield for it in the long-term. This was done whilst taking the risk that in a short to intermediate-term of the coming two to three years, they may have to record losses in respect of the transaction.

The struggle over the Arena Star Group

In December 2019, Mega Or, which is controlled by Tzahi Nachmias, signed on an agreement with Marcus Webber for the acquisition of the control in Arena Star Group, the real estate company (62%) for consideration of 135 million dollars. Webber, who controlled the Arena Group through ASTC, a private Singaporean company, hoped that he could put the failed adventure with Arena behind him. He acquired the control in Arena from Jackie Ben Zaken and Abraham Nanikashvili in 2009 and Webber then invested approximately one billion shekels in it up to the time of the sale of the company.

Marcus Webber  Alon Ron

Although most of the Arena Group's acquisitions and the investments were executed before his arrival or his involvement in the Company's activities, in the years in which he controlled the Company, which were the best decade that the real estate market has known, the Arena Group's properties continued to present weak performances and to incur heavy losses for the company, which were translated into a sharp fall in the share price.

Webber gave up and decided to get out of the Arena Group as almost any price. However, sadly for him, the fierce rainstorms that were prevalent in Israel in January 2020 caused flooding damage in the Nahariya mall. This event, together with the start of the Corona crisis, was a good excuse for Nachmias and Mega Or to try to withdraw from the acquisition transaction, claiming that there was a significant change for the worse in the main asset, even though the insurance covered the entire cost of the repair of the damage.

When Mega Or withdrew from the acquisition, Webber was stuck with the holding in Arena for a year, in which three lockdowns were imposed. Surprisingly, nobody was interested in acquiring it until February, when the Abu family, headed by Yechiel Abi and his son Tzahi, the controlling interest in the private real estate company, Abu Yechiel, submitted an offer for the purchase of Arena (62%).