February 25, 2021

The Salkinds’ Path to Discount Investment Is Challenging the Anti-Concentration Law

Elco, which is controlled by the Salkind family, is on its way to join Tzachi Nachmias in acquiring Discount Investment, thus becoming an even larger and more centralized ‘octopus’; To overcome the law that prohibits multi-layered pyramids, the Salkinds pull out the trick used by Eduardo Elstein, i.e., restricting holdings to maximum 29.9%

By Golan Hazani - February 25, 2021

A monster is growing right under the nose of the Concentration Committee. The brothers Mikey and Danny Salkind, who have a hefty business appetite, reach out, via Elco Holdings which they control (65.4%), to almost every possible sector in the economy.

In fact, Elco's recent expansionary moves are reminiscent of IDB at the time it was controlled by Nochi Dankner, when it was the largest concern in the economy.

Yesterday, Elco announced that it is expected to invest approximately NIS 400 million in the purchase of 29.8% of Discount Investment's shares, thus joining the group of investors led by Mega Or, which is controlled by Tzachi Nachmias (38%). Thus, the Salkinds will replace, to a large extent, Rami Levy, who was supposed to purchase a similar stake, but was halted by the Ministry of Communications, who disapproved the double holding this would create for him in the cellular sector. Rami Levy’s operations in this sector are via Rami Levy Communications, whereas Discount Investment is the controlling shareholder of Cellcom (46%).

If the deal goes through, Elco will become a significant shareholder in a company that controls a variety of companies (see chart). In addition to Cellcom, which is the largest cellular company in Israel, Discount Investment has control of the biotechnology investment company Elron (61%), Mehadrin Plantations and Real Estate (44.5%), Epsilon Investment House (69%) and the Properties and Building real estate company (74%), which holds a significant stake (29.9%) in the Gav-Yam real estate company.

Will the Ministry of Communications Approve?

Elco is already at this time a significant real corporation, dominating huge companies of the economy. It controls Electra (49%), the largest infrastructure and construction company in Israel, which is traded at a market value of NIS 6.5 billion. Electra is itself a multi-armed ‘octopus’. It is involved in the construction of roads, tunnels, transportation infrastructure, ports, residential buildings, commercial buildings, air conditioning systems and elevators, with some of its operations being located overseas. In addition, Elco controls Electra Real Estate (64%), which operates through investment funds mainly in yielding real estate in the US, focusing on housing clusters.

Elco also controls Electra Consumer Products (51%), which owns the Mahsanei Hashmal chain and the Shekem Electric chain, and imports a variety of well-known electrical brands, including that of the German giant Bosch. Elco also has activities in the energy sector via Supergas (61.7%), which was listed last year on the stock exchange, after purchasing it from Azrieli for NIS 770 million.

Supergas, which is traded at a value of approximately NIS 1.1 billion, distributes gas to private and institutional entities, and initiates and establishes electricity operating facilities using gas. In addition, Elco has activities in the cinema sector, via the Globus Max cinema chain, which it acquired from a receivership.

All of these holdings are already turning Elco, which seven years ago was a company in severe crisis, into a significant real corporation. The company's balance sheet in the first nine months of 2020 amounted to NIS 12 billion, and revenues amounted to NIS 8 billion. It is expected that by the end of the year, revenues will reach a threshold of over NIS 10 billion. The group's net profit in the first nine months of 2020 was about half a billion shekels.

Due to the fact that Elco is a significant real corporation, it will be required to obtain the approval of the Concentration Committee in order to acquire the stake in question in Discount Investment. The Committee may impose hurdles to the transaction, mainly with regard to granting the permit to control Cellcom via Discount Investment.  Anyone who holds more than 10% of a cellular company must obtain a control permit. It is the Ministry of Communications that grants the permit, but it is supposed to obtain an opinion from the Concentration Committee before making a decision. The Concentration Committee will examine all of Elco's assets before issuing the recommendation.

Until last year, Elco was holding the cellular operations via Electra Consumer Products, which held Golan Telecom. Electra Consumer Products sold Golan Telecom to Cellcom for NIS 600 million, so that if Elco does buy the Discount Investment shares, the company will to a large extent make its way back to it.

Elco's choice to acquire 29.8% of Discount Investment is not coincidental. We are dealing with a stake that is similar to the one that Mega Or will acquire (29.9%), which won the tender to purchase 81% of Discount Investment, after the IDB bondholders preferred the group led by the latter over the outgoing controlling shareholder, Eduardo Elstein. The choice of that number is intended to deal with the Anti-Concentration Law, which prohibits pyramids of more than two public strata.

In the case of mega Or and Elco, if they shall be deemed controlling shareholder of Discount Investment, this would create a pyramid prohibited by the Anti-Concentration Law.  The number was taken from Elstein himself, who, because of the Anti-Concentration Law, sold the Gav YAM shares held by Properties and a Building, until he was left with a 29.8% stake, thus claiming to have lost control of the company, and thus getting rid of one layer of the pyramid.

Even if the Concentration Committee shall decide that those two do not control Discount Investment, Elco will have a say in the conduct of the corporation, and it is hard to believe that it will solely act as a financial investor. It would not be unreasonable to assume that it has plans for some of Discount Investment’s arms, of which first and foremost Cellcom.  Thus, the starting point of Salkind and Nachmias in any event challenges the Anti-Concentration Law.

Those who expressed joy at Salkind entering the picture are the IDB bondholders.  Said bondholders feared that Nachmias is a serial ‘regrettor’ and is already about to regret the transaction, after Levy left the picture, since he already has withdrawn from big transactions in the past, such as the acquisition of Ispro and Arena Group. Elco’s joining has reduced the level of concern, even if it does not provide the security and certainty needed for the holders, since a strong partner is not only an advantage but also a disadvantage. As mentioned, the regulator may cause difficulties because of Elco's great power, and delay the transaction in which the group of investors will purchase 81% of Discount Investment for NIS 1.14 billion.

Bitan Wines Are Targeted as Well

At the same time as Discount Investment, Elco is holding negotiations, via Electra Consumer Products, for the acquisition of the Bitan Wines retail chain, the second largest in Israel in terms of number of branches - 148. Such an acquisition will increase Electra Consumer Products’ retail power. Elco is also conducting negotiations to bring the Seven Eleven retail chain to Israel.

Elco's Real Goal: Gaining Control of Cellcom

Unlike many others who have turned a blind eye to Discount Investment, the interest of the Salkind family in the company is not in its real estate business, but in the cellular company Cellcom. Elco, which is controlled by the Salkinds, parted ways with its cellular business when it sold Golan Telecom (which was owned by its subsidiary Electra Consumer Products) to Cellcom itself, for NIS 650 million. Now, if the transaction is completed, they will get a handle on Cellcom by means of an investment of NIS 400 million and at a value of about NIS 1.4 billion in the parent company.

Unlike the Salkinds, Tzachi Nachmias, the controlling shareholder of Mega Or, which leads the group of buyers of Discount Investment, is interested in the real estate business, and is also interested in selling Cellcom. The Salkinds are helping him form a group of buyers, and in the future, apparently, a division will be made. Elco will stay with Cellcom, and Nachmias will stay with the real estate. How so? The lawyers will work overtime and find out how the loot can be divided. The Salkind family has already hired the services of a senior attorney in the communications field.  Either way, such a division will require an array of approvals, of which those of the general meetings of the various companies.

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