It is commonplace to note the vigorous market for inbound investment and M&A transactions involving high-tech companies in Israel. Hardly a week goes by without a deal. Between 2002-2011, Israeli high-tech companies raised $15 billion from investors, and in the same period owners received more than $37 billion in proceeds from M&A and IPO exits. There were approximately 85 acquisitions in 2011 alone. These trends have continued into 2012.
However, until recently, the vast majority of M&A activity in Israel was strategic and focused in the technology space. But a number of recent developments foretell two new trends: (1) the emergence of financial buyers, including private equity buyout funds and investors playing in the distressed space, to complement the existing strategic M&A activity in Israel; and (2) increased activity in a plethora of business sectors in addition to high-tech. Why?
The Economic Concentration Commission — Everything is on the Block
The Economic Concentration Commission, a committee appointed by the government of Israel to consider the problem of high concentration of ownership of Israeli companies by a small number of conglomerates, issued its final recommendations in February of 2012. The commission was formed in response to public outcry in the wake of a 2010 Bank of Israel report finding that 16 family business groups ultimately control some 25% of firms listed for trading in Israel, about half of the market capitalization of Israeli companies, and over 60% of the economy’s available credit. By holding shares of listed companies through a chain of majority-owned holding companies which themselves issue publicly held securities, these conglomerates leverage the financing provided by the public capital markets while still maintaining ultimate private control of the underlying operating businesses.
The Economic Concentration Commission has recommended the adoption into law of a complex set of regulations calculated to reduce the ability of holding companies to maintain their grip on large swaths of the Israeli economy. For example, the Commission recommended reducing the proportional voting rights of holding companies that use a chain of non-wholly owned subsidiaries, or “pyramids,” to control operating businesses. Even more significantly, the proposed regulations would also prohibit the cross-ownership of so-called “real” businesses and “financial” businesses.
We believe that even ahead of the adoption into law of the recommendations, the momentum behind the initiative to reduce concentration will increase acquisition opportunities for foreign buyers at more attractive valuations. This will be true a fortiori once final regulations are adopted, which will pressure, and in some cases require, conglomerates to make significant divestitures. Because of the great diversity of businesses held by the conglomerates, these buying opportunities should be attractive not only to the “traditional” high-tech shopper, but also to strategic and financial buyers in numerous other market sectors, including real estate, energy, chemicals, building materials, telecom, financial services, and consumer goods, to name only a few.
Distressed Debt and Equity Special Situations — It’s Not All in the Family Anymore
In the last year, the financial press and the Israeli public generally have been gripped by the financial distress of prominent business leaders and the companies that they control (including some of the same conglomerates that were the target of the Economic Concentration Commission just discussed). For example, after protracted failed negotiations with its Israeli unsecured creditors who are owed in excess of $300 million, Ampal American-Israel Corporation filed for bankruptcy protection in the United States (taking advantage of its incorporation in New York in 1942). Ampal owns gas, ethanol, and wind energy assets in and out of Israel, and is also invested in a broad cross-section of Israeli companies engaged in various other fields including communications, leisure-time, real estate, and capital markets. Ampal has recently engaged the investment bank Houlihan Lokey to market some of these assets in an effort to reorganize and/or to find financing to pull itself out of bankruptcy.
Another interesting example is the IDB group, which holds a large number of operating businesses through a typically complicated series of holding companies, each of which has issued its own bonds or bank debt. In September of 2012, IDB’s controlling owner, Nochi Dankner, completed an emergency equity infusion transaction between his top-level holding company and an Argentine financial investor. A few weeks following that transaction, the New York-based distressed fund York Capital acquired, at a steep discount, several hundred million dollars of bonds issued by one of the bottom-most holding companies in the IDB holding structure. In this play, York has positioned itself to exert great pressure over management of the enterprise, and possibly control the fate of its assets, a number of which are prized and healthy business concerns. In light of a significant maturity wall in the next few years, we expect these examples to multiply, as foreign buyout funds and distressed debt players profit from opportunities to invest in, acquire, or force the sale of companies scurrying to refinance debt or raise equity to meet pending principal and interest payments.
These developments in the distressed debt arena, coupled with the imminent regulations recommended by the Economic Concentration Committee, strongly suggest the likelihood of greater and more diverse involvement than ever before by foreign capital in the Israeli market in the coming years.