In December 2013, Israel introduced new legislation — the Law for the Promotion of Competition and Reduction of Concentration — designed to break the dominance of large corporations and strengthen competition in the country’s economy. This “anti-concentration law” will soon come into effect, heralding a huge shake-up in the country. Many of Israel’s biggest companies are set to be broken up, creating significant opportunities for private equity.
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A few large conglomerates and family-owned companies have typically dominated the Israeli economy, particularly in sectors such as financial services and energy. Analysts in Israel estimate that roughly 40 public companies, with a total market value of US$25 billion, will have to be privatized or at least refinanced under the new legislation. The controversial law will likely be unpopular among Israel’s elite but private equity firms on the lookout for acquisitions should welcome this development.
Israel’s biggest financial services conglomerates will be at the centre of the changes. The anti-concentration law will stop big financial institutions from owning a “significant financial business” at the same time as owning a “significant non-financial business”. Conglomerates have been given until December 2019 to offload assets.
The law will also focus on breaking up so-called pyramid structures, where an entity controls multiple layers of Israeli listed companies. The “pyramids” that control more than two companies will be forced to sell these businesses by the end of 2019, spurring yet further deal activity.
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The banking and payment cards industries are of particular focus to the Israeli authorities, and will be on private equity’s radar. The Bank of Israel and Israel’s Ministry of Finance have set up a committee to boost competition in these sectors, and have indicated new regulation is likely. A small number of large operators currently dominate the payment card sector. The card companies also provide financial services, such as loans, and are backed by some of Israel’s biggest banks. The regulator is moving to break up the relationship between the card companies and lenders.
Due to regulatory changes, Israel’s two biggest banks, Bank Hapoalim and Bank Leumi, will likely have to dispose of their credit card operations. The third biggest card operator, C.A.L., is also likely to be separated from its bank owners. If, as expected, Israel’s financial services giants are barred from bidding for these card companies, private equity may have a clear path to seize this unique buying opportunity.
As the landscape in Israel becomes ever more competitive, these changes could present some excellent opportunities for PE buyers.