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Israel: Break up shake-up
10 February 2014 | By Burhan Khadbai
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Legislation intended to loosen the stranglehold of a few conglomerates on the economy is set to trigger a surge in sell-offs and overseas interest
Israel’s economy has often been described as monopolistic but until now nothing has been done to tackle the problem. In December 2013 the Knesset (Israeli parliament) passed a law intended to increase competition and there is likely to be a deep impact on how business is done in the country.
A key feature of the law is its intention to break up the complicated monopoly structure that has caused civil unrest.
“There’s been a growing groundswell of public opinion over the past four or five years that something is fundamentally rotten with the economy,” says Barnea & Co partner Simon Jaffa. “Three years ago we had the so-called cottage cheese protests. Demonstrators filled the streets of Tel Aviv for weeks complaining about the price of cottage cheese – and more generally about the sky-high prices of a plethora of goods and services. One of the main targets of the demonstrations was the local oligarchs and tycoons whom the public considered to be controlling much of the economy and therefore to a large extent were responsible for economic ills including high prices, low wages and lack of competition in many sectors.
“The outrage over high prices and lack of competition has compelled a reluctant government to bow to public pressure and gradually begin the implementation of the business concentration law.”
“In Israel, compared to the UK, consumer protection didn’t really exist,” adds Epstein Rosenblum Maoz partner Simon Marks. “There was a big uprising by people in the streets.”
“Clearly, the problem has been the dominance of a relatively small number of large groups and the idea is to break these groups up and increase competition in the marketplace,” says Herzog Fox & Neeman partner and head of international practice Alan Sacks.
One of the key parts of the new law states that groups cannot own both a major financial and a non-financial company. In other words, if you are a big bank and you own another company in a non-financial sector such as services, you must sell one or the other.
But lawyers stress that the legislation is not strictly an anti-monopoly law. It is attempting to tackle companies that have ownership in a number of sectors and thus dominate the economy, rather than those that monopolise a single sector.
As Marks puts it, “It’s not a crime to be a monopoly – it’s not a crime to be big.”
The law will mean a dramatic shake-up in the economy.
“A number of groups are going to have to be broken down so there’s going to be a lot of changing and chopping, and M&A activity in one way or another,” says Sacks.
“It may not have gone as far as many of the demonstrators dreamed of but the law will have dramatic and far-reaching consequences for the economy,” adds Jaffa. “It may mark the end of the multi-layered holding companies that for many years have been a feature of the economy.”
The structure of companies is also under scrutiny.
“Another aspect of the business concentration law is to tackle business pyramids or multi-tier corporate holdings,” explains Jaffa. “According to the law no group may now have more than two levels of publicly listed companies. This will stop the unfortunate situation whereby controlling shareholders basically have the final say over all the companies in the pyramid structure, despite being only minority shareholders in those lower down.”
While the law has only recently been put in place and will not come fully into force until next year, changes are already in the air and many companies are already looking at their future strategy.
“No doubt the big players will have to sell,” says Marks.
For example, UK-based Apax Partners, which owns both Psagot, Israel’s largest asset management business and dairy giant Tnuva, is seriously considering selling the latter to Chinese buyers in response to the law. Freshfields Bruckhaus Deringer is understood to be advising on the deal but declined to confirm its role.
The feeling is that businesses that are affected are looking to deal with the issue sooner rather than later.
From a legal perspective, the result should be plenty of work – particularly in M&A.
“Inevitably, there are going to be more transactions,” says Freshfields partner and Israel group head Frank Miller, pointing to foreign investors as a group who will be attracted to Israeli assets.
“I’m certain we’ll see increasing M&A activity and I anticipate some interesting investment opportunities for foreign buyers who may be able to take advantage of the sell-off that is being demanded by the new legislation,” adds Jaffa.
In the past few years Israel’s M&A market has been fairly active, with US technology companies showing particular interest.
“Where there’s been a big buzz is the big deals seen last year in technology,” says Sacks. “All the big American technology companies are looking to buy in Israel. Big deals took place last year involving US giants such as Apple, Google and Facebook.”
According to Thomson Reuters, the top M&A deal in Israel in 2013 was Google’s purchase of Waze, a provider of traffic reporting services, for £605m.
The new legislation makes international involvement in Israel more likely, believe lawyers.
“It’s a big opportunity for overseas lawyers. There has been quite a lot of overseas activity over the years but there will probably be even more now,” says Marks.
As with any legislation, the benefit will only come if it achieves its aims, but lawyers are optimistic the business concentration law will do what it is supposed to.
“There’ll be a lessening of the concentration of power in the hands of a small group of oligarchs and tycoons,” says Jaffa. “In turn, we hope that there will be increased competition which will bring about the hoped-for reductions in prices and the closing of the salary gap that has been widening in recent years.”
“The concentration law has gone the extra mile compared to other jurisdictions,” adds Marks. “In four years from now, creditors will be able to go to the courts with a nice toolbox of remedies.”
Increased competition not only means more opportunities from the foreign side but also on the domestic front. The law is likely to benefit both small and medium-sized businesses as well as start-ups, which will have a fairer chance to compete.
However, Jaffa believes there are still plenty of unanswered questions over whether the impact will be as far-reaching as the legislature intends.
“Enforcement will depend to a large extent on the antitrust controller exercising his power to force through change,” he says. “We’ve seen in the past that not everyone in this position is willing to go to war when confronted by powerful tycoons.
“Are the days of the big conglomerate over? We shouldn’t count our chickens yet. No doubt much consideration will be given to ways to preserve and safeguard economic power.”
While affected companies consider their next move, it is clear that this is an interesting time in Israel’s economy and in its legal market.
“The bottom line is that there will be more opportunities, which is good news for lawyers,” concludes Marks.