Legislation to break up the concentration of economic power in Israel will spark a business upsurge, say panellists at our London event
In June 2011 many Israelis protested against the continuing rise in food prices by boycotting one staple food item – cottage cheese. Large public demonstrations about the cost of living followed amid growing criticism that a high proportion of Israel’s wealth rests in the hands of a few.
Cottage cheese was just the start. Since then, the Economic Concentration Committee, tasked with breaking up this dominance of economic power, has been poring over rules aimed at changing the situation. Its final report was submitted last year, recommending that certain tycoons and corporate owners should offload either their financial or industrial assets.
While the proposed regulations have not yet come into effect, their potential impact on the market for foreign buyers is considerable.
To discuss the developing regulatory environment in Israel and how investors can make the most of the opportunities on offer, The Lawyer, in association with Herzog Fox & Neeman Law Office (HFN), hosted its latest Briefing Live event, ‘Israel: Open for Business’, at London’s Andaz Hotel.
The panel was chaired by City editor Joshua Freedman, who kicked off proceedings by asking why Israeli companies are being forced to offload assets.
“The main issues in Israel are the cost of living, the cost of housing and the cost of food,” responded panellist Alan Sacks, who heads HFN’s international practice. “The problem [of concentrated wealth] began because of close ownership, so the introduction of competition – which will help the price of products drop dramatically – means these conglomerates will have to strip down their assets if they want to do an M&A transaction.
“Israel is unique because almost every company is still owned by the founding shareholders, but two years from now we’ll see a very different make-up of controlling players in the market.”
This new-look legal market will be full of new buyers, Sacks predicted, adding that Israeli businesses are currently changing hands from local tycoons to foreign companies – a change that will eventually lead to a more diffuse and diverse market of business owners.
The knock-on effect will be an opening-up of competition – and consequent growth – in Israel’s legal market.
But are companies feeling the effects now? Although the legislation has not been approved by the Israeli parliament, panellist Ehud Sol, who heads HFN’s corporate and securities department, said the impact of the proposed legislation is already being felt.
“Due to the fact the law will immediately impose more restricted corporate governance and not allow any growth other than organic, almost every business is on the shelf,” said Sol. “For foreign investors it means the party is about to begin. Foreign investors with deep pockets will be in a position to purchase businesses at relatively low prices.”
One of the changes flowing from the Economic Concentration Committee will be in the way big businesses can use ‘pyramid’ structures, which at the moment means a holding company can control a number of subsidiaries.
“The proposed legislation is intended to promote competition and reduce concentration in Israel,” said Sol, “including by forcing controlling shareholders that have both financial holdings, such as banks, insurance companies and investment houses, and significant ‘real’ holdings, such as food conglomerates, retail chains and energy companies, to sell one of those activities, and forbidding certain levels of pyramid structures. In Israel, publicly traded companies and large business groups generally have a shareholder that controls them through a pyramid.”
With so many high-quality Israeli assets for sale, the question is whether these deals will be financeable from an international capital markets perspective.
“The international equity capital markets have long been open to Israeli companies and we are now seeing a return to pre-crisis levels with regard to Israeli IPOs on the international equity markets, particularly in the US,” said panellist David Becker, a capital markets partner in White & Case’s Israel practice. “But the international high-yield bond market, which has historically been one of the key sources of financing and one of the top drivers for large acquisitions globally, is still relatively new for Israeli companies.
“A recent highly successful high-yield bond transaction for a large Israeli telecom demonstrated that the international high-yield bond market is open for the right Israeli credits, and we believe a number of other Israeli companies will be seeking to do the same thing.
“There are still many unique structural and withholding tax considerations that need to be addressed when arranging internationally syndicated high-yield bond transactions for Israeli companies, but with the right advisers, Israeli companies can properly arrange and structure these transactions, and tap into the high-yield bond market which is such a critical global source of capital.”
With Becker pointing to a return to pre-crisis levels for Israeli IPOs on the international equity markets, particularly in the US, one of the concluding points of the debate centred on where Israeli businesses are looking to raise money.
“Israelis are looking to New York – they don’t see London as the place to go,” explained Sol. “Whatever advantages there were seem to have evaporated. If these companies are looking to raise money they’re now looking to the States. US investment banks came to Israel, but the English ones didn’t – and the US banks brought their lawyers with them. In terms of M&A activity, we’ve seen the US law firms far more prevalent [in Israel] than London firms.”
On top of this, some of the world’s biggest technology companies are continuing to invest in the country. Many of these companies – Microsoft, Facebook and Apple for example – are US-headquartered.
“One thing that will continue is that Israel’s economy will continue to be driven by technology,” added Sacks. “The world’s sexiest companies are all buying and they will continue to invest.”
The future, then, is looking bright for foreign investors. While London’s lawyers might need to pull up their socks up to compete in the country, the proposed new rules should see a boom in cross-border transactions and M&A deals. Israel is indeed open for business.
In association with Herzog Fox & Neeman