Israeli authorities have set a precedent by introducing the first ever corporate anti-concentration law in the world. By forcing national conglomerates to sell their assets, the legislative sea change presents huge opportunities for M&A and, in particular, private equity (PE). With many companies already in talks with potential buyers, the reforms are attracting increasing attention.
Introduced in December 2013 with a tight schedule of four to six years for firms to be compliant, the law for the promotion of competition and reduction of concentration was met with resistance from the business community.
Much of Israel’s relatively small economy, particularly in strategically important sectors like energy and financial services, is made up of large conglomerates owned by local family groups, which are then assembled in so-called corporate pyramids. These companies will have to either sell their assets, or subsume into their core businesses by restructuring by 2019.
“At first we thought something so anti-market couldn’t really get through, but it seems no politician wants to be seen as opposed to this,” said Niv Sivan, partner at Gross Kleinhendler Hodak Halevy Greenberg in Tel Aviv. “You can’t really say there wasn’t a problem with the market, but the steps being taken are really quite aggressive – and unprecedented.”
The anti-concentration law is made up of three parts: breaking up pyramid companies to no more than two layers, preventing one company from owning a significant financial and non-financial business simultaneously, and ensuring the state considers economic concentration issues before granting permits and licenses for projects.
- Israel is the first country in history to introduce a corporate anti-concentration law. It hopes to diversify the economy, and provide better choice and a lower cost of living for consumers;
- Lawyers have called the move anti-market and aggressive, and it’s been met with significant resistance from the business community, which is largely made up of large family-owned conglomerates;
- Sixty percent of the banking credit market is made up by just two lenders. This high concentration makes arguing against the law difficult;
- It’s created huge opportunities for M&A, in particular private equity houses looking to enter the Israeli market. Financial services is set for a major sale.
Joshua Kiernan, partner at Latham & Watkins, said that over the last two years there’s been an uptick in PE funds’ interest in Israel, which he thinks is being driven largely by the new law: between 2013, when the law was enacted, and 2015 the value of PE buyouts rose by 322%.
Companies have just three more years to dispose of an estimated 40 major businesses. Some are already up for sale – insurance firm Phoenix was almost sold to Chinese investors earlier this year.
Herzog Fox & Neeman’s Asaf Bar Natan thinks many financial services assets will be disposed of as it’s such a tightly regulated sector. “This could present a significant opportunity for foreign investors – though regulators will want to promote stability and long term investments,” he added.
The grace period, which if all goes to plan will come to an end in 2019, gives sophisticated investors a chance to adopt positions now that will afford them potentially major influence in future M&A. “So with that in mind, Israeli regulators may not be so enthusiastic with regard to financial sector investments,” added Natan.
One risk is that there simply won’t be enough eligible buyers. “We don’t see many players here that can purchase all these companies, as the richest and strongest ones are also having the concentration law applied against them,” he added. If identifying buyers within the specified timeframe is a problem then the grace period can be extended, though local lawyers are divided as to how likely this is.
Otherwise a trustee will be appointed by the state to find a suitable buyer – obviously a less than ideal outcome for sellers. “Personally I really don’t believe the legislator will let it end like that,” said Natan. “If we see some of the biggest national banks and insurance companies losing value, the government will extend the time period.”
But with a goal of diversifying the economy and reducing the cost of living, very few can argue with the law’s purpose. “Having so much of a relatively small market controlled by a small number of individuals creates some systemic risk,” said Kiernan.
It’s been a problem before. When mogul Nochi Dankner’s holding company IDB, which once dominated the Israeli economy, got into difficulty and defaulted on its bond payments in 2012, it had a domino effect on the banks and pension funds holding those notes.
Also on the government’s radar is the credit card industry. A separate law is also being introduced requiring banks to sell their credit card units within the next three years, as part of the wider domestic banking overhaul.
Two of Israel’s biggest lenders, Hapoalim and Bank Leumi Le-Israel – which make up about 60% of the banking credit market – are fighting the changes, but there is strong government will to boost competition for households and small businesses. Investors from Europe and the US have already expressed interest in the assets.