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Viewing cable 05TELAVIV466, Privatization Update: GOI Sells Israel Discount

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Reference ID Created Released Classification Origin
05TELAVIV466 2005-01-26 14:42 2011-08-24 01:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Tel Aviv
This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 02 TEL AVIV 000466 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON EFIN IS ECONOMY AND FINANCE GOI INTERNAL LABOR AND COMMERCE
SUBJECT: Privatization Update: GOI Sells Israel Discount 
Bank 
 
This cable is classified Sensitive but Unclassified.  Please 
handle accordingly. 
 
------- 
Summary 
------- 
 
1. (U) The Israeli government's privatization program is 
moving forward.  On January 22, GOI Accountant General Yaron 
Zelka concluded an agreement with prominent businessman and 
Seagram heir Matthew Bronfman for the transfer of 26% of 
Discount Bank to the Matthew Bronfman group for a price of 
NIS 1.3 billion.  Next step: Sale of Bank Leumi.  End 
Summary. 
 
-------------------------------- 
IDB: Israel's Third Largest Bank 
-------------------------------- 
 
2. (U) A Brief History:  IDB was established by Leon 
Recanati in 1935 and run by various members of the Recanati 
family until the mid-1980s.  Following a general crash in 
bank share prices in 1983-1984, the GOI assumed control of 
the bank.  As of the sale to Bronfman, the State owns 57.09% 
of the Bank's shares; the public 31.95%; while the remainder 
is in the hands of various Israeli mutual funds. 
 
3. (U) Discount Bank's Place in the Market:  Israel Discount 
Bank is the third largest Israeli bank, with assets of USD 
32 billion at the end of 2003.  In spite of its ranking, IDB 
lags far behind its main competitors, Banks Hapoalim and 
Leumi, in terms of market share. 
 
4.  (U) New York Branch the Key Asset: Although IDB has 120 
branches in Israel, IDB's most valuable asset is its New 
York subsidiary, Israel Discount Bank of New York.  The 
subsidiary is so valuable that some in the past suggested 
selling it in order to cover IDB's heavy losses in the 
communications sector.  Press reports indicate that the 
Group is considering holding an issuance of Bank Discount 
New York on the Stock Exchange, in order to bring in money 
to expand the US subsidiary's activities. 
 
5. (U) Other Details:  Discount Group owns a number of 
leading Israeli financial affiliates and capital market 
institutions, including Israel Discount Capital Markets and 
Investments, Ilanot Discount, Israel Credit Cards and Diners 
Club, Mercantile Discount, 26.4% ownership in the First 
International Bank of Israel, and has holdings in one of the 
largest Israeli insurance companies, Harel.  In addition to 
its subsidiary in New York, IDB has branches in Miami and 
Los Angeles. 
 
-------- 
The Sale 
-------- 
 
6. (U) The parties will complete the transaction the week of 
January 31, when the Bronfman group officially signs an 
agreement with MI Holdings, the GOI entity managing the 
sale.  As IDB's foreign subsidiaries in the U.S. are 
included in the sale, the Federal Reserve Bank will have to 
give its approval for the sale, and the relevant European 
regulatory bodies will have to give their approval for the 
sale of European subsidiaries. 
 
7. (U) The Bronfman group will pay NIS 1.05 billion at the 
time of closing and will receive financing from the State 
for NIS 250 million, which will be paid in 3 years, yielding 
an NIS 1.3 billion (USD 300 million) final price.  The group 
has the option to purchase an additional 25 percent of the 
government's shares, on top of the 26% it is currently 
purchasing, within three years for a further NIS 1.25 bio. 
In a somewhat unusual twist to the deal, the GOI will 
receive additional sums depending on the bank's post-sale 
performance: If the bank's returns increase by 11 percent to 
13 percent on average in the next four years, the Group will 
have to pay an additional NIS 78 million to NIS 156 million. 
 
---------------------- 
The Workers Have a Say 
---------------------- 
 
8. (SBU) IDB employs approximately 5,700 workers, the 
representatives of whom have been discussing the terms of 
sale with the Ministry of Finance for 8 months.  These 
discussions have sometimes turned hot: The workers kept 
various branches of the Bank closed for days at a time 
during the last two months.  Preliminary agreement between 
the workers and the MOF on January 5, which would entitle 
workers to receive NIS 250 million upon completion of the 
transfer of ownership to Bronfman, appeared to remove a 
large obstacle to the Bank's sale.  This agreement also 
included a clause that current labor agreements would remain 
in place until 2009.  Although the GOI is determined to 
complete the sale, labor action could slow down finalization 
of the deal. 
 
----------------- 
GOI Proud of Sale 
----------------- 
 
9. (U) Upon announcement of the deal January 23, Finance 
Minister Netanyahu issued a press release stating that the 
bank's future, private-sector owners would know how to 
manage the bank better and would strive to increase 
competition in the banking sector.  The release also noted 
the GOI's objective to complete the privatization of all 
Israeli banks by the end of 2005, pointing directly to the 
privatization of Bank Leumi. 
10.  (U) Michal Abadi-Boyanjo, Chairman of MI Holdings, in 
an interview in the January 23/24 edition of Globes, said 
that she "is very happy that the process ended in a sale. 
The privatization of Discount is measured not only in terms 
of the price that is received, but also the influence of the 
sale on the bank and the entire banking system." 
Kurtzer