Three myths have emerged about Nochi Dankner’s sale of Shufersal since the deal
took place on Wednesday.
1. The Shufersal sale is a victory for the
social protest movement
The bad men at Dankner-controlled IDB Holding
Corp. capitulated to the social protest and sold Israel’s largest
supermarket chain Shufersal.
Trumpet the arrival of the Messiah. Prices
will fall and Shufersal will no longer be the same power-hungry supermarket that
charges high prices. What a nice fairy tale, but as is the case with fairy
tales, it has no basis in reality.
Matthew Bronfman and Shalom Fisher’s
Bronfman Fisher Investments is already a shareholder in Shufersal, and Fisher is
the company’s chairman.
Will the supermarket’s business strategy change
by the change in their status from minority to majority shareholders? It is
possible that the exorbitant executive pay at Shufersal – NIS 21 million a year
to its two CEOs and two chairmen (who serve a 25 percent position each) – may be
reduced, but nothing more.
Fisher, Bronfman and Leo Noe paid NIS 2.4
billion for the controlling interest in Shufersal at a 50% premium over its
market cap. Much can be said about these three men, but they are not
philanthropists. They bought Shufersal to make a profit, and we can guess who
will pay the price.
A few years ago, Noe acquired Azorim Properties from
Dankner. Earlier this year, he sold the company, renamed British-Israel
Investments, to Melisron, controlled by Ofer Investments. Noe used the
proceeds to buy Shufersal from Dankner.
This game of musical chairs by
Israel’s businessmen has little affect on the country’s consumers, and whatever
effect results – it is negative. The change in ownership at Tnuva Food
Industries is a salutary lesson.
2. Nochi Dankner sold Shufersal because
of the committee on over-concentration in the economy
Dankner sold Shufersal for
two very good reasons: he is a businessman who got a good offer; and he made a
big mistake that jeopardized his empire when he acquired the supermarket, and is
now paying the price to correct it.
There is no reason to elaborate on
the first reason: the price is right, and even if the seller’s loan is taken
into account, Dankner made a good deal, especially in view of very real future
threats to supermarkets’ profit margins.
The second reason needs
elaborating. A few years ago, Dankner gambled and acquired shares in Credit
Suisse Group AG through IDB unit Koor Industries.
It was irresponsible in
some sense, but it paid off and IDB made billions in capital gains. But instead
of leaving the table, like a compulsive gambler, Dankner redoubled the bet, and
Koor invested billions in the Swiss bank.
The current financial crisis in
Europe has hit bank shares hard, and Koor’s profit has turned into a huge loss.
Dankner is infatuated with the investment and cannot admit that he made a
Instead of cutting his losses and selling his Credit Suisse
shares, he is holding on to them and injecting capital into Koor to shore it up.
The capital market has reacted aggressively, sending the yield on bonds of Koor
and Israel’s strongest conglomerate, IDB, soaring to junk bond status. Even the
perennial tardy Standard & Poor’s Maalot has realized that there is a
problem and downgraded IDB’s bonds.
There is no question that the
committee on over-concentration has put pressure on Dankner, but the deciding
factor to sell Shufersal was his business mistake and IDB’s need to reduce its
huge debt. The sale of Shufersal and Makhteshim Agan Industries will give IDB
breathing room and lower the pressure on its bonds.
3. Pyramids are
Israel’s no. 1 economic problem
Business pyramids, otherwise known as holding
companies, are a problem. Pyramids in which the controlling shareholder
indirectly controls companies results in negligible holdings at the base. In
effect, the controlling shareholder risks little of his own money even as he has
a monopoly on decision making.
This is a serious problem that requires
active treatment by the Israel Securities Authority, which asserts that this is
the biggest problem in the Israeli economy. It is a question, however, if that
is really the case.
Here is a hypothetical scenario: a US billionaire
were to turn up tomorrow and buy IDB because he does not lack for cash. He then
decides to flatten IDB’s pyramid structure by buying all the minority stakes in
the holding companies to increase his stakes in Discount Investment Corporation,
Clal Industries and Investments, Koor, Clal Biotechnology Industries, and Elron
Electronic Industries to 100%, and achieves 70% stakes in their
subsidiaries. It is doubtful if this would solve the problem of
The way in which IDB chooses to control its subsidiaries – through a
pyramid or any other geometric structure – is immaterial. The company employs
plenty of lawyers and experts in corporate governance, but the problems that IDB
creates are because of it is a large and powerful company in almost every sector
in the Israeli economy. It is a company that sometimes acts in a ruthless and
It is necessary to put the cards on the table. Even
after the sale of Shufersal, Makhteshim, and Clal Insurance Enterprises
Holdings, IDB will be a solid and giant conglomerate. That is why a public
debate is needed whether to dismantle IDB into its constituent units just as the
US federal government broke up Rockefeller’s Standard Oil Company in the
trust-busting heyday over a century ago.