What’s on sale?

Most of the money which fueled corporate acquisition in recent years has come from debt raised in the capital markets.

By ALAN SACKS
Artsy bibi (photo credit: Reuters)
Artsy bibi
(photo credit: Reuters)
Prime Minister Binyamin Netanyahu’s decision to call an election early in 2013 halted the progress of legislation that was working its way through the Knesset aimed at lessening concentration in the Israeli marketplace. The draft legislation was based on the recommendations of a committee appointed at the end of 2010 by the prime minister, amid concerns that the concentration of a large portion of the economy in the hands of a small number of investment groups endangered the long-term stability of the Israeli economy.
The first main recommendation of the draft legislation was to separate the ownership of financial holdings (banks, insurance companies and investment houses) from significant “real” holdings. The second principal recommendation was to put an end to multi-tiered, publicly traded corporate groups, through which the majority shareholders control an entire chain of public companies while holding a minor equity interest in corporations low down the corporate chain. Each of these recommendations is likely to trigger significant M&A activity.
One of the first economic measures the new government has decided upon is to push the “concentration” legislation ahead. That being said, market forces may soon render the issue redundant. Israel’s so-called “tycoons” – entrepreneurs who have built corporate empires largely based on borrowed money – have been shown to have feet of clay.
Corporate borrowers are straining under a mountain of debt. A number of major Israeli companies have been sold during the course of the past year to enable the owners to finance debt repayment (leading examples are Partner Communications, one of Israel’s leading mobile phone companies, Makhteshim Agan, a global agrochemical manufacturer, and Clal Investments, one of Israel’s major holding companies, owning among other things Israel’s cement monopoly). Other companies are expected to follow suit.
Most of the money which fuelled the activity of corporate acquisitions in recent years has come from debt raised in the capital markets. Traditionally, the level of security and protections granted to public bondholders has been significantly weaker than that demanded by banks. In light of the financial crisis at the end of 2008 onwards, the Capital Markets Division at the Finance Ministry adopted a series of guidelines for the managers of public funds to follow when investing in corporate (non-government) debentures.
More recently, the concern that the public was losing out in a number of recent debt reschedulings has led to an amendment to Israel’s Companies Law (Amendment No. 18, 2012), which provides that as soon as a company begins negotiating a debt rescheduling with public bondholders, the trustee of the bondholders (and if there is none, then the company itself) must apply to the court to appoint an expert on behalf of the court.
The responsibilities of the expert include analyzing the proposed arrangement, providing an expert opinion on whether the arrangement is fair for the bondholders, and reviewing whether any distributions made by the company to its shareholders prior to the application to court for approval of an “arrangement” amounted to an unlawful distribution.
Public hostility to the tycoons and to their proposals for debt rescheduling has resulted in bondholder trustees adopting a more militant stance than anything seen before. For the first time, we see bondholders attempting to gain control of a major corporate group (the IDB Group), a move without precedent in Israel.
Another and perhaps more significant amendment to the Companies Law (Amendment 19, which came into effect in January 2013) introduces a corporate rehabilitation regime into Israeli law similar to Chapter 11 of the US Bankruptcy Code. If the court approves a rehabilitation process for a company, the provider of “Utilities” to the company must continue to provide the utility, and the court can require the provider of “Vital Services” to continue to provide those services, if necessary for the rehabilitation of the company.
The court-appointed administrator in the rehabilitation process will have wide powers to adopt or reject executory contracts and to raise new money for the company, including on the security of previously pledged assets, ranking prior to existing security interests, if the court considers that existing secured creditors have “adequate protection” for return of their money.
To sum up, it seems likely that the liquidity crisis facing many of Israel’s corporate groups will generate a wave of M&A activity for the foreseeable future, encouraged by the new “Concentration Law,” as and when the legislation is finally passed by the Knesset. However, it is not only adverse market conditions that are encouraging M&A transactions. Israeli technology remains at the cutting edge, and we have recently seen a number of major technology companies, such as Google, Apple, Cisco Systems and Facebook, making significant acquisitions in Israel. This trend will no doubt continue, as Israeli technology attracts growing interest not only from the US but also from China, India and other expanding markets.The author heads the international practice at the Herzog Fox Neeman law firm. This post and others in various law fields can be found at Herzog Fox Neeman’s law blog: unfolding.co.il