The Centralization Law

The law requires Israel’s “tycoons” to sell off a number of large Israeli companies.

Dairy aisle (photo credit: MARC ISRAEL SELLEM)
Dairy aisle
(photo credit: MARC ISRAEL SELLEM)
When a few hundred Israelis pitched their tents on Rothschild Street and tens of thousands of normally apathetic Israelis flooded the streets of Tel Aviv to protest Israel’s high cost of living, it’s doubtful that any of them imagined that their demonstrations would result in the sale of some of Israel’s largest and most important companies to investors from China, but that may in fact turn out to be the legacy of 2011’s social unrest.
During 2013, the Knesset adopted the Centralization Law which requires Israel’s “tycoons” to sell off a number of large Israeli companies, either because they need to reduce the number of layers of what the local media calls “pyramid structures” (i.e. multiple layers of public companies controlled by the same tycoon) or because the law requires tycoons to choose between their financial and “real” holdings (i.e. non-financial companies such as telecom, technology, energy, manufacturing, retail, etc.), selling one and keeping the other. The law provides for a grace period of between four and six years of which one year has already passed and therefore by as soon as December 2017 and no later than December 2019, some of Israel’s largest companies may need to be sold.
The Centralization Law was enacted in order to implement the recommendations of the Centralization Committee appointed by Prime Minister Benjamin Netanyahu and then finance minister Yuval Steinitz during October 2010 and, while it’s true that the committee was established before the outbreak of 2011 social protests, its final report was not released until March 2012 and there can be little doubt that the members of the committee, and the politicians who appointed them, were influenced by the protests of the previous summer. That influence is clearly felt in the committee’s far reaching recommendations which reflect the public’s anger at the perceived role of Israel’s tycoons in Israel’s high prices and the fear of their influence on Israel’s political leadership.
Before asking who will buy the companies that will be sold as a result of the Centralization Law, it’s important to make it crystal clear that, in most cases, the buyers will not come from Israel. The reason for that is fairly simple; any Israeli with the capital to buy these companies will have to ensure that in doing so they are not themselves running afoul of the Centralization Law or Israel’s Restrictive Trade Practices Law. For instance, the Centralization Law prohibits the acquisition of a financial asset by the owner of a large company holding “real” assets while a holder of a competing financial company (even without real assets) would in many cases require the approval of the Anti-Trust Commissioner and that approval may not be forthcoming.
In recent years we’ve seen increased Chinese interest in investment in Israel, the best known examples being ChemChina’s $2.4 billion acquisition of Adama (formerly Machteshim Agan) during 2011, Fosun’s 2013 acquisition of Alma Lasers for $240 million, JT Capital’s ultimately unsuccessful attempt to acquire Clal Insurance, Tnuva’s pending acquisition by Bright Food and the recently announced negotiations to acquire Phoenix Insurance, again by Fosun.
These transactions, which on the whole were not primarily the result of the Centralization Law, reflect the growing interest of leading Chinese investors in the Israeli economy and that interest will only grow as the Centralization Law creates buy-side opportunities for foreigners in general and Chinese investors in particular. This interest reflects the Chinese government’s encouragement of outbound investment which in recent years has turned China into a world leader in international mergers and acquisitions. So much so that during 2014, China became a net exporter of capital with its outbound investment exceeded inbound foreign investment for the first time, and there’s no reason to believe that this trend will end any time soon.
However, Chinese interest in investment in Israel goes beyond this; in both words and actions, the Chinese business community, whether state owned or private, has shown its deep admiration for Israeli companies, whether from the “sexy” hi-tech industry or from more traditional sectors such as insurance (Phoenix Insurance), food (Tnuva) and agro-chemicals (Adama).
By forcing Israel’s tycoons to sell their controlling positions in some of Israel’s best known companies including a number of its banks and insurance companies, the Centralization Law has created a perfect storm for Chinese investors and a once-in-a-lifetime opportunity to acquire profitable and well managed companies which, but for the Centralization Law, would not be up for sale. And while those same opportunities are available to other foreign investors as well, China’s already leading position in international M&A together with its increased focus on the Israeli economy all point to the very real possibility that Chinese investors will play a leading role in the acquisition of those companies that are sold as a result of the Centralization Law.
Though Chinese investment may be a key factor in bringing about the decentralization of the Israeli economy that the leaders of the 2011 protests were calling for, it will not be surprising if we soon find those same leaders rallying against Chinese investment, as we saw in the case of Tnuva. Leaving aside for a moment the latent racism of such objections (did they offer the same objections when UK private equity fund Apax acquired Tnuva?), if and when that happens, leaders of the cottage cheese protests should be reminded that in many cases the sale of leading Israeli companies to Chinese investors will be the direct result of the protests they led during 2011.
The author is a partner in Gross Kleinhendler, Hodak, Halevy, Greenberg & Co.