Bethel Finance: Israel Tycoons Said to Face Rules Cutting Company Pyramids to Three Levels

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Israeli companies, such as Delek Group Ltd. (DLEKG) and IDB Holding Corporation Ltd. (IDBH), will need to simplify corporate structures as the government seeks to reduce debt risk and boost transparency, a person familiar with the discussions said.

The government committee on economic concentration will demand companies limit their pyramid structure to no more than three layers, according to the person, who declined to be identified because the information hasn’t been made public. The committee will propose a four-year deadline for corporations to comply with the new rules, said the person familiar with the final recommendations, which will be presented to the public today.

If implemented, companies including billionaire Isaac Tshuva’s Delek Group, Nochi Dankner’s IDB Holding and the Ofer family’s Israel Corp. (ILCO) may have to sell assets and merge business activities. Some 20 families control 25 percent of the listed companies and 50 percent of the total market share in the Tel Aviv Stock Exchange (TA-25), one of the highest concentrations among developed economies, the Bank of Israel said in its 2009 annual report.

“The recommendations will lower the risk of highly leveraged companies and reduce their power in the economy while strengthening the influence of minority shareholders,” said Noam Pincu, real estate and holding companies analyst at Psagot Investment House Ltd. in Tel Aviv. “The new rules will force companies like IDB to sell their financial businesses and Delek to sell their insurance business.”
Ending Sale Talks

Discount Investment Corp. (DISI), which Dankner controls through IDB Development Corp. (IDBD), IDB Holding’s investment arm, asked Koor Industries Ltd. to start merger talks, the companies said on Feb. 13. Discount Investment ended negotiations in November to sell Shufersal Ltd., Israel’s largest grocery chain, to Isralom Properties Ltd. (ILOM) and England’s Noe family after they were unable to meet possible government requirements endorsed by the concentration committee.

Shares of IDB Holding, which controls the country’s biggest mobile-phone operator Cellcom Israel Ltd. through Discount Investment, have lost 69 percent in the past 12 months. The benchmark Tel Aviv-25 index has declined 16 percent.

“The divestments of companies will bring dynamism and change of ownership thereby increasing competition in the economy, and reduce prices,” said Glenn Yago, senior director at the Milken Institute, a U.S. economic think tank.

Hundreds of thousands of protesters demonstrated in Israel last year calling for more affordable housing and lower prices for food and other consumer products. The lack of competition is one of the causes of higher costs, Prime Minister Benjamin Netanyahu said in a speech to parliament in October. In response to the protests, he appointed a committee led by economist Manuel Trajtenberg, which recommended a series of measures.