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.



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IDB: Israel's Third Largest Bank


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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.



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The Sale


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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.



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The Workers Have a Say


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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.



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GOI Proud of Sale


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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