Bank Leumi Privatization a Great Success for

UNCLAS SECTION 01 OF 03 TEL AVIV 006762

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN IS ECONOMY AND FINANCE
SUBJECT: Bank Leumi Privatization a Great Success for
GOI

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Summary
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1. (U) On November 15, in a dramatic success for the
GOI's three-year-long privatization drive, the Cerberus
and Gabriel private investment groups (also known as
Barnea Investments),headed by former U.S. Vice
President Dan Quayle, won the tender and purchased 9.99
percent of Bank Leumi from the government. Leumi joins
Discount Bank (transaction not yet finalized) and Bezek
as the most recent government-owned companies to be
privatized. The privatization demonstrates the
government's continued commitment to the economic
reform program begun under former Finance Minister
Netanyahu. Finance Minister Olmert and others have
noted that the high price received for the shares
represents a strong vote of confidence by foreign
investors in the Israeli economy. Olmert also said
that the proceeds of the sale will be used to reduce
government debt, another major GOI objective. End
Summary.

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Sale to Investors rather than the Public
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2. (U) Early in 2005, former Finance Minister Netanyahu
decided to privatize Bank Leumi, Israel's second
largest bank with assets of USD 57.6 billion, by
distributing shares to the public. Netanyahu suggested
this method of privatization since he believed it would
encourage public participation in the capital markets.
The Governor of the Bank of Israel (BOI) Stanley
Fischer and Prime Minister Sharon opposed public
distribution on the grounds that it would be a
bureaucratic headache. Furthermore, they wanted the
revenue that would be generated by a sale to investors.

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What is Bank Leumi
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3. (U) Bank Leumi has been in government hands for 22
years, since the Israel bank shares crisis in 1983. It
owns a number of leading capital market and financial
service companies, investment and insurance companies,
as well as affiliates in the U.S., the U.K.,
Switzerland, and Latin America. Prior to the sale,
24.78% of the shares of the bank were in government
hands. Following the sale, the shareholders of Leumi
are as follows: The State of Israel 14.79%, Barnea
Investments 9.99%, Eliahu Insurance Company 9.98%,
Jewish Colonial Trust 4.86%. The public holds 60.17% of
Leumi shares.

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The Deal
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4. (U) The transaction is being touted as a great
success, as the successful bidders offered a price that
was 16% higher than the closing price of Leumi shares
on the Tel Aviv Stock Exchange on the eve of the sale
and 54% higher than the bank's equity. According to
the terms of the sale, which was completed on November
25, the Group purchased 9.99% of the shares for USD NIS
2.475 billion (USD 525 million). The percentage
purchased is under ten percent, which is the trigger
point requiring both Israeli and U.S. regulatory
approval, U.S. regulations being involved because the
Leumi Group has a subsidiary bank in New York. The
Group's option to purchase another 10.01 percent in the
next eighteen months, will be subject to regulatory
approval in both countries. If the Group decides to
purchase the entire 20%, the price will be NIS 4.62
billion (USD 980 million.)


5. (U) Bank Leumi employees will receive benefits
averaging NIS 50,000 - 70,000 (USD 10,000 - 15,000)
from the deal. The period of sanctions and strikes
before the announcement of this deal was relatively
short compared to the longer period of worker unrest
that preceded the Israel Discount Bank sale last
winter. The agreement that the Leumi workers union
reached with the Ministry of Finance (MOF) and
management several hours before the tender process
began gave them the option to purchase close to 10
percent of the Bank's shares at a discount. The
workers will also receive a bonus this year, which is
the equivalent of one month's salary, on average.

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The Winner
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6. (U) Cerberus, a hedge fund established in 1992, and
with assets of USD 16 billion, is headed by Former Vice
President Dan Quayle and CEO Steven Feinberg.
According to press reports, Secretary of Defense Donald
Rumsfeld invested in Cerberus in 2001, and financier
Michael Steinhardt is a shareholder and the Director of
the Finance Division of the fund. Some of Cerberus'
investments include: Burger King, Warner Studios,
Aozora, one of Japan's leading banks (formerly Nippon
Credit Bank),real estate in the U.S. and Germany, Air
Canada, and the National and Alamo car rental
companies. Among the six other contenders in the
tender were UBS, Citibank, and Deutsche Bank, which
were interested in purchasing the shares as a short-
term holding. The GOI had sold a 6.5 percent tranche
of Bank Leumi shares to Deutsche Bank and 3.5 percent
to Citigroup in July 2005. Both sold their shares on
the Tel Aviv Stock Exchange (TASE) immediately after
purchasing them.

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Olmert Pleased: Proceeds Will Reduce Debt
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7. (U) Finance Minister Ehud Olmert said at a press
conference on November 15 that this deal is an
achievement for the Israeli economy, and specifically
for the privatization process. He noted that "the sale
of a large package of shares of a leading bank in
Israel, at a record price, to a strategic investor,
will strengthen competition among banks, and
competition in the domestic capital market." He added
that the policy of privatizing banks is an inseparable
part of the large reforms in the capital market and the
private sector. He called Cerberus-Gabriel a serious
group that did not come to Israel in order to make a
"quick exit." Olmert added that the management of the
Group knows Israel very well and has plans to invest in
the country for the long term. With regard to the
proceeds of the sale, Olmert announced that they would
be used to reduce the national debt. He told the
Israeli business newspaper Globes on November 15 that
"reducing debt is a long term investment and that this
is a very important element of the economic
infrastructure." He noted that this will enable the
GOI to budget more funds for social purposes.

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Amir Peretz Reaction
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8. (U) A November 13 Yediot Aharonot article quoted
Amir Peretz as saying that "privatization has become an
obsession with us." A day before the sale, Peretz said
that he thought that Bank Leumi should remain a leading
public body.

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Bibi Pleased
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9. (U) Former Finance Minister Netanyahu
enthusiastically supported the sale, saying that he is
happy that the Leumi deal was completed during the term
of his successor. He added that "the process of
opening the banks to true competition was completed
today for the benefit of all the citizens of Israel."

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Other Reactions
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10. (U) Alon Glazer, a Banking Analyst at Leader and
Co., told the Israeli business magazine The Marker on
November 15 that the State received a very impressive
price for the sale of the bank. He said that the
privatization of the banking sector is good for the
state. With that, he noted that the Cerberus Group is
not well known in Israel, which could somewhat delay
final approval of the deal by the BOI.


11. (U) Dr. David Klein, former Governor of the BOI,
said in a November 15 Voice of Israel Radio interview
that a hedge fund is not a strategic investor with long
term plans. He said that a hedge fund generally buys
and sells depending on the needs of its investors, and
usually does not hold on to investments for the long
term. He noted that the BOI will take this into
account before giving approval should the Cerberus
Group decides to purchase the additional block of
shares.


12. (U) Yediot Aharonot columnist Sever Plotsker wrote
in an opinion piece on Ynet on November 15 that the
purchasers of Leumi are a "secret investment fund, do
not have an internet site, are not transparent, and are
not listed on any stock exchange." He also noted that
they do not have expertise in either American or
foreign banking. Plotsker acknowledged that the
government received a very good price for the sale of
Leumi, but asked rhetorically whether this is the best
thing for the citizens of Israel, whose formerly
"Zionist" bank will now be owned by a "clumsy,
complicated, and mysterious investment conglomerate."

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Comment
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13. (U) The privatization of Bank Leumi marks the high
water mark for the economic reform program of the
Sharon government, which has helped bring Israel from a
deep recession to a growth rate in the five percent
range. The proceeds from this and other sales have
increased the revenues available to the government and
reduced the deficit. Regardless of the uncertainty
about future economic policy as the country heads into
elections next year, the new government will inherit an
economy that is stronger than anytime in recent years
and freer than it has ever been.

JONES