US embassy cable - 05TELAVIV6762

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