However, due to the tight timetables (the decision to separate the companies must be approved by the end of January by the Minister of Finance and the Finance Committee) and the complex political reality, it is not certain that this will come to fruition – as this mainly depends on whether a government will be formed after the elections. In any case, assuming that the separation process will materialize, the question arises as to who gains and loses from the move, and how, if at all, it will affect the various players in the market.
When it became known at noon yesterday about the Bank of Israel’s decision to support the separation of Cal from Discount, the bank’s stock began to erase some of the gains it recorded at the beginning of the trading day. However, the investors quickly sobered up and realized that this was not a drama that would affect the stability of the bank – and in the end, the increases strengthened and the stock ended the day with a 2.8% increase, even more than the bank index which climbed by 2.2%.
When examining the question of what the separation of the credit card company as a discounter will do, you need to examine two aspects: the financial and the business. Financially, the separation is not dramatic for the bank. In the past, Cal was a substantial factor in the profits of the Discount Group, contributing 15% of the profits. But in recent years, Discount has undergone a revolution that included deep streamlining processes and sharp growth in activity, so that today Cal is responsible for 6-8% of the group’s profits.
Moreover, the sale of Kaal is also expected to generate capital gains for Discount. The company is listed in Discount’s books at a value of NIS 2.3 billion, and if MAX – the competitor that is smaller in scope of activity – is expected to be sold at a value of NIS 2.47 billion, then it can be assumed that Al will be sold at a higher value of NIS 3-2.5 billion, which will yield a capital gain of Several hundred million shekels. This profit will compensate at least in the first years for the loss of profits that Discount records from its holding in Cal (71.8%) which is on the order of NIS 200 million.
Also, Discount, like the other banks, is benefiting these days from another significant candy: the interest rate increase. According to Discount reports, a 1% increase in interest increases its income by NIS 1.1 billion, so the contribution of the increase in interest to the bank is more significant than the loss of future profits from Cal. And of course you can see that the sale of Isracard and MAX (formerly Leumi Card) did not harm Bank Hapoalim and the Leumi, and they found ways to compensate themselves for the loss of revenue from the sale of the companies, primarily by improving their share of the revenue they share with the credit card companies in issuing the cards to the bank’s customers.
So from a financial point of view it is not a shake-up – nevertheless, the CEO of Discount Uri Levin invested quite a bit of energy to convince the relevant parties to keep Kal in his hands, since the loss of holdings in a credit card company still has a price.
First, the sales process obviously consumes energy and management resources. Also, the interim period in which the company is still under the ownership of the bank, knowing that it should become a competitor, is not easy. In Hapoelim and Beaumi it caused severe tensions between the bank managements and the credit card companies.
By the way, ironically, on a physical level, Kal is actually supposed to be closer to Discount in the coming years: while today the headquarters of the companies are not close (Kal is in Givatayim and Discount is in Tel Aviv), these days a campus is being built in the Elef complex in Rishon Lezion which is supposed to unite the entire Discount group, so that Kal will move to sit near the bank’s management.
In addition, a forced separation from a credit card company means the loss of Discount’s knowledge and capabilities in a significant area such as payments, and at the same time it causes the formation of a new competitor with access to the bank’s customers (such as the main distributor of Discount’s credit cards). So although this is not a drama that will shake the bank – but this parting has a price at the bank’s strategic level.
The Cal credit card company, under the management of Levi Halevi, also faces a challenging period. The interim period of the separation is not easy, although it is likely that the relations with Discount’s management will be better than the relations between the Hapoalim and Lumi managements and Isracard and Lumi Card (respectively) at the time. However, disconnecting from a bank, which provided financial support, discounted funding sources and is a major distributor of your cards is not easy.
Cal has grown at an aggressive rate in recent years both in the distribution of its credit cards in the major banks and in the field of non-banking clubs. During the process of parting with Discount, it will indeed have difficulty generating new and aggressive agreements, but that was not really in its plans anyway. After investing a lot in non-banking clubs such as Shufercell and Playcard, it is doubtful whether Cal intended to enter more clubs.
What’s more, Bachel will be able to draw lessons from the separation processes that the competitors went through in order to ease the disconnection from Discount. First and foremost, it is about the importance of creating a long-term operating agreement with Discount to share the revenue between them, and it will ensure stable relations over time with the company’s central ticket distributor.
So while waiting for such a challenging transition period, the company’s management and employees can take comfort in the fact that a deal for sale also brings with it a sales bonus for employees, and sometimes even the distribution of generous options to executives (depending on who the new owners will be).
Even when the Strom Law was enacted, Cal’s competitors – Isracard and MAX – as well as the banks competing for the discount, cried out that it makes no sense for Cal to remain bank owned. They claimed that such a situation gives it a clear competitive advantage, and a distorted playing field, and as evidence: the company was able to grow aggressively through generous agreements with its partners in issuing credit cards at clubs and major banks. And here, five years later, their position was accepted, and it seems that separation is closer than ever. But still, yesterday there were no champagne bottles being opened at Discount and Cal’s competitors.
First, in the financial industry, they think that it is not at all certain that separation will occur in the current political reality, and even if it does – this is a step taken too late. The equilibrium in the credit card industry has already been created, especially in regards to the distribution of income between the credit card companies and their partners (the banks and the partners in the non-banking clubs), and it is highly doubtful that they will be able to return it back to a ratio of income distribution that was better for them.
The answer to the question of who will buy the credit card company depends mainly on the question of whether Clal Insurance will be able to complete the purchase of MAX, Kal’s competitor. If all the approvals are received (not trivial), then there is a high chance that one of the insurance companies (mainly Harel or Phoenix) will rush to purchase Kal, and also gain a foothold in the world of payments. If this does not happen, then the potential of buyers will be significantly reduced. There is of course the Schneidman family, the owners of Direct Insurance, who have been eyeing the world of payments for years and were even interested in buying MAX at the time. However, it will not be easy for her to pick up a deal worth more than NIS 2.5 billion.
Another theoretical possibility is a foreign body, but due to the difficulty for foreign bodies to obtain regulatory approval and after the particularly bad experience of Warburg Pincus in the Israeli market with the purchase of MAX, it will be challenging to interest a serious foreign body in the purchase of Kal.
A solution that can always be on the agenda would be the issuance of a property in Hazvat Beit and turning it into a company without a controlling nucleus like Isracard. Although the markets are not at their best right now, to say the least, but Discount will have 3-4 years to complete the IPO process, which is enough time for the markets to recover.