EBN advises on the rare merger of two Israeli banks
A complex and landmark three-year saga comes to an end after Mizrahi-Tefahot Bank acquires Union Bank of Israel for NIS 1.4 billion, becoming the 3rd largest bank in Israel.
EBN advised Mizrahi-Tefahot Bank Ltd., the third largest bank in Israel, on its successful acquisition of the Union Bank of Israel Ltd., for a value of NIS 1.4 billion (appx. USD 315M) after a lengthy three-year process, which included an almost unprecedented decision by the Competition Tribunal approving the merger between the banks, sale of Union Bank’s diamond credit business and completion of a complex and unique exchange tender offer for the issuance of Mizrahi shares to Union Bank shareholders.
Bank Mizrahi was represented by Doni Toledano, Lior Oren and Iris Kushel from the Commercial Department, Giora Erdinast and Arik Brenneisen from the Litigation Department, Moty Yamin and Hagar Guri from the Capital Markets Department, Michal Rothschild and Shelly Wechselmann from the Competition Department, with the assistance of interns Omer Harrai and Roni Ben-Ivry.
Doni Toledano, Head of the M&A and Banking and Finance Departments of Erdinast, Ben Nathan, Toledano & Co, sat with our editor, Lee Saunders, to answer questions involved with this landmark case.
Banks are heavily regulated in terms of their Capital Adequacy Ratio, their financial monitoring and stability. Accordingly, they are ordinarily self-sufficient and do not require mergers as a way to increase growth. Furthermore, regulators attempted to prevent mergers between banks as they believed that such transactions may have an anti-competitive effect.
Q: Why are banking mergers rare? Is this the first banking merger in Israel or have there been others? Has this one finally crossed the line and the 2 banks are now operating as one?
The Israeli banking market consists of 5 leading banks and a number of additional small niche banks that focus on specific banking services such as mortgage banks. Union Bank was a unique bank in the sense that it was a small universal bank, i.e., despite its small size and small market share, it provided the full range of banking services, which was problematic, as universal banks require significant investments (e.g., in their IT systems). That is why this merger was so synergetic, once Union’s activities are merged into Mizrahi-Tefahot, the merged entity will be able to provide services to Union’s clients in a much more efficient manner. Currently, after the consummation of the transaction, Union is a wholly owned subsidiary of Mizrahi, though, we assume that after the operational issues are dealt with Union will be merged into Mizrahi.
Q: Of all the obstacles – what was the most significant one to overcome?
It is hard to even count the many obstacles we faced during the process. Two major ones were the objection of the Competition Commissioner and the need to obtain the affirmative consent of no less than 95% of the shareholders of Union Bank as part of a tender offer. The Competition Commissioner’s objection was definitely the most challenging part. We were required to file an appeal with the Competition Court which included evidentiary hearings and expert testimony. After the Court granted the appeal, we had to negotiate the conditions to the approval of the merger which included a divestiture of certain banking activities prior to the consummation of the merger. This required us to find a buyer for these activities, negotiate the commercial agreements with the buyer and ensure simultaneous closing of the acquisition and the divestiture transaction.
Q: What characteristics do lawyers working on this need to get a transaction like this across the finishing line?
The transaction involved two banks that are also public companies traded on TASE. In addition to experience and expertise in all relevant disciplines, being corporate and M&A, capital markets, and banking and banks’ regulation, we were required to work together as one team with our litigation and antitrust departments. Without exceptional abilities in all of these areas, the deal could not have been completed.
Q: Such a matter involved M&A, Banking, Litigation, and Competition, what were the most challenging aspects of each of these areas?
In terms of M&A, it was challenging to enter into a long term transaction with the controlling shareholders of Union Bank, taking into account the changing circumstances of such a long process and synchronizing the divestiture with the closing of the tender offer; With regards to Banking, there were many issues to address, including ensuring that all regulatory approvals are obtained in a timely fashion and that the merged entity is in full compliance post-closing; As far as Capital Markets is concerned, the successful completion of a full tender offer also involved a public offering of the shares of the buyer and obtaining the required 95% majority; and with Litigation and Competition, this was a historical case of such significance – in which the Competition Court overturned the ruling of the Commissioner and allowed the merger to proceed despite the regulator’s objection.
