Tycoons and Monopolies I.14.04.13

Tycoons and Monopolies I 14.04.13

by

Howard Adelman

Economic development depends in good part on entrepreneurs. The vast majority are small, but some have become very rich. There are at least seventeen Israeli billionaires in Forbe’s Israel list not counting billionaires who hold Israeli citizenship but whose primary residence is now elsewhere. I have already referred to the richest, the Ofer brothers (Idan and Eyal) and Arison brother (Micki) and sister (Shari) in previous blogs. Since the Arisons largely inherited their money from their father who died in 1999, I will only tell one story of Shari Arison who was voted the 56th greatest Israeli in 2005 because of her philanthropic work. In March 2009, she sponsored the annual Good Deeds Day in Israel to inspire and recruit thousands of volunteers. As part of the event, a Palestinian youth orchestra from Jenin performed classical Arabic tunes and songs of peace in a concert honouring Holocaust survivors. Subsequently, the conductor was condemned by Jenin politicians, fired from his job and expelled from Jenin. Such are sometimes the unintended bad effects of good deeds.

Israeli billionaires are sometimes accused of bad deeds. Focusing on the Israeli documentary, The Shakshuka System (Shitat Hashakshuka), written by the Israeli investigative journalist, Miki Rosenthal and directed by Ilan Aboody, I will re-introduce the Ofer brothers. Shakshuka refers to an Israeli hot breakfast concoction of poached eggs cooked in a tomato and olive oil sauce with lots of spices and an assortment of other ingredients often mixed in – sausages, tuna, spinach, feta cheese. Since the film was broadcast, the term now has a secondary meaning in Israel to refer to mixing of government and big business in the process of devolving state assets onto the private sector. A lawyer working for the Ofer family can be given the credit for this neologism for he described the process for calculating the purchase price of state assets as combining various offers and making a shakshuka out of them.

The film combined a Monopoly Board, cartoons and official records, history and interviews, to explain how the Ofer brothers and the Israel Corporation purchased what were state assets at what were alleged to be bargain basement prices. But the film starts with the end, the effort of the Ofer family to suppress the film and prevent it from being shown on Israeli TV. Eventually they not only failed, but their own film made to counteract the critical film, and shown back-to-back on Channel 1 (the Israeli version of CBC), evidently, according to a radio survey, garnered a credibility of only 10% while the Rosenthal-Aboody film had a credibility of 90%. However, in the process of making the film, Rosenthal lost his job with Channel 2 (the Ofers actually bought the channel as part of its campaign). Nevertheless, the film garnered far more publicity than it would otherwise have if the Ofers had not launched such a strenuous campaign to suppress it. The Ofers also agreed to pay NIS 40,000 to settle their suit against Rosenthal et al out of court.

In the film, as in a Michael Moore documentary but without Moore’s narcissism, no one from the Ofer family, its hirelings or the government is willing to talk to Rosenthal about the process of privatization, but in the tradition of investigative journalism, the narrative relays how the government sold state assets in the resource industry cheaply while the companies continued to pollute and hired former state employees in charge of the sale to work for the Ofers immediately after the purchase. Other than introducing a new meaning to a Hebrew word, as a result of making the film, Rosenthal and Aboody have been frozen out of many work opportunities. At the same time, the Ofer brothers blame the film for making government officials unwilling to meet with them lest those officials be suspected of collusion.

We should not, however, stereotype billionaires, though when at the end we discuss the Eastern European Israeli billionaires, one may be tempted to do so. The billionaires in Israel represent a widely divergent group both in background, how they made their fortunes and any conclusions that can be drawn for their impact on the Israeli economy. The most well known in Canada is David Azrieli because he is a Canadian as well as an Israeli citizen and is included in the Canadian rather than Israeli list. He made his money (currently a fortune estimated in excess of $3 billion), like many of the very rich who made fortunes in Canada, as a property developer in both Israel and Canada where he is ranked as the 9th wealthiest Canadian by Forbes.

Trained as an architect in the Technion (though he never graduated) and having served in the IDF, he was one of the first Israeli migrants to Montreal in 1954. The Azrieli School of Architecture and Urbanism at Carleton University was named after him, not only because of his $5.1 million donation, but because of his commitment to high quality architecture in his developments. In Israel, the Jerusalem Shopping Mall, as well as twelve other super malls in Israel, and the Azrieli Center in Tel Aviv, are now landmark developments. Azrieli has a controlling share in Sonol, Tambour and Supergaz. There is no indication that his contribution to the Israeli economy (and the Canadian economy) has been anything but positive.

However, he has donated funds to Im Tirtzu, self-described as a centrist organization combating efforts to promote a boycott of Israeli academic institutions. However, Im Tirtzu is known for its denial of the Nakba, condemnation of artists who support Palestinian nationalism, its campaign against the New Israel Fund for funding the "lies" that were fed into the Goldstone Report, and especially its criticisms of biases in political science departments of universities. In the case of Ben Gurion University of the Negev, the organization claimed that 9 of 11 professors in the department were left-wing activists who supported the boycott of Israeli academic institutions. Although the heads of Israel’s seven leading universities condemned Im Tirtzu‘s "dangerous attempt to create a thought police," the Israeli Council for Higher Education appointed an international committee to investigate the allegations but it too became controversial because well-known scholars were rejected from being appointed to the committee and the original chair also resigned. The committee did conclude that the curriculum of the department was indeed imbalanced and recommended closure unless changes were made.

Then there are the American billionaires who are also Israeli and not included in the list. Micki Arison is classified as American because he runs Carnival Lines out of Miami; both he and Shari were born in the USA and retain their American citizenship. Noam Gottesman, who founded GLG Partners, a wealth management firm, which he sold but still controls TOMS Capital, has lived in London and New York and is not an Israeli resident. Other Israeli-born billionaires have made their fortunes in America. Arnon Michan, the Hollywood producer (Pretty Woman, L.A. Confidential and numerous other movies) built his initial fortune in Israel by developing and expanding his father’s fertilizer company into a large chemical business. He has always had an intimate relationship with Israel, having served in the Israeli intelligence and is credited by Shimon Peres for obtaining what was required to build Israel’s nuclear capacity — as well as other forms of arms dealing. (Meir Doron and Joseph Gelman (2011) Confidential – The Life of a Secret Agent Turned Hollywood Tycoon). He has no current impact on the Israeli economy except as a goodwill ambassador and financial backer of the Israeli Network which re-broadcasts Israeli programs to Canada and the United States.

Marc Rich is another billionaire born in the USA with Israeli citizenship, but he lives in Switzerland. He fled the USA to escape indictment for tax evasion, running an export oil scam and involvement in the illegal trading with Iran in 1983 but was pardoned by President Clinton in 2001. A more interesting billionaire personality from an Israeli perspective is Haim Saban, another Hollywood mogul who owns Univision, the Spanish-language media giant. He sold Fox Family Worldwide, a co-venture with Robert Murdoch, to Disney in 2001 and made $1.5 billion. He has retained a continuing commitment to and involvement in Israel but is formally classified as an American billionaire. His main efforts are directed towards ensuring American support for Israel rather than having any direct impact on the Israeli economy. He supplied the funds to build the headquarters in Washington of the Democratic National Committee and founded and funded the Saban Center for Middle East Policy at Brookings.

The big Israeli billionaire movers and shakers in the Israeli economy, other than those discussed above, can be divided into five groups:

a) Mizrachis – Israeli Jews born in Arab countries;

b) the Ashkenazis;

c) the older Israeli-born businessmen;

d) the Young high-tech Sabras;

e) the East Europeans, the most colourful collection of all.

I will discuss the Mizrachis in this blog, then the other Israeli billionaires in subsequent blogs. Since the Toronto International Jewish Film Festival is now on, I will delay some of these economic blogs to review some of the films I see.

Shlomo Eliahu came to Israel as a child of fourteen from Baghdad and made his fortune, and reputation for integrity and responsibility, in insurance and banking. He owned large stakes in Bank Leumi and the Union Bank of Israel (Bank Igud) which in turn owned 9.9% of Bank Leumi’s shares, but very recently had to sell his personal stake in Bank Leumi to consolidate his takeover of Migdal Insurance and Financial Holdings and escape the requirements of the Israeli anti-monopoly laws. He is one of the two billionaires who has run for and had a seat in the Knesset, first as part of DASH, the Democratic Movement for Change, in 1978, and then in 1980, as part of Ahva until 1981. He then went back to making money. In 2012, that effort landed him in trouble with the law for he was fined almost $3million for non-payment of taxes between 2007 and 2009 when he took NIS 74.3 million out of Israel without notifying the authorities, in part ostensibly for gambling in London. There were rumours of money laundering but no evidence that I could find and a spokesperson for the Eliahu group explicitly denied it.

When Italian insurance giant Generali was due to sell its interest in Migdal to Eliahu, and Elihau was about to sell his shares in Bank Leumi, as stated above, to satisfy the new anti-trust laws, Bank Leumi lent Eliahu NIC2billion to buy Generali’s 69.1% controlling share of Migdal. Eliahu sold another block of shares in Leumi for NIS200million thereby raising about two-thirds of the needed price of his purchase of Migdal. After Eliahu completed the purchase of Migdal, the share price rose 40% and Eliahu joined the billionaire class.

I tell this story because all sales were private. But if it was a state sale to a private entrepreneur and the share price went up 40% after the sale was completed, there would have been accusations that the stock was sold too cheaply and that politicians and civil servants had colluded with Eliahu to help him make his fortune. The reality is that once you have a fortune, it is easier to enlarge it for there are fewer competitors in the buying sweepstakes for states privatizing their holdings.

Eliahu retained his personal political conscience. He railed against the high cost to Israelis of buying a home because of the scarcity of land and sites on which to build. He called for land to be privately owned so a base for personal capital would be created. "Why have Israelis, exemplary children, been sentenced to a country that does not care to give them a piece of land? To build a home?…We have a lot of land. In two years, I’ll build you hundreds of thousands of homes at a construction cost of $1,000 per square meter. $20,000 for a young couple, an 80% mortgage, and you’ll have a reasonable home for a family.”

Yitzhak (Isaac) Tshuva, another Mizrachi Israeli, seems to have been apolitical. He was born in Libya. He came to Israel as an infant in the Jewish exodus from Arab countries following the War of Independence. Starting as a contractor and developer, he has maintained his down-to-earth modesty though he came to own some very posh investment properties through his wholly owned property company, El-Ad, in New York, Florida and Los Angeles, including the landmark Manhattan Plaza Hotel which he recently sold after renovating and selling off a large number of condos.

Tshuva also controls the Delek Group, a global integrated energy company based on the Israel Fuel Corporation which he acquired from private interests rather than the state, but in gaining control, he pushed aside the establishment very wealthy Recanati family which made him some enemies in establishment circles. The Delek Group was part of the conglomerate that discovered and brought on stream the Tamar gas reservoir; Delek owns about one-third of Tamar. (See my blog on the energy sector.) He is an example of a Horatio Alger story of a self-made billionaire who made his money through hard work, discipline and dedication. Though in his early years he received state contracts – such as for building the Bar Lev Line along the Suez Canal – there was never any suggestion that he obtained those contracts other than through competition and an excellent business reputation. He has also had but survived serious setbacks, losing half a billion dollars when financial markets took a dive in 2008.

Tshuva has one ambitious plan that would have a tremendous political impact – to develop a 106-mile canal to bring Red Sea water to help refill the Dead Sea as well as develop hotels, restaurants and parks along its length. Tshuva is working with Jordan and the Palestinian Authority as well as the Israeli government to advance the project.

One last aside on the Recanati famil fortune which controlled the IDB Group and bought a controlling share of Gmul at a premium price just when the stock market hit the skids. When he lost about a half billion dollars and had to liquidate assets to satisfy creditors, he stepped aside. Leon Recanati lost control but retained his (and his family’s) reputation as a businessman of honour and integrity.

TO BE CONTINUED

Tycoons and Monopolies.I.14.04.13.doc

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