Shimon Peres, the 91-year-old former Israeli president, may not be the most obvious social media fanatic. Yet in 2014 he opened an account on Weibo, China’s equivalent of Facebook, expressing his desire to interact directly with the Chinese people, including its younger generation. The nonagenarian quickly received over 50 million ‘likes’ on his Weibo page.
This symbolises a wider cultural and economic shift. For decades, Israel’s political elite has made much of the nation’s natural affinity with the US and the influential Jewish community there. That umbilical cord to the world’s most powerful nation that has fertilised Israel’s tech and start-up community remains intact. But in recent years, as western pressure and sanctions have been exerted on Israel over its conflict with Palestine, it has turned its sights to the East, where Asian jurisdictions have taken a less judgemental line on its political and military stance.
Simon Jaffa, a partner at Barnea & Co, says that trade and investment coming from Asia is making a fundamental difference to economic stability in Israel, and is a welcome boost to the local legal profession: ‘The Chinese are interested in doing business and they are not going to be prevented from doing business simply because of the political environment.’
And the Israelis and the Chinese have an enduring mutual appreciation. Amit Ben-Yehoshua, an Israeli consultant at the Shanghai office of Dacheng Law Offices (the Chinese firm that recently announced a merger with Dentons), says he is still routinely surprised by the Chinese people’s respect for his country. ‘If you take a taxi cab in China and say you are from Israel, they will think that you are very smart,’ he argues.
Daniel Green, a partner at Yigal Arnon & Co, says there is no history of anti-Semitism in China: ‘They see a little scrappy country of immigrants and refugees, which against all odds has transformed itself into a technology superpower.’
Monopoly play: antitrust concerns leave natural gas sector in limbo
Ever since the sizeable Tamar and Leviathan natural gas fields were discovered in 2009 and 2010, Israel has been coming to terms with its energy wealth. Israeli energy company Delek and US-based Noble Energy have become the most powerful players in the industry.
Many would have expected Israel to still be celebrating its good fortune, but its antitrust authority has had persistent concerns about Delek and Noble’s perceived dominance. Tamar, which is understood to hold 10.8 trillion cubic feet of natural gas, started flowing in 2013. Leviathan holds 22 trillion cubic feet and is not yet in production.
‘Noble and Delek have been brave enough to spend considerable amounts of money on exploration and they have hit the jackpot,’ comments Simon Jaffa of Barnea & Co.
As the big players in the market, the antitrust commissioner has concerns that they hold a de facto monopoly to supply natural gas to the Israeli market. A previous attempt to reach a satisfactory arrangement with Delek and Noble was cancelled at the end of 2014, with the antitrust authority director general David Gilo stating that the natural gas monopoly of Delek and Noble should be broken up.
How this is to be achieved is still unclear. Noble and Delek own 85% of the Leviathan field and control the Tamar site as well. There had been proposals that the gas from Tamar reserved for Israeli consumers, as well as the smaller Tanin and Karish gas fields, be sold to a third party. Yet with Leviathan being the most significant of the various fields, there were remaining concerns that these measures would still not defeat the alleged monopoly.
With all this regulatory uncertainty, efforts to promote foreign investment into Israel’s natural gas industry are now uncertain. In May 2014, Australia’s Woodside Petroleum withdrew its $2.7bn bid to buy a 25% stake in Leviathan. ‘All this uncertainty puts off foreign companies coming into Israel and investing,’ Jaffa comments.
He has concerns about how fast the gas industry is moving in Israel and that the longer it takes to get Leviathan into production the more it will depreciate the field’s long-term value. He believes that neighbouring states that commercialise their gas reserves first will have a natural advantage on the regional and international stage.
‘Until the matter has been finally settled, investment and projects in the upstream oil and gas sector are in limbo,’ says Renelle Joffe, the head of the energy group at Meitar Liquornik Geva Leshem Tal. As such, she is downbeat about the short-term outlook for the energy practice: ‘Following the recent antitrust decision, the practice has been focused more on regulatory issues and less on projects, which in my opinion is a great pity.’
However, Dan Hacohen, head of the energy practice at Agmon & Co Rosenberg Hacohen & Co, who has worked on all the major gas discoveries in Israel, is more upbeat: ‘Proceedings will probably bring about divestitures and assets will change hands bringing in international investment.’
Capital flows
History and traditions aside, market data illustrates the growing importance of Israel’s trading relationship with China and Asia. According to Mergermarket, four of the top ten Israeli M&A transactions in 2014 involved a Chinese or Asian party (see ‘Israel: deals in 2014’, page 86). The largest was Shanghai-headquartered Bright Food’s $1.75bn acquisition of Tnuva Food Industries, Israel’s largest food manufacturer and distributor, from Apax Partners. Freshfields Bruckhaus Deringer and Israel practice Fischer, Behar, Chen, Well, Orion & Co advised Bright Food, while China’s Global Law Office and Israel firm Herzog Fox & Neeman advised Apax Partners. Tel Aviv-based Meitar Liquornik Geva Leshem Tal represented Tnuva.
Koby Simana, chief executive at IVC-Online – a resource centre for data and information on Israeli hi-tech and venture capital investments – says that local hi-tech companies and venture capital funds have traditionally sought their funds from American institutional investors, family offices and corporates. But he says there has been a notable shift in capital coming from China, Japan and Korea.
While the deals involving Chinese and Asian investors have been comparatively large by Israel’s standards, buyers are lured to Israel by not only the pioneering spirit, but also by the attractive valuations. ‘You get more bang for your buck,’ says Ben-Yehoshua.
Barnea & Co founding partner Michael Barnea also believes that investors benefit from a slightly more convivial environment when chasing deals: ‘In some respects because of the geopolitical limitations, there is less competition for certain deals. Investors may not face as much competition for business as in the US or UK.’
Such valuations have not prevented some sizeable transactions getting through. This includes China National Chemical Corporation (ChemChina) acquiring Israel’s Makhteshim Agan Industries for $2.4bn in 2011. Herzog Fox advised Makhteshim Agan, with fellow domestic firm GKH Law Offices advising ChemChina.
Large delegations of Chinese are routinely witnessed in Israel looking at investment and acquisition opportunities. Hong Kong tycoon Li Ka-shing donated $130m to Technion, Israel’s leading engineering university in 2013, as part of a deal to establish a joint academic venture with Shantou University in China’s Guangdong Province. The venture will create the Technion Guangdong Institute of Technology.
Geva says that while China is eager to acquire some of Israel’s innovation at attractive prices, the trend is mutually beneficial. Israel’s tech companies for the most part have not struggled for funding as investors have been able to envisage healthy returns in the short-to-medium term. ‘Israeli venture capitalists tend to focus either on areas where Israel has dominance, such as military-related technologies, or sectors that are less capital-intensive such as new media, internet and telecoms,’ he comments.
He points to the $1.1bn sale of Israeli smartphone navigation application Waze to Google in 2013 as an example where investors have made a successful exit. Cleary Gottlieb Steen & Hamilton and Israeli firm Goldfarb Seligman & Co represented Google, while Waze was advised by GKH Law Offices and Silicon Valley-headquartered Gunderson Dettmer.
In contrast, the biotech, healthcare and medical devices segment has struggled because the process of bringing products to the market generally requires more long-term vision and is more capital intensive. In this regard, Israel’s rationale for seeking alternative funding channels is based on shrewd thinking. Neusoft Group, China’s largest IT and software company, acquired a majority shareholding in Aerotel Medical Systems in 2014. S. Horowitz & Co advised Neusoft, while Gelbard, Amit, Wesler – Law Office represented Aerotel.
The red-carpet treatment for China has not just been confined to the start-up and emerging company sector. China Harbour’s Pan Mediterranean Engineering Company (PMEC) won the tender to construct the Southport Terminal at Ashdod. There has also been talk of the proposed high-speed rail link between the Mediterranean and the Red Sea – the ‘Med-Red’ – not even going to tender and simply being handed to the Chinese government. ‘It is emblematic of the increasingly close relationship between the two countries,’ Jaffa says.
Beyond China, there has been curiosity from other Asian states in Israel’s dynamic economy. Clifford Davis, a partner at S. Horowitz & Co, one of the largest firms in Israel, says that he worked on four transactions in a month involving Japanese companies. In 2014, e-commerce giant Rakuten acquired Israel messaging app company Viber Media for $900m. Viber was advised by White & Case, with GKH Law Offices, Linklaters, and Morrison & Foerster representing Rakuten.
While having a tight nexus with the world’s leading economic superpowers, such as the US, China, Japan and the European Union, Israel is also making a play for the developing world.
Steven Berelowitz, a partner at Tel Aviv firm Hamburger Evron & Co, says that over the past decade exports from Israel to Africa have increased from approximately $370m to some $1.3bn. He believes that a slight decline in trade in the last couple of years was a mere blip and that Israeli innovation is well positioned to play an integral role in Africa’s emergence as a genuine economic power. ‘Over the past three years approximately 20% of the sub-Saharan countries have shown a steady growth of around 7% and are becoming ever more interesting to Israeli companies,’ he says, suggesting that planned infrastructure and transport improvements between Israel and Africa can only help this phenomenon.
Favourable conditions: US real estate investors access Israeli bond market
While Israel is increasingly turning its sights to Asia-Pacific and other emerging markets, the US, its closest long-term trading partner, has identified Israel’s capital markets as an attractive location to raise money.
Much of the interest is coming from New York-based Jews who happen to run some of the biggest real estate investment companies in the country. Gary Barnett, the president and founder of Extell Development Company, raised some $300m on the Israeli bond markets in 2014.
Dudi Berland, a partner at corporate finance firm Shimonov & Co, says he has been working for 50-hours straight at times as more US real estate investors look to tap into the Israeli debt markets.
This phenomenon derives from US real estate investors traditionally avoiding the US corporate bond market. As many of these companies are seen as small-to-medium sized in the US context, they often attract lower ratings than larger US bluechips, unlike in Israel where they are regarded as much more sizeable organisations. ‘Small-to-medium sized companies in the US are considered to be giants here,’ Berland remarks.
In addition, Israel currently has lower interest rates than in the US, making it attractive for issuers. With interest rates at a historic low, investors are desperate to put money into something that is going to generate a sufficient return. Clifford Davis of S. Horowitz & Co says: ‘Israel has this confluence of money, demand and supply. It really is a win-win situation at the moment.’
Israel’s pension and mutual funds are obligated to invest on behalf of their stakeholders and currently the bond markets are an attractive option. With these real estate developers given high credit ratings by the Israeli authorities, it makes them all the more compelling. ‘Mutual funds are only allowed to invest in Israeli securities. There is lots of public money to invest,’ remarks Shirel Guttman-Amira, head of the corporate department at Agmon & Co Rosenberg Hacohen & Co.
The US real estate issuers have also filled a gap left by a limited domestic bond market. This is largely linked to a series of Israel’s tycoons running into financial distress recently.
Berland believes market fundamentals mean that the Israeli securities market will not necessarily remain a niche route explored only by US real estate investors that have personal or business links to the nation. He says that other industries and other jurisdictions, such as the UK, are likely to tap the local debt markets.
Seizing initiative
Given the new markets that Israel is now trading with, it represents a notable challenge to Israel’s modestly sized law firms – until recently, a firm of over 200 fee-earners was considered exceptionally large.
Despite size limitations, Israeli firms have been quick to position themselves for cross-border work involving Asia and other emerging markets. While the legal market has a strong contingent of US-trained attorneys that have emigrated to Israel, the links to other markets are less obvious. Israel-based lawyers frequently travel to Silicon Valley and New York, and have done for years, but now they are making the journey to places such as Shanghai, Beijing and Tokyo.
Yoav Sade heads Meitar Liquornik Geva Leshem Tal’s China desk and has seen a significant uptick in cross-border transactions involving China in the last five years. ‘There are more and more opportunities and actual deals between Israel and China. You regularly have Chinese companies making acquisitions, investments and taking minority stakes in Israeli companies,’ he comments.
Geva, who runs Herzog Fox’s China desk, holds similar sentiments to Sade: ‘The cake is going to get bigger in the next few years. 2015 will be by far the best year ever in terms of deal size and volume size.’
Tehila Levi-Lati leads the China desk at ZAG – S&W – an international firm jointly owned by Israel’s Zysman, Aharoni, Gayer & Co and US practice Sullivan & Worcester – which has a co-operation agreement with Chinese firm JunZeJun Law Offices. Levi-Lati, who has been working on China matters for over ten years, will relocate to JunZeJun’s Chengdu office in 2015 and continue to run ZAG’s China desk from there. She believes there is no better time to capture the expanding demand for transactions involving China and Israel. ‘If you ask me, China will be bigger than the US in ten years’ time,’ she says.
It would appear that the fact-finding missions and admiration between the two countries will continue to blossom, because of the clear mutual benefits. Daniel Green and Simon Weintraub are partners at Yigal Arnon and are members of the firm’s Asia desk. Earlier this year, the two travelled to Beijing and Shanghai and came back filled with optimism. Weintraub says that it was his first visit to mainland China and he was struck by the vast amount of available capital there, the advanced nature of the country and the sophistication of the local law firms. Indeed, since their visit, Green and Weintraub have already welcomed two visiting Chinese law firms.
Green remarks: ‘China has a lot of capital for outbound transactions and they are looking for places to park that money. When you put it altogether, you can see an emerging win-win partnership.’ LB
chris.crowe@legalease.co.uk