Discount Bank Seeks to Keep Credit Card Arm Cal, Deal Faces Regulatory Hurdles

Discount Bank is seeking to overturn a law requiring it to divest its credit card company, Cal, as the sale of its controlling stake faces significant regulatory challenges. The bank has appealed to the Bank of Israel, Ministry of Finance, and Ministry of Justice to cancel the divestment mandate, while the Israel Competition Authority is imposing conditions that potential buyers, Union and Harel, find difficult to accept. Discount Bank is under time pressure, as the law mandates the sale of control by May 2027, and securing a new buyer, obtaining approvals, financing, and finalizing a new agreement could take months.

The current deal values Cal at approximately 3.75 billion shekels, potentially rising to 4 billion shekels with performance-based payments. Discount Bank, holding about 72% of Cal, stands to receive around 2.7 billion shekels, with the remainder contingent on performance. The International Bank, holding the remaining 28%, is expected to receive just over 1 billion shekels. Despite losing its operation with El Al's frequent flyer program, Cal has continued to grow, reporting a 7% increase in revenue to 843 million shekels in the second quarter and an 11% rise in transaction volume to 55 billion shekels. Active cards reached 4.2 million, and its consumer credit portfolio grew by nearly 12% to about 9.3 billion shekels within a year.

The Competition Authority's concerns primarily revolve around the potential buyers, particularly Union Group, controlled by George Horesh, which holds a significant stake in Super-Pharm. Cal also operates a credit card and loyalty program with Shufersal, a major competitor to Super-Pharm. The authority fears that a credit card company owner with a large retail network could leverage the vast consumer purchasing data it holds to gain an unfair advantage over competitors. To mitigate this, the authority is demanding restrictions on board appointments and mechanisms to prevent information flow between Cal and Union.

These stringent conditions are making the acquisition less attractive, as buyers desire influence over management and strategy. Ironically, Discount Bank previously received a higher offer of approximately 4.18 billion shekels from Moti Ben-Moshe, but opted for the Union-Harel deal, believing it would face fewer regulatory obstacles. If the current deal collapses, Discount Bank could explore other options, including returning to previous bidders, seeking new buyers, an IPO of Cal, or distributing Cal shares to its own shareholders. However, the International Bank's rights complicate an IPO without its consent.

The situation is part of a broader national reform aimed at separating credit card companies from banks to foster independent competition. Discount Bank's desire to retain Cal, a profitable entity that could potentially even obtain a limited banking license in the future, represents a step backward for this reform, which has already reshaped the credit card market by separating Israel Discount Bank's rivals, Isracard and Max, from their parent banks.