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UPDATE 1-Israel seeks to break up large conglomerates



(Recasts, add details, quotes from prime minister, central bank chief)

By Ari Rabinovitch and Steven Scheer

JERUSALEM, Feb 22 (Reuters) - Israel's government, under pressure to lower the cost of living, said on Wednesday it would break up some of the country's largest conglomerates as part of a plan to reduce concentration and boost competition in the economy.

Israel has one of the highest concentrations of corporate power in the developed world and the Finance Ministry said the country's 10 largest business groups controlled 41 percent of the market value of public companies.

"There is no phenomenon of concentration in the OECD like in the Israeli economy," Prime Minister Benjamin Netanyahu told a news conference where a government panel presented its final recommendations.

"I am a proponent of competition and against monopolies and cartels," said Netanyahu, who as finance minister a decade ago implemented free market and economic structural reforms.

The main recommendations, which need cabinet and parliamentary approval, include requiring conglomerates with significant financial and non-financial assets to divest.

Holding companies structured like pyramids will have to limit their tiers of subsidiaries in a move designed to change the current set-up, in which parent companies often own publicly listed units which in turn have their own listed subsidiaries.

Under the new rules, existing groups will be allowed no more than three tiers of subsidiaries and new conglomerates two.

Institutional investors must also curb credit issuance.

Companies will have four years to comply with the new rules. The panel published interim recommendations last September.

Israel's conglomerates have been partly blamed for driving up prices of basic goods, leading to mass protests last summer which are expected to resume in coming weeks. The government is also under pressure to stem the tide of debt settlements due to their impact on pensions.

"Today we are talking about concentration, but a very important factor related to increased competitiveness is imports," Bank of Israel Governor Stanley Fischer said. "We must continue to liberalise imports -- that is the best way to increase competitiveness in the economy."

WHAT TO KEEP, WHAT TO SELL

According to the recommendations, companies cannot hold a bank or other financial firm with assets above 40 billion shekels ($11 billion) as well as a non-financial company of more than 6 billion shekels or revenue.

As a result, the IDB Group would have to divest Clal Insurance or other key holdings such as Cellcom , Israel's largest mobile phone operator. And Delek Group would have to decide between keeping insurance company Phoenix and brokerage Excellence Nessuah or its massive fuel business -- which includes a number of offshore natural gas wells.

Also, private equity firm Apax Partners would need to choose between food maker Tnuva or the Psagot brokerage.

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"This report is not intended as an attack on the business sector. Everyone realises that the economy cannot be managed on the basis of government production alone," said Fischer.

"We have to rely on the business sector, but must ensure that it operates efficiently and without influencing the political system."

Earlier this month, IDB said it planned to merge two of its intermediate holding companies to simplify its pyramid-type structure and reduce costs. Discount Investment Corp would buy the portion of Koor Industries it does not already own.

($1 = 3.77 shekels)

(Additional reporting by Tova Cohen; Editing by Helen Massy-Beresford)

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Keywords: ISRAEL ECONOMY/COMPETITION