Keystone Resets Its Structure: Management Fees Are on the Way Out, but Dilution and Control Are on the Way In

Why This Matters Now

After 2025 showed that Keystone can unlock value inside Egged and Keystone Power, the April 15 notice shifts the argument to a different question: who controls the pipe that connects that value to public shareholders, and how much it costs to remove the external manager from the middle.

This is not just a governance debate. It is an economic one. Keystone ended 2025 with NIS 941.8 million of net profit, NAV before tax of NIS 18.1 per share, investment value of NIS 4.658 billion and equity of NIS 3.044 billion. But those numbers were driven mainly by fair value gains, while dividend, interest and loan-repayment income was almost flat at NIS 236.7 million, and operating cash flow fell to NIS 119.9 million.

That is exactly the kind of backdrop in which external management fees start to look expensive. The current agreement is linked to asset value, so as the portfolio grows and marks move up, the fee grows as well, even before more cash actually reaches shareholders. In 2025 management fees rose to NIS 40.6 million, up from NIS 34.7 million in 2024 and NIS 31.1 million in 2023.

But anyone looking only at the savings headline is missing the price. The proposal includes an approximately NIS 52 million injection into a new subsidiary, a 5% post-merger equity issuance to the management company, a fixed deal price of NIS 12.425 per share, new articles, and the conversion of Biram, Deutsch and Bar from de facto controllers through contractual rights into a formal control bloc with more than 25% of the vote.

What Is Actually Being Put to a Vote

The proposal going to shareholders on May 20 has several moving parts, and all of them matter:

One more point matters: during the interim period Keystone will no longer pay the full management fee. Instead it will reimburse the employment and operating cost base. If the merger closes, the management company gets only a top-up for the chairman and CEO under the new compensation terms. If the merger fails because of the tax ruling, the compensation mechanism changes again. In other words, the economics already begin to shift before full completion.

What Keystone Is Buying for Itself

The strategic logic is easy to understand. The current management agreement expires in June 2026, and it is not just costly, it is loaded with value-linked rights. The management company is entitled to fees based on asset value, and also to options equal to 5% of any future share issuance. That structure makes sense for a young platform trying to scale quickly. It becomes harder to defend when the company already carries a NIS 4.658 billion portfolio and is moving into a heavier development phase inside Keystone Power, Sorek and data centers.

So Keystone’s logic is straightforward: stop paying an external manager on value that has not yet turned into accessible cash, bring management in-house, and pre-empt part of the compensation structure that would otherwise open up if the old agreement reached renewal or termination under a different setup.

The fairness opinion presents that case clearly. Depending on the scenario, the gross economic saving ranges from NIS 106 million in an immediate-termination case to NIS 283 million in a long-duration case running through 2035. Even after internal-management replacement costs, the high-level picture remains positive.

But that is only half the calculation. The move is not being judged in a world of savings only. It is being judged against what Keystone is paying to buy that freedom.

Where the Price for Shareholders Starts to Look Heavy

This is the core of the argument.

The fairness opinion puts the net economic cost of the issued shares, after deducting the additional NIS 52 million, at NIS 70 million to NIS 101 million. That range is built off three reference points: the 60 day average share price, the 5 day average share price, and book equity. On the 60 day basis, the 5% block is valued at NIS 126.9 million, and the net cost falls to NIS 69.9 million after deducting the additional amount. On the 5 day basis the net cost is NIS 87.6 million, and on the book-equity basis it is NIS 100.8 million.

The problem is that the deal itself is fixed at NIS 12.425 per share, based on the 60 trading days through March 15, 2026, and will not adjust upward even if the stock keeps rallying before closing. Keystone closed April 17 at NIS 22.5 per share. That is no longer theoretical. On a rough current-market basis, using a market cap of NIS 4.599 billion, a 5% post-issuance block would imply about NIS 242 million gross, or about NIS 190 million net after deducting the NIS 52 million contribution. That is a very different economic read from the one embedded in the fairness opinion.

So the higher the stock stays before completion, the more expensive the deal becomes for existing shareholders, while the consideration paid to the management company remains locked to an older and much lower reference price.

There is also a control shift here. Until now Biram, Deutsch and Bar were considered controllers because of the special rights embedded in the management agreement. After the move they are meant to become a visible control bloc with more than 25% of the voting rights based on actual shares rather than contractual power.

That matters for two reasons.

First, the company is not only cancelling a fee line. It is rebuilding the power layer. Second, the new articles remove not only the old management-company mechanics but also some of the existing constraints around ownership and distribution policy. In practice Keystone is buying itself more freedom. The real question is who benefits from that freedom first: public shareholders or the newly formalized control group.

Why This Is Happening Now

The timing is not random. 2025 was a year of value creation, but not a year that solved Keystone’s old problem: the gap between asset value and accessible cash.

Cash income did not grow. Operating cash flow weakened. Net financial debt rose to NIS 1.231 billion. At the same time Keystone moved deeper into projects where capital stays inside for longer, including Sorek, Hagit 2, Atarot and 100 MW-IT of data centers.

In that kind of structure, an external management agreement that charges on asset value rather than accessible cash becomes harder and harder to justify. From Keystone’s perspective, this is the natural moment to buy flexibility before June 2026 arrives, before the old agreement’s compensation mechanisms open fully, and before another layer of development funding is needed.

Approval odds also look meaningfully stronger than in a normal related-party vote. Altshuler Shaham with 19.6%, Clal with 7.83% and Avraham Rubinstein with 10.43% already support the framework and are not treated as personally interested parties on the agenda. That does not make the vote automatic, but it does mean the process already went through a real institutional negotiation track.

What Has to Happen Next

The test of this move will not be whether Keystone stops paying external management fees. That is the easy part. The test is whether it can do something with the new freedom that actually improves public-shareholder economics.

That means four things:

1. The May 20 meeting has to pass, including the special majority for the articles amendment.
2. The tax ruling has to come through without burdensome conditions that delay or hollow out the transaction.
3. The company will need to show that internal management does not just replace a service provider, but actually improves capital allocation and the speed at which cash moves upward.
4. The market will need to become comfortable that the price paid to the management company is not too high relative to the saving, especially if the share price remains far above the March reference level.

In that sense Keystone is now entering a new phase. Less of a fund with an external manager, more of an infrastructure holding company with clearer control, wider room to maneuver, and more direct responsibility. That can be very good for the company. It is not automatically as good for the public float if the price paid along the way proves too high.

Conclusions

This is not just a cost-cutting move. Keystone is trying to buy itself managerial and capital-allocation freedom at a point where its portfolio is larger, more complex and more dependent on long-duration development. In that sense, the direction is understandable.

But the real economics are more complicated than the headline. The saving at company level looks real, especially if the old management agreement would otherwise have stayed in place for years. On the way there, however, Keystone is giving the management company 5% of the equity, fixing the deal price off a share that now looks meaningfully too cheap, and converting contractual control into a formal equity control bloc.

That makes the right reading of the move a double reading. On one side, Keystone is removing a friction layer that had started to grow too quickly relative to accessible cash. On the other, it is transferring real value, not just accounting value, from the public to the management company and its owners. If the company can turn the new freedom into more accessible cash, the market may absorb the price. If not, what looks like a structural improvement today may ultimately be remembered as an expensive dilution deal.