This is an English convenience translation from the original Hebrew version.
 In the event of any discrepancy, the Hebrew original is the binding version.

Further to the Company’s Immediate Report dated 27.6.2011 (reference no.: 2011-01-193941) regarding negotiations that the Company is conducting with Leumi Partners Ltd. (“Leumi”) through Petrochemical Investments (2006) Ltd., a wholly owned subsidiary of the Company (“Petrochemical Investments”), jointly with the other controlling shareholders of Avgol Industries (1953) Ltd. (“Avgol”), excluding Mr. Nir Peleg, the Company hereby announces that, on 29.6.2011, an agreement was signed and consummated between Petrochemical Investments, Mr. Joshua Goldwasser and Music-Net Ltd. (jointly: “Goldwasser”), Mr. Achai Bonneh and Achai Bonneh Holdings Ltd. (jointly: “Bonneh”), Mr. Abraham Zilberfeld and Avzil Holdings Ltd. (jointly: “Zilberfeld”) and Leumi (“the Leumi Agreement”), whose principal provisions are as follows:

1.1 Petrochemical Investments, Goldwasser, Bonneh and Zilberfeld (jointly: “the Sellers”) sold a total of 34,253,163 shares of Avgol to Leumi, which constitute 11.50% of Avgol’s share capital (11.26% on a fully diluted basis). Out of the above quantity, Petrochemical Investments sold 14,892,680 shares of Avgol to Leumi, which constitute 5.00% of Avgol’s share capital (4.89% on a fully diluted basis).

1.2 Additionally, the Sellers granted Leumi an option to purchase 25,317,555 additional shares of Avgol, constituting 8.50% of Avgol’s share capital (8.32% on a fully diluted basis). Out of the above quantity, Petrochemical Investments granted Leumi an option to purchase 5,957,072 additional shares of Avgol, constituting 2.00% of Avgol’s share capital (1.96% on a fully diluted basis).
The option is exercisable by Leumi at any time during a period of 36 months commencing as of the transaction closing date. The option shall be exercised vis-à-vis the Sellers on a pro rata basis among them. The option exercise price is NIS 3.25 per share, after deducting any distribution that Avgol might execute between the transaction closing date and the relevant exercise date, without any linkage (“the Exercise Price per Share”).
The Leumi Agreement contains provisions prescribing various adjustments to the option shares in the event of technical changes in the share capital (e.g., capital consolidation and distribution), the distribution of bonus shares, a merger, etc. The Leumi Agreement also prescribes that Leumi may choose (and if Leumi does not choose, Petrochemical Investments may so choose) to exercise the option according to a “cashless” mechanism; i.e., that in lieu of the underlying shares, Petrochemical Investments shall transfer, for no consideration, that number of shares whose value on the exercise date shall be equal to the number of options resulting from the difference between their market price and the exercise price.
It was further agreed that the Company shall be the guarantor for all of Petrochemical Investments’ undertakings pertaining to the said option it granted to Leumi.

1.3 In consideration for the sale of the said shares and the granting of the said options, Leumi paid to all of the Sellers together a total of NIS 109,610,122. Out of this total, the sum of NIS 47,656,576 was paid to Petrochemical Investments.

1.4 The Leumi Agreement prescribes that for as long as Leumi holds at least 9% of Avgol’s equity, Leumi shall be entitled to appoint one director of Avgol, and, subsequent to exercise of the option vis-à-vis the Sellers in its entirety, whether by way of an ordinary exercise or via the cashless mechanism, Leumi shall be entitled to appoint an additional director on its behalf. Leumi’s right to an additional director shall expire if its holdings of Avgol shall drop below a ratio of between 10% and 15.5% (the ratio varies depending upon the option exercise method ¬– ordinary exercise, via the cashless mechanism, or a combination thereof).

1.5 The Sellers undertook in the Leumi Agreement to make use of all means of control they possess in order to cause Avgol to maintain its dividend distribution policy, whereby it shall distribute a dividend annually at the rate of 50% of the net annual profit, all being subject to the statutory provisions and Avgol’s cash flow needs.

1.6 As long as Leumi holds at least 9% of Avgol’s equity, and subject to the statutory provisions, the Sellers undertook in the Avgol Agreement to make use of all of their means of control in Avgol so that no resolution relating to various matters in which Leumi has minority protection shall be put to a vote by Avgol’s Board of Directors and/or by Avgol’s General Meeting without receiving Leumi’s prior written consent.

1.7 In the Leumi Agreement, Leumi was granted the right to tag along in a transaction for transfer of control over Avgol from the Sellers to a third party, or in a transaction for the sale of half or more of Petrochemical Investments’ holdings to the other Sellers, according to the mechanism prescribed in the Leumi Agreement.

1.8 In the event that the Sellers shall engage in an agreement with a third party for the sale of all of their holdings of Avgol, or if a full tender offer shall be submitted for the purchase of all Avgol shares, they shall be allowed to force Leumi to sell all of the Avgol shares that Leumi had purchased within the scope of the agreement to that third party, subject to the guarantee of a particular return to Leumi in respect of its investment, and subject to additional conditions specified in the Leumi Agreement.

1.9 If, during a period of 18 months after the transaction closing date, the Sellers shall engage in a transaction for the sale of shares or options of Avgol to any third party (other than within the scope of an exercise of the phantom share option as stated hereunder in clause 3.1), or if Avgol shall undertake during the said period to carry out a transaction for a sale, offering or allotment of shares or options at a share price that is lower than the price of the present transaction, then Leumi shall have the right to receive price-adjustment compensation from the relevant Seller, or shares of Avgol for no consideration, at the quantity that shall be equivalent to the total price-adjustment compensation that would be due to Leumi.

2. Further to the Company’s Immediate Report of 27.6.2011 (reference no.: 2011-01-193941) regarding Petrochemical Investments’ engagement in an agreement with Mr. Nir Peleg (“Peleg Agreement”), under which Peleg granted Petrochemical Investments a right to purchase all of his Avgol shares, the Company hereby announces that, on 29.6.2011, Petrochemical Investments gave notice that it was exercising its right by virtue of the Peleg Agreement to purchase all of Mr. Peleg’s shares of Avgol, being 5,625,000 shares of Avgol, which constitute 1.9% of Avgol’s share capital, at the price of USD 0.519 per share, for a total consideration of USD 2,919,375. Pursuant to the Peleg Agreement, the Peleg Agreement is expected to be consummated within three business days of the date of the exercise notice.
Subsequent to the exercise of the right vested Petrochemical Investments by virtue of the Peleg Agreement, and subsequent to the consummation of the Leumi Agreement, Petrochemical Investments shall hold 70,716,960 Avgol shares, which constitute 23.74% of Avgol’s share capital (23.24% on a fully diluted basis).

3. Concurrent with the signing of the Leumi Agreement as specified above in clause 1, Petrochemical Investments engaged with Goldwasser, Bonneh and Zilberfeld in a deed of amendment (“the Deed of Amendment”) to the agreement dated 21.5.2006 (as revised and amended from time to time), between the Company and shareholders of Avgol, under which the Company, through Petrochemical Investments, had purchased shares of Avgol Ltd. and which regulated the relationship between shareholders of Avgol Ltd. (“the Petrochemicals Agreement”).
The principal provisions of the Deed of Amendment, which was signed and has come into effect, are as follows:

3.1 In addition to the phantom share right by virtue of the Petrochemicals Agreement,  Petrochemical Investments was vested the right, within the scope of the Deed of Amendment, to purchase from Goldwasser, Bonneh and Zilberfeld 62,056,670 Avgol shares that are owned by them and are subject to the phantom share right (which constitutes approximately 20.83% of Avgol’s share capital – approximately 20.39% on a fully diluted basis), for the consideration of the price of the phantom share right, which is currently USD 0.519 per share and is dividend adjusted (“the Share Purchase Right”).
For details about the phantom share right by virtue of the Petrochemicals Agreement, see clause 9.1 (d) of the Company’s Periodic Report for 2010 (reference no.: 2011-01-105066).

3.2 Goldwasser, Bonneh and Zilberfeld undertook that, during a period of 36 months commencing as of the transaction closing date, they shall not sell their Avgol shares that are subject to the Share Purchase Right.

3.3 The parties to the Deed of Amendment reciprocally waived vis-à-vis the other parties the right of first refusal and/or the tag-along right vested them (to the extent vested), in relation to a sale of the shares and/or a granting of the options (and/or the exercise thereof), that are the subject of the Leumi Agreement.

3.4 Petrochemical Investments shall not be entitled to exercise its phantom share right in relation to any of the shares being sold to Leumi pursuant to the Leumi Agreement, or any of the shares that pertain to the option granted to Leumi in the Leumi Agreement.

3.5 As of 31.8.2011, Goldwasser, Bonneh and Zilberfeld shall be entitled to sell Avgol shares from time to time to a third party, without Petrochemical Investments exercising its phantom share right in relation to those shares, provided that Petrochemical Investments shall receive notice of the sale of those shares, and provided that the entitled shareholder shall retain a quantity of Avgol shares that shall not diminish from that quantity of his shares that are subject to the phantom share right and to the Share Purchase Right (“Sale Exempt from the Phantom Share Right”).

3.6 With reference to a Sale Exempt from the Phantom Share Right relative to Bonneh and Zilberfeld, various provisions of the Petrochemicals Agreement were amended, which relate to the right of first refusal granted to Petrochemical Investments and Goldwasser during a sale of Avgol shares to a third party.

4. According to the preliminary examinations conducted by the Company, the Company expects to record a capital gain totaling approximately NIS 20 million as a result of the consummation of the Leumi Agreement, as specified above in clause 1. Furthermore, as a result of its receipt of the Share Purchase Right, as specified above in clause 3.1, and of its recognition of this right as an asset, the Company expects to record an additional gain (after deducting a tax reserve) at the sum of approximately NIS 65 million.
The Company’s assessments and estimates of its gains as specified above is forward-looking information, which is based on preliminary (unaudited) examinations of the accounting implications of the transactions specified above, as performed by the Company and its professional advisors, based on the information in their possession at this time, Therefore, there is no assurance that these assessments and estimates will prove to be accurate and the Company’s actual gains might differ materially.

Sincerely,

Israel Petrochemical Enterprises Ltd.