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Merrill Lynch today issued a Buy investment recommendation for Bezeq (TASE: BZEQ), though underscoring that its expectations for the third quarter of 2006 are not high.

"Overall, we are expecting stagnant top line numbers (both quarter over quarter and year over year)," write analysts Meloy Horn and Haim Israel.

Moreover, their 12-month price target of NIS 5.90 for the privatized phone company's stock is a mere 2.5% above its opening price on the Tel Aviv Stock Exchange Sunday morning.

But don't fixate on Bezeq's numbers, counsel the analysts: keep a beady eye on the negotiations between management and union representatives. "An agreement appears to be eminent" (sic), "which would allow management to deliver a revised strategy on cost cutting" (sic) "and restructuring to compensate for the stagnant fixed-line by and to increase shareholders' returns."

In short, the bank foresees that management may gain wiggle room to make serious cutbacks following an agreement with the powerful workers' union.

The analysts don't see Bezeq growing its numbers not only in the third quarter, but in the year 2006 either. However, they predict that subsidiaries Pelephone (cellular), Yes (satellite television) and Bezeq International (long-distance) will compensate for any drop in income from fixed-line communications.

Merrill Lynch predicts a consolidated NIS 2.87 billion revenue in the third quarter, as the subsidiaries compensate for a 4.7% drop in income from fixed-line communications.

The analysts also note expectations of strong communications growth in the third quarter because of the war in the north.