Taking Stock / What Ben-Dov's takeover of Partner won't cause
The business sector has been rustling like mad: Ilan Ben-Dov, a man who came out of nowhere and became a multi-millionaire, an importer of Samsung cellphones who in recent years developed leanings toward spiritualism and peace on earth - this is the man who won the tender to buy the controlling interest in Partner Communications, with a bid of NIS 5.3 billion.
In his sprint to conquer the cellular peak, Ben-Dov ran over two hardened long-haulers: Shaul Elovitch, importer of Nokia devices and owner of Eurocom and 012 Smile, and Ishay Davidi, the alpha boss at FIMI, the best investment fund in the land.
Ben-Dov was prepared to do a very great deal in order to win Partner. He undertook to pay the seller, the Chinese company Hutchison Whampoa, a NIS 500 million fine if he failed to obtain the requisite regulatory permits to consummate the deal. He also deposited $25 million up front, on the account as it were, which he won't get back if the deal goes sour.
From his perspective, buying Partner is a giant step forward. Twenty years ago, Ben-Dov was a small-time businessman. Soon, assuming he can wrap up financing for his buyout, he'll own one of the more prominent emblems of Israel's business scene.
Nochi Dankner, who controls the IDB group - and who has been Ben-Dov's stated model for emulation - sent his congrats. He said the deal had been priced low and wished his new competitor success. IDB owns competitor Cellcom.
Partner has only one other real rival, Pelephone, a subsidiary of Haim Saban's company Bezeq.
Dankner and Saban have good reason to be fond of the cellular sector, and to welcome Ben-Dov to the arena. All three, Dankner, Saban and Ben-Dov, know perfectly well that three things will not arise from this gigantic deal: Competition will not ensue. Prices will not drop. And, customer service will not improve.
What Ben-Dov is buying from Hutchison is one of the three companies that received franchises from the state to charge Israelis what we can fairly call "cell tax," amounting to NIS 20 billion a year. Minus the companies' costs, the three companies remain with operating profits of about NIS 4 billion a year.
This is a regressive tax. It hurts the poor more than the rich, let alone the workers who get reimbursed for their communication costs.
True, nobody forces the public to use cellular phones. But in 2009 it's become a staple for most people, just like television or personal computers. Maybe more so.
Ben-Dov, Dankner and Saban, and their managers, have no reason to compete with one another. The cellular market is saturated, the companies are highly profitable. All that remains is for the cellular service providers to ally in order to quash any sign of nascent intention to introduce competition.
An indication of the degree of competition and risk in Israel's cellular market, under the present regulatory regime, can be found in Cellcom's equity structure. (Partner can expect much the same under Ben-Dov.)
Both companies will be financing all their investments, activities and balance sheets with loans, totaling as much as NIS 6 billion. Their safety cushion is very thin, a mere few hundred million shekels.
The banks and investors in the cellular companies' bonds don't demand thicker padding because they figure it's a safe business, free of competition. The cellular companies are mints for their owners, and low risk, too.
It isn't cheap to join the club of cellular taxers. Dankner, who owns Cellcom, may say Ben-Dov isn't paying much. But the fact that Ishay Davidi of FIMI, the most liquid and experienced of the contenders for Partner, thought otherwise and opted out of the race speaks for itself. Ben-Dov paid full price.
How to pay for it? Borrow billions from the banks and public, as well as using the roughly billion shekels in Scailex's bank accounts. Ben-Dov bought Scailex using borrowed money too.
Ben-Dov is highly experienced in borrowing. During the boom years he borrowed hundreds of millions of shekels from the public to build the real estate empire controlled by his company Tao Tsuot.
Come the crisis, Tao lost its way and started racking up huge losses. Ben-Dov took advantage of the sorry situation to buy back, on the cheap, some of the bonds he'd issued.
In other words, Ben-Dov knows how to ride the capital market waves, be the tide high or low. Heavy leverage to buy Partner doesn't deter him. It may even attract him.
Ben-Dov is a skilled entrepreneur who thrives in the Israeli jungle, and is faithful mainly to himself. The ones who need to look out for the public interest are the regulators, led first and foremost by Communications Minister Moshe Kahlon. And the institutional investors, of course, which bought Ben-Dov's bonds for the public's portfolios. If Kahlon and the institutionals fall down on the job, the public will be paying for the Partner deal twice: through their cellular bills, and later, through their lower pensions.
Kahlon has to gird his loins, strap on his sword and take on the giants, forcing competition down their throats by whatever means it takes. The managers of the institutional investors have to make sure that the interest rates and securities they demand in exchange for lending to these enormously leveraged businessmen compensate their clients for the risk.
The high level of leverage in the cellular market will make it all the harder for Kahlon to introduce competition.
That's because the stressed company owners will be all the more aggressive in their battle against consumers (and they'll be cheered on by their bankers, too).
Worse - the concentration of power in the banking sector will make it even harder for new cellular players to set up shop. The banks won't welcome potential detraction from the profits of their cellular borrowers.
Meanwhile, the regulator committed an oversight that's concentrating power in the banking sector even more.
The managers and owners of Israel's banks and insurance companies are pulling every string they can in the corridors of power to enable cross-holdings of banks and insurance companies. Why would they want that? To quash competition. To make sure no new players can join the game and start grazing on their lawns.
When serving as chairman of the Knesset Economics Committee, Kahlon loudly touted the cause of reducing bank service fees. His battle didn't achieve much. The cartelistic structure of the banking system precluded any real change. The cellular market is simpler. It is free of considerations such as stability, and is starving for competition.
But first Kahlon has to make a tough decision. Is he on the side of seven rich investors, or one the side of 7 million Israelis with cellphones? Like we said, it's a tough one.
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