Bezeq Takes a Hit as Communications Minister Approves Huge Rate Cut

Just before he steps down, Communications Minister Yoaz Hendel announces plan for 40% rate cut for landline phone service

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Bezeq fiber optic infrastructure
Bezeq fiber optic infrastructureCredit: Ronen Toppelberg

As days go, Tuesday couldn’t have been worse for Bezeq, Israel’s dominant telecommunications provider.

First, the Communications Ministry said it would back arch-rival Hot Telecom’s plan to buy the fiber-optic network provider IBD. Then the ministry announced it would be holding hearings to slash rates of Bezeq’s key landline telephony service by 40%.

Shares of Bezeq tumbled 12% over Tuesday and Wednesday in heavy trading to end at 3.44 shekels ($1.04) on the Tel Aviv Stock Exchange. More than a billion shekels was wiped off the company’s market capitalization in a single stroke.

“We are coming out today with a move designed to right a long-suffered consumer wrong that affects every household in Israel, in which we are revising Bezeq’s controlled fixed line telephone prices downward,” Communications Minister Yoaz Hendel said in a statement.

Analysts said the rate-cut decision was politically motivated. Both it and the IBD decision were taken just as Hendel readies to step down as minister after Defense Minister Benny Gantz fired him for joining Gideon Sa’ar’s new political party.

In any case, the rate reduction is still subject to a hearing before it is implemented, and with Hendel leaving, it may never happen. The ministry announced a similar hearing three years ago, but it never took place.

However, if the plan does move forward, the ministry said it would lead to a 40% reduction in monthly payments for telephone subscribers, from 50 to 60 shekels on average (including value-added tax) to 30 to 40 shekels. The change is expected to save the public 400 million shekels annually, it estimated.

While per-minute costs are being slashed, too, the biggest hit for Bezeq will come from the proposed drop in the fixed line monthly charge from 57.92 shekels to just 24.36 shekels, including VAT. That’s because many Israelis pay for a home phone line but almost never use it. They pay little more than the monthly fixed rate, generating big profits since Bezeq provides almost no service.

In fact, the ministry’s decision, which marks the first adjustment on landline tariffs in 17 years, was based on an analysis led by Prof. Reuven Gronau and ministry Deputy Director General Ofer Raz-Dror, which concluded Bezeq was earning excessive profits from landlines.

The decision comes as a rude surprise to Searchlight, the U.S. investment fund that in 2019 bought a 60% in B Communications, Bezeq’s parent company (Israeli David Fuhrer simultaneously bought another 11%). Only two days before, BCom had increased its stake in Bezeq, buying 40 million shekels in stock. BCom shares plunged 20% on Tuesday and Wednesday.

In response to the rate cut, Tomer Raved, BCom’s CEO, warned that ultimately the consumer would suffer from the rate cut because telecoms companies would not have the resources to invest in infrastructure and that foreign investors would be deterred from entering the Israel industry.

Eran Jacoby, CEO of Rosario Research & Consulting, said it was no coincidence that Hendel made his dramatic announcement just as he is leaving office.

“This is the second time in the past decade that a minister on his final day in office decides a major reform that no one had spoken about at all,” Jacoby said. “Gilad Erdan did the same thing with the reform of the wholesale market just before he quit. It only shows that all these decisions are political, not professional.”

Jacoby said the politicization of communications policy demonstrated the need to dismantle the ministry and replace it with a professional agency. He hinted that the rate cute announcement was simply aimed at getting votes before the widely expected election early next year.

Jacoby agreed that moves like the sudden rate cut would deter overseas investment. “We have foreign investors that have returned to the industry after years of avoiding it because of regulatory issues,” he said. “Now we’re showing them again that instead of managing the industry normally, it’s being used as a political tool. Investors are paying the price for a minister’s decision. It’s doing real damage.”

Liran Lublin, head of research at IBI Investment House, said Bezeq generated 1 billion shekels of revenues annually from landlines. “So a 400 million reduction is dramatic, if the plan is implemented,” he said.

Lublin noted that Bezeq only recently approved the deployment of fiber optics at a huge cost. “Now the Communications Ministry is pulling the rug out from them. It’s suddenly created a hole of hundreds of millions shekels. The question now arises as to how Bezeq will operate.”

“Bezeq was making excess profits in landline telephones and this had to be addressed. But is that the way? Should it be done like this? All at once and just before the minister leaves office?” he asked.

The approval for Hot to buy a stake in IBC still requires the backing of the Competition Authority, but it moves the process a critical step closer to fruition.

Hot wants to buy a 23% in IBC, whose network competes with Bezeq’s, and a smaller one operated by the cellular provider Partner Communications, for 175 million shekels. The remainder of IBD is owned by Cellcom Israel, the Israel Infrastructure fund and Israel Electric Corp. The ministry’s approval is conditional on IBC increasing its coverage to 1.7 million households from 1 million now, and doing it in five years rather than 10.

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