Bezeq Quietly Readying the Way to Create an Israeli Telecom Giant

Company will fully unite operations of Pelephone, Yes and Bezeq Int’l

Bezeq headquarters in Tel Aviv, Israel, June 21, 2017.
Amir Cohen/Reuters

Bezeq is quietly planning one of the biggest business undertakings in Israel today – to create a giant telecommunications group, indeed Israel’s biggest measured by revenues, by joining the operations of its three of its biggest subsidiaries.

Project Alpha, as the plan is being called internally among Bezeq executives, would unite subsidiaries Pelephone (cellular telephony), Yes (satellite television) and its Bezeq International (internet and international calling) into a single a group.

The group would be bigger than Bezeq itself, which provides landline telephony service.

TheMarker has learned that the process, which got underway last year, will come to its full fruition during 2020. After considerable research, Bezeq officials decided that Yes will be the lead brand for the group with Bezeq International and Pelephone serving as sub-brands.

Israel’s biggest and oldest telecoms company, Bezeq has been contending with a rapidly changing market and stiffer competition. Its efforts to compete have been hamstrung by the fact that it still lacks clear ownership after Shaul Elovitch ceded control in the face of police and securities investigations and mounting debt.

The entry into the market of a major old-new player will inevitably reverberate through the telecoms market, where Bezeq’s rival have also been struggling with the intense competition and facing big changes.

Cellcom Israel, the country’s biggest mobile operator, is weighed down by huge debt and is due to begin big layoffs. Partner Communications, Cellcom’s No. 2 rival, is going through a change in ownership after the Israeli-U.S. media/entertainment entrepreneur Haim Saban said he would give up his shares. Hot telecom is looking to merge.

Consumers have already seen the first signs of the tie-up, with Bezeq for the first time offering them so-called triple play packages of multichannel TV, internet infrastructure and phone service led by the Yes brand name. The package will soon be expanded to include cellphone service via Pelephone.

Yes itself is scheduled to undergo a major shakeup by the end of this month when it begin offering internet TV under its own name, instead of under the Sting brand name as it has until now. Eventually the plan calls for dropping Yes’ core satellite TV service altogether in 2026.

Bezeq’s Walla website and its retail unit are not part of Project Alpha and Bezeq has said in the past its plans to sell the two businesses.

Project Alpha grew out of Bezeq’s frustration with trying to remove a government ban on its merging its subsidiaries into its parent company. The so-called structural separation the Communications Ministry demands had prevented Bezeq from competing with Cellcom, Partner and Hot, which can offer customers all-inclusive packages and enjoy lower costs.

The ban will eventually be dropped, but not anytime soon. The Communications Ministry recently told the High Court of Justice in an lawsuit filed by Bezeq that the company had not fully implemented the competitive reforms it has set as a condition for ending structural separation.

Regulators would not countenance a full merger between three three subsidies any more than it would a merger into the parent company. As a result, Bezeq has decided via Project Alpha to join its three key subsidiaries operationally and benefits from the synergies.

Another factor that created an obstacle to the three units tying up was internal rivalries. All three have been in business as separate entities for 20 years or more, and have strong brand names. Their managers guarded their respective turfs jealously. As long as the market wasn’t overly competitive, they could charge premium prices; Package deals could have inevitably seen price erode.

But the market is no longer like that. Pelephone is barely breaking even and its prospects for boosting average revenue per user, or ARPU, an industry benchmark, are poor. Yes is in even worse financial trouble. Bezeq International’s business is in decline.

Even with the tie-up and the triple play packages they offer, the three units still face regulatory restrictions their rivals don’t, for instance discounts on regular rates for the individual services, As a result, the triple play package offered by Yes is 199 shekels a month, versus 139 and 159 shekels at Partner and Cellcom, respectively.

In any event, the combined companies will be Israel’s biggest telecoms group. Taking their combined revenues for 2018, the Prject Alpha group would have had revenues that year of 5.3 billion shekels, compared with 4.2 billion for Bezeq the parent company. Hot telecom had revenues of 3.99 billion shekels.

They have a combined workforce of about 5,600 people, more than twice that of Partner, for example. The companies have not downsized to the degree their competitors have plus they occupy expensive office space. As part of the Alpha Project, Pelephone will move from Givatayim to smaller, more modest offices in Petah Tikva. However, there are no plans to consolidate their headquarters into one location.

The executive behind Project Alpha is Ron Guron, who has held a series of high-level jobs in the Bezeq group, including CEO of Pelephone since 2015. As part of the tie-up, he was also named CEO of Yes and Bezeq International and has formed a joint management team for the three companies. He began working on the tie-up a year ago.

Shlomo Rodav, who has been Bezeq chairman since April 2018, is the person who originated the idea and has been its driving force.

In his time in office he has focused on housecleaning at Bezeq, taking 3.5 billion shekels in charges, laying off staff and dropping new business ventures. But Rodav has not sought to taken any positive steps for the parent company, which is coping with declining revenues and 36% decline in its Tel Aviv Stock Exchange-traded share price since the start of this year.

That may come when regulators approve a new ownership group for the company, comprised of the U.S. investment fund Searchlight and Israeli David Fuhrer. Searchlight and Fuher have given their backing to Project Alpha.

People involved in Project Alpha warn that the plan is complicated and laden with risk. In ordinary mergers, the financial benefits are immediate and apparent. Project Alpha won’t yield any immediate financial gains for the Bezeq group until it either leads to lower costs or increased revenues,

The biggest risk, they said, is that the management group will struggle to lead such a big operation and the disappearance of such well-known brand names. Pelephone’s name is synonymous with the Hebrew word for cellphone.

Cutting costs is a major challenge Project Alpha is only beginning to address now. Bezeq International and Yes have reached agreements with unions on combined staff reduction of close to 650. If Pelephone follows through with layoffs on the same scale – about 20% of payroll – it will be letting go of about 500 employees.

On the management level, more and more executive functions are being taken over by a single person for all three companies, for example in the area of procurement.