Cellcom Israel said Thursday it had agreed to buy its upstart rival Golan Telecom in a move that quickly set off a hail of criticism from politicians and media outlets who said it would weaken the stiff competition that has caused the cost of cellphone plans to tumble in the past three years.
Cellcom said it would pay 1.17 billion shekels ($301 million) for Golan. The low-cost wireless carrier had been the main catalyst for pushing down prices in the sector, which in turn pressured profits and lost customers for Cellcom and its two veteran rivals, Partner Communications (Orange) and Pelephone.
The takeover must be approved by the Antitrust Authority and the Communications Ministry. Meanwhile, Finance Minister Moshe Kahlon, who had led the 2012 reform, voiced strong opposition to the proposed tie-up.
“Approving the deal will be a serious blow to competition in the cellular market and will lead to rising prices,” Kahlon said in a letter to the Antitrust Authority hours after the deal was announced. He noted that Cellcom, Israel’s biggest mobile operator, would control 40% of the market after the takeover.
Cellcom shares ended down 2.7% to 28.50 shekels on the Tel Aviv Stock Exchange, which reflected concerns about its financing of the deal.
The acquisition values Golan at 40% of Cellcom’s market capitalization and will be financed by issuing 400 million shekels of its shares to Golan’s shareholders, led by the French businessmen Michael Golan and Xavier Niel. An additional 200 million shekels will come from issuing new shares, with the rest financed internally.
But other telecom stocks rallied on the news. Partner jumped 8% to 19.06 and Bezeq, Pelephone’s parent company, rose 2.1% to 8.18.
Investors reasoned that the takeover would lead to higher rates and valuations for the cellphone industry. Analysts at Halman-Aldubi Investment House estimated that monthly bills would increase by 10 shekels for every customer, raising the carriers’ valuation by 30%.
“In the short run, Partner is expected to do better than Cellcom. The bottom line is that Celcom made a strategic move and is paying a high price to eliminate a company that was a nuisance to the telecommunications market,” explained Liran Lublin of IBI Israel Brokerage & Investments.
Launched in 2012 when the government issued new licenses to boost competition and made changing providers easier, Golan today has about 900,000 subscribers versus Cellcom’s 2.85 million. Golan is expected to end 2015 with revenue exceeding 500 million shekels and adjusted earnings before interest, tax, depreciation and amortization of 204 million shekels.
On Thursday both companies talked about the synergies of a tie-up that would keep Golan as a stand-alone brand in the Cellcom group.
“The acquisition of Golan Telecom will allow us to add a low-cost brand to our portfolio,” Cellcom chairman Ami Erel said. In a presentation, Cellcom said it would benefit from operating efficiencies, widen its subscriber base and sell more smartphones.
Michael Golan said it would make Golan, which in August hired an investment bank to explore options including putting the company up for sale, financially stronger.
“The company will continue to compete independently and offer the public attractive deals and packages,” he promised. It would also save Golan 600 million shekels it owes Cellcom, on whose network it has been piggybacking its services.
The Communications Ministry said Thursday it would examine the proposed merger together with the Antitrust Authority once it received the documents.
Communications Ministry Director General Shlomo Filber has said he is not opposed to mergers, as long as there is enough competition and no negative impact on infrastructure. Right now there is no antitrust commissioner, which could hold up any clearance from that body.