Israeli Cellphone Shares Plunge as New Price War Breaks Out

Hot counters Cellcom's new TV offering with super-cheap cellphone package.

Cellcom

Battered and bruised by the emergence of competition in their core mobile-phone business nearly three years ago, Israel’s cellphone companies now face a new onslaught that has sent their share prices into a tailspin.

Partner Communications lost another 5.0% on Monday, to end at 17.30 shekels ($4.37), bringing its loss over the past two days to 11.5% and its share price close to its most recent low of 15.50. Cellcom Israel dropped 4.2% to 28.91 shekels, leaving it with a similar decline of 11.5% over Sunday and Monday.

Behind the cellphone companies’ latest woes is last week’s launch of Cellcom TV, making the company the first new entrant into the broadcast television market in 15 years, which has been a duopoly split between Bezeq and Hot.

Cellcom’s opening offer to provide multichannel television at just 99 shekels a month – far less than the 250 shekels typically offered by Hot and Bezeq’s Yes satellite TV unit – immediately prompted a price war across different media.

Hot countered with a super-low cost cellphone package of two lines for just 40 shekels a month. Golan Telecom, an upstart cellular provider created during the 2012 cellular market shakeup, offered two lines for just 37 shekels. Both offer unlimited phone service.

Partner entered the fray, too, this week offering, through its 012 arm, a 39-shekel-a-month package, the rate guaranteed for a “lifetime.”

“Hot’s move was done, I believe, to signal to Cellcom and the market generally that whoever tries to attack its core [television] business will be ambushed in cellular telephony,” said Ori Licht, an analyst at IBI Israel Brokerage & Investments.

“Partner’s offer was limited to the first 10,000 new subscribers, but it has created a panic in the market. Until now, stock market investors took comfort in the fact that cellphone packages at least contained a mechanism for raising rates in the future. This offer raises concerns about further deals offered for the long term.”

Bezeq also stands to be hurt by the new competition, both through Yes – which stands to lose subscribers – and its Pelephone mobile unit, which may have to enter the price wars, too.

Bezeq shares closed 2.6% higher on Monday at 6.85 shekels, but that was after dropping 4.5% in the days before.

Even if Bezeq and Hot opt not to engage in a TV price war, they stand to lose subscribers to Cellcom and give the ones who stay more pricing power over providers, getting either reduced rates or forcing providers to give them for-pay channels for free.

For now, however, they are taking the high road, with Hot expanding its video-on-demand offerings to justify its higher subscription price and Bezeq launching a campaign – “Don’t compromise by taking less than Yes.”

The latest collapse of cellphone share prices also has implications for the capital market where Scailex, the company that once controlled Partner, owes bondholders some 923 million shekels, with much backed by Partner shares as collateral.

Under the Scailex bailout agreement reached last July, the Partner shares were valued at 27.34 shekels each, almost 40% more than their current price. If bondholders had to accept the shares in lieu of repayment, they could be taking a haircut that could reach as much as 360 million shekels.

Haim Saban, the Israeli media mogul and Partner’s controlling shareholder, is, meanwhile, looking at an 800 million-shekel paper loss on his holding.

Saban received a loan from Hutchison Communications – the Hong Kong company that controlled Partner until 2009 – to finance his buying of the shares. While the holding is only a small part of his portfolio, Saban could opt, under the terms of the loan, to hand over the shares to Hutchison rather than repay it, making the Hong Kong company once again Partner’s owner.