Israel’s Cellular Market Is Aboil After Hot Announces Surprise Accord With Golan

Spurned suitor Cellcom Israel says it will seek NIS 900 million in compensation as cellular shares tumble.

Golan Telecom's CEO Michael Golan at the company's offices in Tel Aviv.
Eyal Toueg

Israel’s cellular industry boiled on Monday after Golan Telecom announced a tie-up with Hot Telecom and Cellcom Israel said it would seek 900 million shekels ($233 million) in compensation from Golan for dropping a planned merger

Hot Telecom took Cellcom and the Israeli cellular industry by surprise on Friday by announcing it had signed an agreement under which its services would host Golan Telecom’s network for 10 years.

On Monday, Cellcom struck back saying the Golan-Hot accord violated the Share Purchase Agreement and National Roaming Agreement it had previously reached with Golan.

“Should Golan Telecom and its shareholders fail to remedy all such breaches within the time frame set in the agreement, [Cellcom] will take all actions available to it under the SPA, NRA and applicable law, against them,” it said.

The news sent cellular shares into a tailspin in Tel Aviv Stock Exchange trading on Monday. Cellcom, the company most directly affected by Golan’s about face, ended down 11.8% at 26.80 shekels but Partner Communications, its No.2 rival, finished down 6.1% at 18.61 and Bezeq, which controls the third big cellular operator Pelephone, was down 1.3% at 7.15.

Investors reason that the Golan-Hot deal upsets hopes for a gradual reduction in the competition that has weighed on the mobile sector since the government instituted reforms in 2012. Lower cellphone rates and higher subscriber turnover spurred by the competition have been a boom for consumers, but have saddled operators with higher costs and this year has pushed many of them into the red.

“We don’t rule out that the [agreement with Hot] will preserve the high level of competition for a longer time than previous forecasts had expected, because it will improve the cost structure of Golan and Hot,” said Sabina Levy, an analyst at Leader Capital Markets.

Gil Datner, a cellular stocks analyst at Leumi Capital Markets, said that Cellcom stood to lose significant fees it had been charging Golan for carrying Golan’s services on its network and that it would have trouble showing a profit without them.

Even if Cellcom were to get the first 600 million shekels of debt from Golan inside the 30-day deadline it has set, it would have little material impact on the value of the company, he added.

The debt is big enough to sink Golan Telecom, but in Friday’s statement Hot, which is owned by telecoms tycoon Patrick Drahi’s European cable group Altice, said it would make financing available to Golan to cover the liabilities to Cellcom

That said, none of the other relevant details of the deal – including the financial scope of the hosting agreement, the technology model, the size and conditions of the loan – were included in the statement to the stock exchange.

Cellcom, Israel’s biggest cellular company, had reached a 1.17 billion-shekel agreement to buy Golan late last year, but the Antitrust Authority rejected the move in April, saying it would undermine its efforts to introduce more competition to the market.

Since then, the fate of the merger has been unclear. Cellcom has said that the two companies were negotiating an agreement, subject to regulatory approval, that would allow Golan to continue to use Cellcom’s networks, much like the agreement Golan reached with Hot.

For its part, Golan said it was still hoping to challenge the antitrust decision. In the meantime, at least four groups were reportedly ready to buy the company.

Two questions remain about the Hot-Golan tie-up. One is whether regulators would agree to the arrangement, which would transform Golan into what the industry calls a mobile virtual network operator, or MVNO – a mobile provider without its own network. Golan’s license requires it to build one, but it hasn’t yet. The other is whether the agreement will eventually evolve into a full-fledged merger between the two companies.

The Antitrust Authority said at the time it rejected to Cellcom deal it not want to see Golan become an MVNO, which would weaken its competitive ability. Launched in 2012 and controlled by French businessmen Michael Golan and Xavier Nie, Golan has been the price leader in the market..

Leader’s Levy said she believed Golan’s ultimate goal was still to exit the market. On the other hand, she would not rule out “that the agreement with Hot is just part of the negotiation process with Cellcom that is meant to strengthen Golan’s bargaining position.”

Datner, of Leumi Capital Markets, said he thought regulators might even agree eventually to a full merger. “A deal that joins the No. 4 and No. 5 companies in the market is a lot easier to accept,” he said.