Golan Telecom Says It Is Seeking to Be Bought or Merge With Rival

Announcement sends mobile shares soaring amid expectations of industry consolidation.

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

Golan Telecom, the upstart company that played a key role in the shake-up of the cellular telephony market three years ago, said on Wednesday that it was in the market either to be acquired or buy one of its competitors.

“Golan Telecom shareholders are alert to a potential consolation similar to what is occurring in other markets around the world. The shareholders have given a mandate to an investment bank to prepare and examine options that could result in a sale, acquisition or merger so long as they leave Golan Telecom independent,” the company said in a statement.

The announcement set off a powerful rally in cellphone companies on the Tel Aviv Stock Exchange on expectations that the move signaled a retreat from the intense competition in the industry that has led to falling cellphone rates and declining profits – and even losses – for telcos. Partner Communications closed up 15.5% to 26.85 shekels and Cellcom Israel climbed 11.8% to 18.20.

Golan is closely held by an investor group led by the French-Israeli entrepreneur Michael Golan.

“This is huge,” Ilanit Sherf, head of research at Psagot Investment House, told Bloomberg News. “With a sale or merger, there will be less competition and the companies will be able to raise prices. The process will take some time, but it seems pretty reasonable that the Communications Ministry will support such a move.”

Israel’s mobile market saw an explosion of competition in May 2012 when then-Communications Minister Moshe Kahlon introduced rules that enhanced completion. Golan was one of a clutch of new entrants that stormed the market with low-cost packages, pressuring industry veterans Cellcom, Partner and Pelephone to cut their rates.

Since then, however, it has been difficult for operators to make money despite considerable downsizing by the big three. Two of the new players, YouPhone and Home Cellular, have dropped out in recent months by being acquired. The remaining players have sought to find new revenue sources by offering landline and Internet.

In that context, Rami Levy – the supermarket chain that operates a low-cost cellphone service – said on Wednesday that it had received a license from the Communications Ministry to offer Internet services, overseas phone calls and landline phone service. Until now Rami Levy has only be licensed to offer mobile services, as a virtual providers using others’ networks.

Rami Levy, which has leveraged its supermarkets to sell its services, has about 100,000 subscribers, making it one of the smaller companies. Subscription growth has levelled off in recent years and may even have declined as Golan encroached on its customers. The expanded license will now let Rami Levy offer a range of telecom services.

An industry source, who asked not to be named, said Golan was acting because it knows the accommodating regulatory environment it has enjoyed is likely to end soon and its costs will rise.

“Golan isn’t entering a mergers-and-acquisitions process out of distress but because it understands that it’s at a crossroads. The Communications Ministry has made it clear that policy is changing, and it won’t give [regulatory] breaks to Golan as it has in the past.”

Industry sources said that Golan is profitable on an operating basis even as it regularly cuts its rates. But that is because it has so far not taken on the hundreds of millions of shekels of costs to build a network of its own, and has even removed some of the few communications towers it had erected.

Under the terms of its license, Golan had an end-of-the-year deadline by the Communications Ministry to have a network covering at least 40% of the country. But in 2014 it reached a long-term agreement with Cellcom to continue using its network, over objections from the Communications Ministry.

Golan counts 800,000 subscribers and a month ago said its first-half revenues were 500 million shekels, denying a report in TheMarker that it was losing money.

Reports have been circulating in recent weeks that Golan had already retained the investment bank Rothschild, which had approached the other cellphone operators about buying the company.

TheMarker reported about 15 months ago that the company was on the block for 1 billion shekels, but Michael Golan firmly denied the reports.

Sources at Golan noted that Israel’s mobile market is unusual in that it has so many players, and that makes it unlikely the number can remain so high. In most markets, there are no more than three or four providers.

They said that Golan may end up remaining an independent company and even swallow up a rival. The announcement was made now in order to put an end to rumors that had been circulating for so long, they said. But another industry source said it was made to pressure the ministry for regulatory concessions.

Industry sources said that if Golan’s moves end in a merger, the mostly likely candidate is Cellcom, on whose network it already piggybacks it services.

Partner operates a joint network with Hot Telecom and the two may eventually merge. A merger with Pelephone, the mobile subsidiary of Bezeq, is unlikely to pass musters with the Antitrust Authority because of Bezeq’s dominant share of the telecommunications market.