The Israeli cellular industry was aboil on Monday amid a clutch of dramatic announcements and media reports.
U.S.-Israeli entertainment magnate Haim Saban confirmed earlier reports that he was ready to relinquish his 30% controlling stake in Partner Communications, Israel’s No. 2 mobile company, to the Hong Kong conglomerate Hutchison Whampoa after failing to secure better terms on debt he must pay back.
Meanwhile, reports surfaced that Cellcom Israel, the No. 1 company, was planning to lay off 1,000 employees, a third of its total, and raise badly needed capital through a rights offering. On Sunday, Channel 12 news reported that Cellcom and Hot Telecom were discussing a merger.
The news was greeted positively in the stock market as badly needed steps for Israel’s ailing cellular sector. Shares of Cellcom surged 6.5% in choppy trading to end at 7.66 shekels ($2.18). Partner was up 4% to 15.29 shekels by closing and Bezeq, whose Pelephone unit is the third-largest player, advanced 2.8% to close at 2.21.
The Israeli industry has been under pressure since a 2012 industry reform that brought new rivals into the sector and forced the big three industry veterans to slash rates. The result has been narrower profits and in the case of Cellcom losses while the companies struggle to find new revenue sources from internet television and other streams.
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Saban owes about 1.1 billion shekels to Hutchison, a loan he took over when he bought the stake from Ilan Ben-Dov’s Scailex in 2013. Repayment of the principal is due in January but the 30% stake he put up as collateral on the loan is about 730 million shekels, less than the loan, giving Saban little incentive to pay it. Hutchison co-founded Partner in the late 1990s and sold its stake to Scailex in 2009 before Scailex sold it to Saban.
In a filing with the U.S. securities regulator, Saban said his company, SB Israel Telecom, had been in discussions with Hutchison regarding the loan’s terms.
“At this time, it is unlikely that any agreement will be reached between SB and the lenders, and the lenders may exercise their rights,” it said.
Neither Cellcom nor its parent company, Discount Investment Corporation, issued a statement on Monday regarding the layoffs or rights offering. “Cellcom is a publicly traded company and when it has something to report, it will do it through the stock exchange,” the company said.
Nevertheless, unconfirmed reports were that Discount’s board had discussed the firings.
The rights offering, if it goes through, would force Eduardo Elsztain, who controls Cellcom through his IDB group, to put up about half the capital or see his 47% stake in the company diluted.
Compared to Partner, Cellcom is in deeper financial trouble. While Partner eked out a 3 million shekel profit in the second quarter, Cellcom lost 35 million shekels, more than doubling its first quarter loss. Cellcom has today debt of about 3.4 billion shekels, compared with cash of just 1.3 billion. Last month the S&P Maalot credit ratings agency cut its bonds to an A- rating with a Negative outlook.
Merger talks between Cellcom and Hot, which neither company would confirm, is reportedly in an advanced stage and occurring on the level of controlling shareholders.
A merger would help cool the competition that has hit the industry so hard. However, it is not at all clear that regulators would approve it. While in principle the Communications Ministry supports mergers, it only favors ones between smaller players, not two of the largest. The Competition Authority told TheMarker on Monday that it had not examined the Cellcom-Hot issue and wouldn’t comment.
Likewise, Hutchison cannot expect to take control of Saban’s Partner stake easily. It would have to get a permit, which would be difficult to get given U.S pressure on Israel to bar Chinese investment in critical Israeli infrastructure.