Israel's Communications Ministry Will Let Cellcom, Partner Buy Control of Fiber Optic Network

Cellular companies have been looking for alternative revenue sources amid heightened competition in the mobile telephony market.

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In a surprise decision on Tuesday, Israel’s Communications Ministry said it would allow Cellcom Israel and Partner Communications, Israel’s largest cellular companies, to buy control of IBC, the troubled joint venture that is building a nationwide fiber optic network.

“The ministry has given approval to two companies that now lack infrastructure to bid to invest in IBC,” the ministry said in a statement, adding that the two companies would be allowed to become controlling shareholders in IBC.

Until now, cellular companies have been barred from holding stakes in Israel Broadband Company, a joint venture between the Israel Electric Corporation and a group led by Sweden’s ViaEuropa, under the venture’s licensing terms.

Dispute between its partners have left IBC struggling to bring fiber optic links and super-fast internet to Israeli homes since it was launched two years ago under the brand name Unlimited. By one estimate, it has just 2,500 customers.

The company has reportedly retained Rothschild Bank to find a strategic investor. Bloomberg News reported two weeks ago, citing unnamed sources, that IBC was looking for one or more partners to invest about $300 million in the project.

Given Cellcom and Partner’s experience in telecoms, the ministry’s decision to let them buy control of IBC should improve its prospects and enable it to emerge as a third competitor in a market now dominated by Bezeq and Hot Telecom.

Tuesday’s Communications Ministry statement indicated that Bezeq and Hot would be required to share their networks with smaller rivals, although the exact terms have yet to be determined.

The announcement came hours after Partner issued a statement saying it had submitted a letter to the ministry’s director general about options for deploying a nationwide fiber optic network. The statement didn’t include any references to IBC.

“Partner’s goal would be to deploy a fiber optic-based infrastructure as part of its overall strategy to become a comprehensive telecommunications group. The independent, fiber optic-based infrastructure would allow the company to offer faster internet services in Israel, as well as the transmission of advanced and high quality television services,” the company said.

Israel’s cellular companies have been looking for alternative revenue sources amid heightened competition in the mobile telephony market since the government introduced reforms in 2012. Cellcom has already launched an Internet-based on-demand TV service.

Nevertheless, the news didn’t lift telecoms shares – Partner ended the day down 0.6% at 17.30 shekels ($4.48) and Cellcom lost 1.5% to 24.65 shekels.

Ilanit Sherf, an analyst at the Psagot brokerage, told Reuters that Partner was unlikely to go it alone in fiber optic, given the high cost, which she estimated would be in the billions of shekels. Teaming up with Bezeq or IBC would be more feasible, she said.

“Every option raises questions regarding the extent of the investment, the financing ability of Partner while its core activity – cellular – is still bleeding, and the number of years needed to reach broad deployment,” she said.

With reporting from Reuters.