Israeli Mobile Phone Operators Wage War to Save Merger

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

The government has all but said it will not allow Cellcom Israel to acquire its smaller competitor Golan Telecom, but with just days to go before an official decision by the Antitrust Authority is due, the two companies are still determined to make their case.

It was left to Michael Golan, the controlling shareholder of Golan Telecom, do it. In a forceful letter to Benjamin Netanyahu, who serves as communications minster as well as prime minster, Golan warned that his company won’t be able to survive on its own.

“Failure to approve the merger between us and Cellcom will lead to Golan’s collapse,” he wrote in a letter released late on Tuesday, which included opinions backing his prediction from a host of industry experts.

“A collapse will have serious consequence both for the cellular market and for the general public, in particular for Golan Telecom’s one million customers and its hundreds of employees,” Golan said.

The merger, which was first announced five months ago, calls for Cellcom – Israel’s biggest mobile operator – to buy Golan for 1.17 billion shekels ($310 million). The merger would cut the number of players to four from five and boost Cellcom’s market share to 37%.

The stock market appeared to be signaling on Wednesday that the Cellcom-Golan merger’s prospects were looking up. Cellcom shares rallied, ending up 5% at 27.62 shekels. A final hearing with antitrust officials is scheduled for Sunday, with their decision expected to follow within a week.

Golan is the most aggressive of the wireless carriers to emerge from the big regulatory shake-up of the market in 2012. The reform brought a host of new players into a market that was controlled by Cellcom Israel, Partner Communications (Orange) and Bezeq’s Pelephone unit. The price of cellphone plans plummeted, but so did the companies’ revenue, profits and investment in new technologies.

Golan, in particular, faces a bleak future without a merger. Under its network-sharing agreement with Cellcom, the fees it pays go up sharply this quarter. It already owes Cellcom 600 million shekels for use of the network, a debt that will be canceled only if the two companies merge.

Taking their time

Officials have been taking their time weighing the pros and cons of the proposed merger, but they have sent negative signals. Antitrust Commissioner Michal Halperin told the companies last month that she was inclined to reject the proposal.

The Communications Ministry, which retained Prof. Eyal Winter of the Hebrew University to study the implications, has expressed similar sentiments.  And the Finance Ministry’s budget division compiled a report that came down sharply against the idea.

Finance Minister Moshe Kahlon built his reputation as a consumer crusader when, as communications minister, he presided over the 2012 mobile market reform. He has a big stake in guaranteeing that its gains are retained.

Officials have countered Golan’s warnings by insisting that they are prepared for his company’s sudden exit from the market.  The Communications Ministry said this week it had consulted with Israel’s other mobile operators and was satisfied that they could absorb Golan’s subscribers without disrupting service.

In fact, industry sources said the sudden collapse of Golan would probably leave many of its customers without service for several days at least: The remaining carriers would find it impossible to provide new SIM cards and change the billing information for a million people within a day or two. For Hot Telecom, the smallest of the remaining four, it would also present major engineering challenges.

“The Finance Ministry has decided to play poker with Golan, hinting that the deal won’t be approved and sending the message that he should sign a network-sharing deal and stay in the market,” said one industry executive, who asked not to be named. “The problem is they chose to play against the world’s best poker player,” he said, referring to Golan.

Experts are divided about the impact of a merger and the absence of Golan in the market. It is almost certain that the cost of mobile plans would rise, but so would investment and the quality of service. The Center on Regulation in Europe says that based on Europe’s experience with industry consolidation, rates would go up 16.3% while investment by operators would rise 19.3%.

In Israel’s case it would mean the average bill, which is now a super-low 63 shekels a month before value-added tax, would rise to 73 shekels. With VAT, the added cost would be 12 shekels a month.

Antitrust experts, however, warn that Golan is not an ordinary player. It was the market disrupter, egging on the others to lower their rates. Without it, the remaining players will be under less pressure to keep prices down.

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