Israeli Telecom Company Blames Coronavirus as Merger Is Called Off

Send in e-mailSend in e-mail
Send in e-mailSend in e-mail
משרדי חברת פרטנר
משרדי חברת פרטנרCredit: AMIR COHEN / REUTERS

The coronavirus epidemic has claimed as one of his victims a major merger in the Israeli telecommunications market – the offer by Altice Holding through its Hot Telecom unit to buy Partner Communications.

In a brief announcement, Altice – a European-based telecoms group controlled by Patrick Drahi – announced on Tuesday it was pulling out of the 3.5 billion shekel ($980 million) deal.

Industry sources offered differing explanations for the decision, including that it was unrelated to the epidemic. Some said it was due to doubts that the deal would ever get regulatory approval.

Partner, in its announcement, indicated that it was coronavirus-related. “The reasons mentioned by Altice were the rapidly deteriorating economic situation and bleak prospects for a short[-term] recovery,” it said in a statement.

Regardless, the collapse of the merger raises questions about the future of Israel’s beleaguered telecoms sector and the future of its four main players.

The planned merger would have had a major impact on the industry, creating a giant with a 40% market share in mobile and internet infrastructure and a force in multichannel television.

Beyond that, it would have boosted investment in Israel’s aging telecoms infrastructure. Hot had said that had the merger been approved, it would have committed itself to a major spending project to upgrade its network – an amount sources at Hot had put at between 5 billion and 8 billion shekels to roll out a nationwide fiber-optic network capable of handling the most advanced 5G technology.

When Altice announced its offer to buy Partner in January, it valued the company at a 20% premium to its Tel Aviv Stock Exchange market cap. Altice executives believed that the offer was attractive enough that Partner would move quickly to seal terms.

That proved not to be the case. The two sides agreed on the general terms of the merger, but couldn’t agree on the size of the payment Hot would make if the deal didn’t go through.

More importantly, Partner demanded that Altice and Hot provide documentation showing they could finance the deal by bank loans. Altice did not and the negotiations stalled before being canceled on Tuesday.

The economic impact of the coronavirus has loomed large over the telecoms industry. Partner shares have fallen 20% since the start of March, which increased the premium Altice would be paying to 40%. On Tuesday, Partner shares closed down 0.5% to 13.23 shekels on the TASE.

The buyers were aware of the fact that an abortive offer by Cellcom Israel to buy Golan Telecom for 1.17 billion shekels in 2015 had been revived earlier this year for just 590 million shekels – a stunning drop in Golan’s value, which they did not want to see repeated if they bought Partner.

Israeli regulators are now considering the newest Cellcom-Golan merger. It would create an industry leader with a 35% market share and reduce the number of players, inevitably leading to an increase in rates for users.

However, the proposed merger is smaller than the Hot-Partner deal and would have a less dramatic effect on the market.

The industry today counts four groups that offer a full range of telecommunication services: Bezeq, the former incumbent; Hot; Cellcom, which includes the IBC fiber-optic Network; and Partner.

Of them, Partner is relatively strong financially: Its 2019 financial report showed a relatively low rate of subscriber losses for its cellular service, low debt and considerable growth in television and internet. But average revenues per user continued to decline and its net income plunged 63% in the fourth quarter from a year earlier to just 7 million shekels.

Hot recorded a 2.2% increase in revenue, but its earnings before interest, taxes depreciation and amortization fell 11%. It added 25,000 subscribers in 2019 for its TV and internet services after it upgraded its network to a faster 500 megabits.

Even without the coronavirus effect, the Israeli market will have difficulty supporting four major players at current levels of income and expenses. The epidemic and lockdown orders that have kept so many at home has meanwhile demonstrated the need to ensure the financial health of the players, so that they can cover the cost of upgrades.

But for now, the epidemic is depriving the companies of a major revenue source, namely roaming charges from coming and outgoing tourism. The amount is estimated at 200 million shekels per company on an annualized basis, of which 80% goes to their bottom lines. In addition, the almost complete cessation of equipment will hurt their first quarter financial results.

Moreover, both revenue segments stand to be hurt further in the second quarter and beyond if the recovery from the epidemic proceeds slowly.

“After the coronavirus, there will no longer be four telecoms groups in Israel. Even without the merger the market will have to be restructured,” said one industry executive who asked not to be named.

Sources suggested that in the most extreme case, companies would collapse and new merger deals would emerge. A more mild scenario sees companies imposing big spending cuts and the shuttering of money-losing operations, especially in television.

The big concern is that the competition that has enabled Israelis to enjoy unusually low prices for mobile and other services over the last decade will be undermined. The two players that have been most responsible for the intense competition are also the financially weakest. Without them, the market will be in the hands of the Bezeq-Hot duopoly.

Click the alert icon to follow topics: