Buyer Beware: The Tycoons Are Returning to Israel’s Cellphone Market

Netanyahu must not be allowed to wreck competition.

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

Four years ago, at the height of the financial crisis that brought down several of Israel’s tycoons, we asked the governor of the Bank of Israel at the time, Prof. Stanley Fischer, if the downfall of the tycoons heralded the end of their era — or whether we would see others come in their place. “There will be others,” said Fischer.

It wasn’t much of a gamble on his part, since the materials from which a tycoon is made — high leverage, passing risks onto the public, two to three monopolies in their investment portfolio and a multilayered business pyramid — are the fondest wish of certain businesspeople. But somehow it was convenient to think that if people like Nochi Dankner, the most problematic model of a tycoon we had here, was departing from the arena, perhaps we would see him replaced by more positive, less aggressive figures, or at least we would be seeing more restrained behavior.

Dankner’s successor at IDB, Eduardo Elsztain, gave the impression of being a nice guy — a foreign businessman who came here and introduced some variety into the membership of the Israeli business-government club. Even Shaul Elovitch, a businessman who made his fortune by importing Nokia devices to Israel, looked like a more likable player than Dankner, not to mention the agreeable French guy, Michael Golan, who came from nowhere and shook up the Israeli telecom market. But that romantic idea has to be set aside.

There are moments in the lives of a businessperson and of a consumer when it seems that they can really work together against strong monopolistic forces. There are even moments in the life of a businessperson when he receives support from the public or the regulator, because he takes on the mission of generating competition, reducing concentration or introducing the style of a foreign investor who is not among the 20 families who control the Israeli economy.

But these are only moments, and they pass quickly. Whether by coincidence or not, Elsztain is responsible this week for two episodes that force us to recall that concentration is still with us, and that competition in the telecom market could be a passing phenomenon.

In the first one, that same Elsztain recruits Gil Sharon, CEO of Pelephone (from the Bezeq and Elovitch Group) for the job of CEO of Discount Investments Corporation — and grants him a glorious salary package plus shares in Cellcom and Supersol with a total value of about 42 million shekels ($10.7 million). In the second, he announced Cellcom’s intention to acquire ownership of Golan Telecom for 1.17 billion shekels.

So in two moves, Elsztain is guaranteeing himself both reduced competition in the telecom market, which has subtracted billions from Cellcom’s value in recent years, and also restoring to the playing field the over-the-top compensation packages at which IDB excelled during Dankner’s tenure.

Those same salary packages guaranteed Dankner, in his day, a gang of loyal directors who fought the regulators and consumers for him to head off competition. In at least one instance — that of Effie Rosenhaus, who was CEO of Supersol — the company’s aggressiveness even led to a conviction for violating the antitrust laws and a two-month prison sentence.

It is not immaterial to mention that the same Elsztain controls IDB and Discount Investments through an investment fund registered in Bermuda, and that his direct share of the salary he is paying Sharon is relatively small, so he is indifferent to the sum. The one who is not indifferent is Sharon himself, whose job is to work very hard to justify that salary. He is probably doing good things for the benefit of the company, but we are interested in the consumer as well.

Good for everone but consumers

The more difficult move is the intended acquisition of Golan Telecom and the merging of it with Cellcom. That’s good for Cellcom, of course, it’s certainly good for Golan, and it’s even good for Pelephone (Elovitch) and Partner (Haim Saban). The only people for whom it isn’t good is telecom consumers, who in recent years have been living in a paradise that is liable to end soon. And it really will end if Prime Minister Benjamin Netanyahu goes along with this gang and appoints a new, easygoing antitrust commissioner, one who will pave the way for the transaction.

Cellcom and Golan Telecom are aware of the possibility that the deal will not be approved. That’s why they are trying to make it seem that Golan Telecom will continue to operate as a cheap brand. Allow us to say we’re not falling for that. Why? Because when Ami Arel, chairman of Cellcom, says that “the acquisition of Golan Telecom will enable us to add a cheaper brand to our array of products, and I’m certain that the Cellcom management will be able to successfully integrate the activity of Golan as a cheap brand of Cellcom” — it’s easy to be suspicious. Mainly if we recall that the same Arel tried at the time to justify IDB’s purchase of the daily newspaper Maariv for the purpose of “synergy in the field of content” rather than as an aggressive whim on Dankner’s part.

Arel will say whatever is necessary in these situations to reassure the regulator so he will approve the transaction. In effect, the purpose of the deal is to reduce competition and restore prices in the telecom market to a balance that is more convenient for the telecom companies and their owners. As far as they’re concerned that’s legitimate, of course. As far we we’re concerned, not so much.

Will Netanyahu defend competition?

And that brings us to the key person in this story — Netanyahu, who is also the communications minister, so he is involved in the matter, and also the economics minister, so he appoints the antitrust commissioner, who in turn is supposed to approve or reject such a transaction. Netanyahu is also foreign minister, so perhaps in that capacity he will have something to say (like, “I want to encourage foreign investors to come here to take advantage of the Israeli consumer”?)

In the past Netanyahu called himself a defender of competition and the free market. In recent years that no longer interests him. His strange alliance with Elovitch, revealed last week in an investigative report by Haaretz’s Gidi Weitz, raises the suspicion that he is willing to sacrifice the interests of the general public — such as promoting competition in the telecom market — in return for the positive coverage he gets from the Walla website, which is owned by Elovitch. But during this term Netanyahu has taken several steps in the ministries he holds to increase business concentration. This issue is now lying in wait for him and he can’t blame anyone for it: If he approves the Cellcom-Golan Telecom merger, he will be remembered as the prime minister who with his own hands destroyed the most important consumer achievement of the past decade.

Postscript: Two ministers could find themselves in bad shape if Netanyahu allows the Cellcom-Golan Telecom merger: Finance Minister Moshe Kahlon, who forged a career (and won 10 Knesset seats) thanks to the competitive reform he led in the telecom market when he served as communications minister, and Gilad Erdan, the public security minister, who continued the revolution in the landline communications market.

On Monday, Erdan turned to the acting head of the Antitrust Authority, Uri Schwartz, and to the director general of the Communications Ministry (and Netanyahu associate) Shlomo Filber, demanding that they head off the merger. His reasons are that Golan Telecom received unprecedented benefits to enter the telecom market and foster competition, and is therefore ineligible for a prize in the guise of a check for 1.17 billion shekels when the company decides to leave the market. Erdan is right. Golan was given red carpet treatment for the purpose of introducing competition, but he operated with a strategy whose endgame was to pocket funds that derive from the potential damage he could cause his competitors.

There’s no reason to award him this prize, and no reason to give it to the other telecom companies. If Golan doesn’t want to operate the company, he can return the license or look for a new buyer. And what will Kahlon do? Will he allow Netanyahu to destroy his life’s work?

Kahlon said Monday: “The blow to competition in the telecom market will be something we will regret for a long time to come. The merger of Golan and Cellcom is a serious mistake. The prices of phone calls will soar to a level of hundreds of shekels per month, instead of the tens of shekels that the public is paying today. Approval of the merger will restore us to the days when there was no competition, and the consumers will become the victims.”

Now it remains to be seen whether Kahlon and Erdan will allow Netanyahu to destroy competition in the telecom market. They have the power to prevent this move; the question is whether they will use that power or make do with press releases.