Israeli Antitrust Rejects Golan-Cellcom Merger, Throwing Deal in Doubt

Communications Ministry also announces opposition to deal in which major telecom company would but its smaller rival.

Michael Golan at the Golan Telecom headquarters in Tel Aviv, June 9, 2013.
Eyal Toueg

The Antitrust Authority on Tuesday rejected a plan by Cellcom Israel and Golan Telecom to merge, saying the tie-up would reduce competition in the cellular market and inevitably cause rates to rise.

“Approval of the merger will lead to the disappearance of a firm that creates competition. As a result the market is liable to return to the situation in which the large cellular operators do not have any incentive to compete, so that they essentially follow one another in raising prices to the consumer,” the authority said in statement.

The Communications Ministry, which also has the authority to block the merger, backed the decision in a separate statement. But Golan responded with a sharply worded criticism and it is expected, together with Cellcom, to appeal the decision.

On the Tel Aviv Stock Exchange, the reaction was relatively muted as officials had earlier signaled they opposed the planned merger, which was announced last October. Cellcom shares ended down 2.5% at 27.10 shekels ($7.19) and Partner Communications, it biggest rival, finished 1.7% lower at 17.48.

The merger called for Cellcom, Israel’s biggest mobile provider, to pay 1.17 billion shekels to buy out Golan. The tie-up would reduce the number of players in the cellular market to four from five, and turn Cellcom into the biggest of them, with a 37% market share.

Golan entered the cellular market in 2012 after a regulatory shake-up enabled upstarts to effectively compete against Cellcom and the other two veteran giants – Partner and Bezeq’s Pelephone unit. The result, as Antitrust Authority figures showed, caused monthly rates to tumble 60%, or by about 73 shekels a month compared with before the reforms.

But the stiff competition and lower rates have caused industry revenues and profits to disappear, arousing concerns that the providers won’t be able to invest in maintaining and upgrading their networks. Industry revenues have fallen 38% since 2010 and 10.5 billion shekels in 2014, the authority said.

Some of the smaller players have already merged and, as regulators were deliberating approval, Golan recently warned that it might also collapse, leaving subscribers stranded and creating chaos in the market. On Tuesday, the company had harsh words for the Antitrust Authority.

“The decision was purely political with no economic facet,” the company said. “The politicians have decided to make Golan the scapegoat and sacrificial lamb, even though it was the one case of real competition in the State of Israel’s history, which saved the economy 5 billion shekels every year since it was formed and every household 10,000 shekels.” 

But the authority, which has been headed by Michal Halperin since earlier this year, discounted the threat of Golan’s failing if the merger were blocked. 

“Although the Antitrust Authority cannot decide for Golan how to react if the merger is not approved, it believes that Golan has a number of options that do not require its exit from the market,” it said, suggesting it reach a networking-sharing agreement like the one that exists between Hot Telecom and Partner, or selling itself to a buyer who won’t detract from competitive conditions in the market.

The authority will release a document outlining its entire case for rejecting the merger, but in a press statement it gave some insights into its thinking – most of it relating the role of Hot Telecom, a new and small player that would fell less pressure to play the role of keeping cellphone rates down without Golan in the market.

Hot is competing in multiple telecoms markets – landline and television as well as mobile, the authority explained, and will be tempted not to be too competitive in the cellular segment if its rival, Cellcom, don’t compete too aggressively in television.

The authority said Golan had been playing a special role as price leader in the market and that because the costs for a new player to enter were so high it was unlikely to be replaced. It said virtual operators, like Rami Levy, were not big or strong enough to pose real competition.

The authority rejected Golan and Cellcom’s contention that similar kinds of consolidations in the European telecoms market showed that competition would not be eroded by the industry’s being reduced to four key players.