Analysis

Bezeq’s in a Free Fall, but Does Anyone Want to Buy It?

Even before criminal investigations toppled him, controlling shareholder Shaul Elovitch had done serious damage to the company’s finances. Now it’s in legal, regulatory and ownership turmoil, too

A Bezeq adveretisement
Screenshot

When Doron Turgeman, the CEO of Internet Gold, met last week with the creditor banks of his parent company, Eurocom Communications, about how to proceed with his company’s controlling stake in Bezeq, the atmosphere couldn’t have been anything but funereal.

Just over a year ago, Bezeq – Israel’s dominant telecommunications provider – was riding high under the control of Shaul Elovitch. But then the Israel Securities Authority revealed it was investigating Elovitch and a slew of Bezeq group executives about a deal in which Bezeq bought out Elovitch’s stake in the Yes satellite television venture.

The probe gradually expanded to include Bezeq’s allegedly illicit dealings with the Communications Ministry and allegations that the company traded favorable coverage of Prime Minister Benjamin Netanyahu and his wife on its Walla news site for helpful regulations.

The investigations have cost a host of top Bezeq executives, including CEO Stella Handler, their jobs and forced Elovitch to cede control of Eurocom and the Bezeq group. Everything involving Bezeq is now in flux – management, long-term plans, ownership and regulatory issues.

Elovitch stepped down as chairman in February to be replaced by Shlomo Rodav. Handler is due to depart in August after a running-in period for her successor David Mizrahi. Control of Bezeq, via Eurocom, is in the hands of Eurocom’s bank creditors, who are angling to offload it. Efforts to sell Bezeq via the sale of Eurocom or an intermediate company, B Communications, have so far failed.

In the meantime, an embarrassed Communications Ministry is taking a harder line with Bezeq, in part by demanding that the company open its landline network to the wholesale market by August 1, a move Bezeq is fighting to delay with all its might.

The result has been a sharp decline in Bezeq’s share price and market value on the Tel Aviv Stock Exchange, which in turn has brought down the entire Eurocom group with it. On Monday, Bezeq shares closed at 4.02 shekels ($1.10), their lowest point in more than four years.

But even before the investigations surfaced, Elovitch had been engaged in a strategy that was undermining the company’s finances. Saddled with huge debts from his 2010 leveraged buyout of Bezeq and other loans he took to assemble his Eurocom group, Elovitch had to squeeze every shekel he could out of Bezeq to service it.

The result was Bezeq paid more than 15 billion shekels in dividends in the Elovitch years to cover debt payments to Eurocom and other companies in the Eurocom pyramid. In the process, Bezeq’s shareholders’ equity was shaved down to just 2.4 billion shekels as of March, or just 12.8% of its 18.9-billion-shekel balance sheet.

Bezeq’s market value has tumbled 44% (after adjusting for dividends paid) since its high of 23.7 billion shekels in early 2016. B Communications, the company just above Bezeq in the Eurocom pyramid, has seen its market value drop 26% to 995 million shekels.

For Internet Gold, the company above B Com, the drop has been a stunning 65% to 287 million shekels. Even after Internet Gold raised 100 million shekels last month in a share offering, its net asset value is somewhere between nil and a few dozen million shekels.

The immediate future doesn’t look brighter. In the first quarter of 2018, Bezeq’s operating profit plunged 30% from a year earlier to 462 million shekels. Apart from the wholesale reform, Bezeq’s mobile-telephony subsidiary, Pelephone, is fighting new competition from XPhone while Yes is under pressure from internet TV offerings.

Bezeq last month introduced its first-ever “triple play” package of internet infrastructure, landline telephony and online television. Bezeq had long refused to offer such a package, as its rivals had, but growing competition, especially from online TV offerings by Cellcom Israel and Partner Communications, gave it no choice.

Turgeman – the Internet Gold CEO – and the banks face a daunting challenge in trying to divest Bezeq by selling Internet Gold’s 65% stake in B Com, which in turn has a controlling 24% stake in Bezeq.

The plan hammered out a week ago with the banks calls for Internet Gold to sell its B Com stake via competitive bidding. Who will compete is not yet clear. No one knows whether Tzahi and Chen Neuman, the brothers who had sought to acquire B Com at a 1.4-billion-shekel valuation through a negotiated deal with Internet Gold, have the resources to do it.