Bezeq Takes First Step to End Structural Separation

Move to merge with Yes unit comes as criticism of Communications Ministry decision mounts.

Bezeq Israeli Telecommunication Corp. headquarters in Tel Aviv, Israel.
Bloomberg

Just days after getting preliminary clearance from the Communications Ministry to end structural separation of its business units, Bezeq’s board moved to begin the process by approving a proposed merger between the parent company and its Yes satellite television unit.

The board’s approval came amid sharp criticism from the treasury and State Comptroller about the Communications Ministry’s decision as well as from Knesset lawmakers. Antitrust Commissioner Michal Halperin also levelled criticism of the decision.

But Stella Handler, Bezeq’s CEO, accused the media in particular of being hostile to the company and failing to present both sides of the story.

“Today Bezeq is the only communications company in the world, a dinosaur that sells landline services separately from its other services like television and internet,” she wrote in a Facebook post. “There’s no logic to it and the first one to pay the price is the consumer. If [structural] separation entails costs, who’s going to pay for it?”

Shares of Bezeq, which jumped on Sunday after the ministry’s decision was first reported, retreated on Monday, falling 0,5% to end at 7.06 shekels ($1.85).

Merging Yes into Bezeq would give the company tax-loss credits it is entitled to use over the next eight years totaling about 1.3 billion shekels. The merger, however, is subject to the Communications Ministry’s final approval ending structural separation, which is still subject to public hearings before it becomes final.

The storm over Bezeq broke out over the weekend after the company said the Communications Ministry has given its nod to a plan that would let the company merge its landline, Yes, internet and Pelephone cellular units legally and financially.

The units, however, would have to maintain separate operations and management. In addition, Bezeq would have to step up infrastructure investment and the rollout of its fiber optic network.

The structural separation was imposed on the company in the 1990s when the internet and cellular markets were emerging as a way to prevent the former telephone monopoly from overwhelming rivals.

But in comments released on Monday, the antitrust chief signaled her view that the Communications Ministry had acted prematurely. While she conceded that in terms of competition policy, structural separation wasn’t critical, Halperin contended that Bezeq had not done enough to allow competition in infrastructure and landline telephony.

In a letter to Shlomo Filber, the ministry’s director general, she wrote: “Your letter [to Bezeq on the ministry’s stance], canceling structural separation is being done in the context of reforms in the wholesale market. In our view, the wholesale-market reform is not firmly established and it is premature to relate to it as a success that has achieved the results it set out to achieve.”

A report by the Knesset Center for Research and Information estimated that while Bezeq’s share of the household landline market had shrunk from 82% in 2001, it still controlled 69% as recently as last year. It said Bezeq had enjoyed high rates of profitability – net margins were 25.5% in 2014, three times the average for publicly traded companies in Israel — because its network is far bigger than any of its rivals.

Anxiety over structural separation is also linked to concerns that Bezeq’s controlling shareholder, Shaul Elovitch, is close to Prime Minister Benjamin Netanyahu, who also serves as communications minister. While Netanyahu has recused himself from Bezeq-related issues, Filber is a close association of his.