Mobile Operator Cellcom Mulls Acquisition of Rival Golan

Israel's largest mobile operator is the first to announce it plans to review the possible purchase of holdings in its competitor.

Moti Milrod

A day after Golan Telecom announced it was considering putting itself up for sale, a first possible buyer emerged, with Cellcom Israel saying Thursday it was weighing whether to make an offer to buy its rival.

The acquisition is unlikely to pass antitrust scrutiny, but if it did – or if Golan finds a different buyer or merges with a rival – it would mark a major retreat from the super-competitive market that emerged in the wake of 2012 cellular telephony reforms.

In a terse announcement, Cellcom, Israel’s largest mobile phone operator, said it planned “to review the possible purchase of holdings in, or assets of Golan Telecom , following an invitation by Bank Rothschild, representing Golan Telecom’s shareholders.”

Cellcom said it made the announcement only because its controlling shareholder, Discount Investment Corporation, would be required to under Israeli securities regulations. Golan said on Wednesday it was exploring the option to be acquired or merge with another company.

Golan is closely held, but shares of the two publicly traded cellphone companies have been rallying in expectation of an industry shakeout, or at least an end to the price competition that has saddled the industry with lower revenues and profits. 

On Thursday, however, they fell sharply. Cellcom, which was up in early trading after the announcement, ended down 4.7% to 26.50 shekels ($6.77) on the Tel Aviv Stock Exchange. Its rival, Partner Communications, lost 5.3% to end at 17.24. 

Industry sources said the Antitrust Commission was highly unlikely to approve a merger between the two companies, which would diminish competition in the sector. They said Golan’s controlling shareholder, the French-Israeli entrepreneur Michael Golan, was using the prospect of a sale or merger to pressure the Communications Ministry to ease regulatory requirements on the company.

“It is unlikely that the government will approve the sale of Golan to any of the existing companies because that would mean letting competition in the local market disappear,” Gilad Alper, a senior analyst at Excellence Nessuah Brokerage, told Bloomberg News.

Israel’s mobile phone industry underwent a revolution just over three years ago when loosened regulations broke the chokehold by Cellcom, Partner and the Pelephone unit of Bezeq. A host of new operators, led by Golan, sparked a price war with all-inclusive monthly packages.

Over the following years, combined revenues for telecommunications industry shrunk by 4 billion shekels to 22.2 billion in 2014, even as quantity of usage grew with the rise of smartphones and other services. 

The challenging conditions have continued into this year. Last month Cellcom reported an 85% drop in second-quarter net profit as its subscriber base dropped by 37,000 to 2.848 million subscribers.

By comparison, Golan has 850,000 subscribers and last month claimed it would have revenues of 500 million shekels this year and an operating profit. Golan has consistently played the role of industry spoiler by offering low-cost packages that rivals feel compelled to match.

But one reason Golan has been able to contain costs is because it offers its services over the Cellcom network and recently signed a long-term agreement extending the pact. However, the Communications Ministry has set an end-year deadline for Golan to have set up its own network covering at least 40% of the country at a cost of hundreds of millions of shekels.

Moreover, Cellcom is deploying 4G services and Golan would be required to buy half that network to meet regulations.

Industry sources said they believe Golan hopes the threat of an industry consolidation will convince regulators to retreat on the demands. Another competitor is cable TV operator HOT, a subsidiary of European telecoms group Altice. Other players are mobile virtual network operators which piggy-back off of other networks.

Competition has meant all-inclusive calls, texts and Internet packages are available for as little as $15 a month.

Cellcom has said it was negotiating with Golan and the Communications Ministry over a third and fourth generation network-sharing agreement with Golan.

Analysts said it was difficult to put a price on privately held Golan and some questioned Golan’s motive in announcing it was contemplating a sale.

They said this could be aimed at pressuring regulators to grant concessions regarding requirements it deploy its own network. Until now Golan has been paying Cellcom to use its infrastructure.

Cellcom is deploying 4G services and Golan would be required to buy half that network to meet regulations.

“A sale of Golan will benefit most of all the existing companies as it will lead to less competition, higher prices and higher profitability,” Alper said.