The Golan Telecom saga appeared to be coming to an end Monday, with reports that a deal to sell the upstart cellular provider is about to be sealed sending the shares of its rivals soaring.
The financial daily Calcalist said an agreement to sell Golan to Electra Consumer Products was due to be completed Monday at a price of 350 million shekels ($91 million), the high end of price estimates that had been circulating.
No announcement was forthcoming by press time, but investors were convinced it would happen soon – concluding five years of misery for the cellphone industry.
Shares of Cellcom Israel jumped 8.6% to end the day at 34.05 shekels, while Partner Communications climbed 5% to 19.37 shekels.
Even though the sale to Electra (which is part of the Elco Group) would leave intact Golan and the super-low rates it has forced other companies to meet, industry sources and investors said Cellcom would likely be the biggest beneficiary of the sale. The Calcalist reported that Cellcom would help finance it with a 130-million-shekel loan.
“From Cellcom’s point of view, the deal is very positive,” said Sabina Levy, head of research at Leader Capital Markets. “Golan is hosted in Cellcom’s network and is generating a lot of revenues for it. Moreover, Golan has a big debt to Cellcom. If Golan were to declare bankruptcy, Cellcom would be losing a lot of revenue, and the process of collecting the debt would become complicated and very difficult.”
Golan owes Cellcom some 600 million shekels of debt for using its network, a issue that has created a lot of bad blood between the two companies (Cellcom is controlled by Discount Investments). Cellcom’s interest in Golan was powerful enough that it sought to buy it more than a year ago, until it was blocked by antitrust objections.
Golan was the most aggressive of a handful of new players that entered the cellular market in 2012, after the government introduced terms that made it easier to compete with Cellcom, Partner and Bezeq’s Pelephone unit – the industry’s big three.
Plunging rates and high levels of customer churn cut into the cellular providers’ profits, even sending them into the red. Cellcom and Partner’s combined profits in their peak year of 2010 were 2.6 billion shekels, but last year they were down to 910 million shekels. Combined revenues, meanwhile, fell from 13.4 billion shekels to 8.3 billion.
Golan itself failed to turn a profit, even though it stubbornly insisted on keeping its rates low and was running up a debt with Cellcom. That was one of the reasons it was put up for sale 18 months ago.
When Michael Golan – the company’s founder and CEO – looked for a buyer for his firm, hopes for a market shakeout saw Cellcom and Partner shares rally, though they still have a long way to go before reaching their old heights. Even after rising 36% in the past 12 months, Cellcom shares are still down 30% from where they were before the 2012 market upheaval, and they are down 70% from their 2010 peak.
Levy said the veteran cellphone operators are keen to raises prices and that Gil Sharon – the former Pelephone CEO who is shepherding the Electra takeover – is an asset in that regard. He is expected to become Golan’s new chairman.
“Gil Sharon and Electra are regarded as ‘rational.’ The market believes that if they do the deal, the goal is to make money – which means raising rates by everyone in the industry,” Levy said. “The assumption is that after Golan is bought, it will become less aggressive about competing on price.”
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