Israel's Electra to Pay $90 Million for Golan Mobile Carrier

Elco unit to buy Golan Telecom amid expectations that rates will start rising; forms joint network venture with Cellcom.

Michael Golan, outgoing head of Golan Telecom.
Tomer Appelbaum

Electra Consumer Products will buy Golan Telecom for 350 million shekels ($90.6 million) in a deal that will keep the upstart cellular company independent, but is likely to spark a rise in phone rates to consumers.

Electra, which is part of the Elco Group, also signed an agreement yesterday with Cellcom Israel under which they will form a 50-50 joint venture to build and operate third- and fourth-generation cellular networks. Cellcom said it would make a 10-year, 130 million-shekel loan to Electra to help finance the purchase of Golan, with repayment beginning after an eight-year grace period.

The transaction is subject to the approval of the Communications Ministry and the Antitrust Authority, but no obstacles are expected. The sale signals the exit of Michael Golan, Golan Telecom’s founder and CEO and public face of the company, from the Israeli business scene.

The deal, which ends a year-and-a-half of speculation over the fate of Golan and Israel’s beleaguered cellular industry, was welcomed as a win for all the companies involved in the deal as well as their rivals.

Shares of Electra were up 8.8% late afternoon on the Tel Aviv Stock Exchange at 58.30 shekels. Cellcom was ahead 2% to 34.72 and Partner Communications, which has nothing to do with the deal, was up 3.2% 19.99.

The network-sharing agreement between Electra and Cellcom, which is valid for 10 years, is not unprecedented in the industry and mirrors the tie-in between Partner and Hot Mobile, which jointly operate a cellular network. For Cellcom, the agreement should be highly profitable. The company said it expected to earn revenues of between 210 million and 220 million shekels annually before value-added tax, depending on the number of Golan Telecom subscribers and their use of the shared network.

In return, Cellcom said it was forgiving debt Golan owes for being hosted on Cellcom’s network since last May. Golan had been making monthly payments of 10.6 million shekels, about half the 21 million shekels it was supposed to be paying. Cellcom and Golan also agreed to end all legal proceedings between them.

Electra, whose businesses include air conditioning manufacturing and importing and retailing, most notably its Mahsanei Hashmal chain of electronics stores, said it saw Golan as a new business segment that would play on its existing strengths.

CEO: 'Creates synergy'

“Buying Golan Telecom will create a synergy for us between the retail world and the brand, where we are the leading player, and Golan Telecom and the cellular industry. The two brands share the same DNA and values, like excellent service at affordable prices,” said CEO Zeev Klimi.

It is not yet known whether the Golan brand will be preserved under the new ownership or who will be appointed CEO of the new company. However, Gil Sharon, who was previously CEO of Bezeq’s Pelephone cellular subsidiary, led the negotiations for Elco, and is expected to be appointed chair of Golan Telecom.

Golan Telecom entered the market in 2012 with much lower rates and a much leaner cost structure than its competitors, and forced the others to imitate it. But Golan repeatedly defied the rules in other ways, too, including dismantling its cellular network in violation of the terms of its license. The company has no infrastructure and it has been losing money and running up debts, but it counts as assets 800,000 subscribers and a well-known brand associated with low rates.

The sale of Golan leaves five players in the market and a sixth one is expected to enter in 2017 – Xphone, which has already acquired a frequency and a network-sharing contract with Cellcom. Xphone is still awaiting an operating license from the Communications Ministry.

Nevertheless, cellphone rates are expected to start rising, which is why cellphone shares extended a rally that has been underway for some time in anticipation of an industry shake-up. Not only has Golan lost money, its rivals have seen revenues fall and profits evaporate and are anxious to raise rates.

“The assumption is that after Golan is bought, it will become less aggressive about competing on price,” Sabina Levy, head of research at Leader Capital Markets said on Monday.