Ministry Backs Plan to Merge Bezeq Telecom's Business Units

Move would not end ban on keeping operating units apart but would entitle company to giant tax benefit.

Bezeq Chairman Shaul Elovitch.
Dudu Bachar

In a move that could save Bezeq hundreds of millions of shekels over the next eight years, the Communications Ministry has said it will let the company take the first steps toward merging its business units.

But the decision, which Bezeq reported to the Tel Aviv Stock Exchange on Friday, is still subject to public hearings and is likely to be opposed by both its rivals and the treasury, who contend that Israel’s dominant telecommunications company hasn’t done enough to ensure effective competition in the communications industry.

“This move has the potential of significantly undermining competition in the communications market, certainly if it is undertaken now, before conditions for acting have been met,” treasury budget chief Amir levi said in a letter om Sunday.

Bezeq has been lobbying hard to end the so-called “structural separation” imposed on it in the 1990s as a way to give other companies the chance to compete against it in the then-emerging internet segment.

Since then, the company has had to operate its core landline telephone business, as well as its Pelephone cellular unit, Yes satellite television and internet operations, as separate entities, adding costs and preventing it from offering packages of phone, internet and TV, as its rivals do.

The decision by the Communications Ministry won’t bring a complete end to structural separation at Bezeq. The proposal calls for an interim arrangement, under which Bezeq will be allowed to operate legally and financially as a single company while management and operations of the different units remain separated by Chinese walls.

But the interim measure would give Bezeq one critical benefit: The parent company would be entitled to use the accumulated losses at Yes, amounting to 5.5 billion shekels ($1.4 billion) against future taxes. Under a preliminary agreement reached with the Israel Tax Authority in September, Bezeq agreed it would pay a 462 million-shekel tax bill after purchasing full control of Yes, but would then be able to use Yes’ losses against future taxes over the next eight years.

That works out to as much as 1.3 billion shekels, or an average of 41 million shekels a quarter. Shares of Bezeq finished 4.6% higher at 7.10 shekels in TASE trading on Sunday in heavy trading.

Bezeq said the Communications Ministry decision is conditional on its investing in infrastructure and accelerating deployment of a fiber optics broadband network to 76% of all Israeli households within three years.

Bezeq sources said they expected the hearings over structural separation to be completed by the end of the first quarter next year, but the company will almost certainly face a fight.

Media and advocacy groups are wary about the warm relationship between Prime Minister Benjamin Netanyahu, who is also the communications minister, and Shaul Elovitch, Bezeq’s controlling shareholder. Netanyahu has recused himself from Bezeq-related issues, but the ministry’s director general is a Netanyahu confidante and Regional Affairs Minister Tzahi Hanegbi handles Bezeq.

The timing of the announcement over the weekend and at the end of the year has also raised suspicions. Although the Finance Ministry did not issue a formal statement, treasury officials reacted angrily to the Communications Ministry’s decision and said it would not be approved as formulated.

State Comptroller Joseph Shapira had urged the Communications Ministry to desist from acting on the structural separation issue until he had completed his report on the Bezeq monopoly. On Sunday, the Movement for Quality of Government added its voice to the opponents.

“Making the decision right now, without any justifiable reason to act so quickly and while the State Comptroller is preparing a wide-ranging and relevant report on the landline communications market, is a decision not based on facts, as it should be, and raises questions about the dubious reasons that stand behind it,” the organization said.

With reporting by Zvi Zrahiya