Elovitch to Buy Bezeq

Exactly four years after buying control of Bezeq, the Apax-Saban-Arkin group will sell off its entire share of the largest Israeli communications company to businessman Shaul Elovitch for NIS 7 billion.

The partners in Bezeq's controlling group, Haim Saban's Saban Capital Group, Moshe (Mori) Arkin and the Apax Partners private equity investment fund, will sell their entire 30.7% stake to Elovitch. However, the deal, which only started to come together Wednesday night, has yet to be sealed even though negotiations are at an advanced stage, TheMarker has learned. Elovitch will be paying a premium over the market price for control, but only of a few percent.

The sale will also have to be approved by the Antitrust Commissioner and the Communications Ministry before it can be completed.

In 2005, the Saban-Apax-Arkin group won the state tender privatizing Bezeq.

Elovitch, the expected buyer, owns via his Eurocom Holdings group a number of businesses, mostly in the communications sector. Eurocom controls Internet service provider and overseas long-distance firm 012 Smile, and 32% of satellite broadcaster Yes. He also owns 57% of Spacecom Satellite Communications, the operator of the Amos satellites.

If Elovitch succeeds in buying Bezeq, then the entire Israeli communications industry will need to be realigned. He will almost certainly be required to sell off some of his cross-holdings to receive regulatory and Antitrust approval for the deal.

In particular, he will most likely have to sell 012 Smile, and the most natural buyer would be cellular company Partner Communications, which is also presently under a management change as it is being sold to Ilan Ben-Dov.

Elovitch will also be forced to sell his stake in Yes. Bezeq owns a 49% share of Yes and has an option to purchase another 8% of the broadcaster. For years Bezeq and Elovitch have been trying to find a way to break up their relationship in Yes, but the Supreme Court has prevented Bezeq from gaining control of Yes. If Elovitch buys Bezeq, then he will control both Bezeq and Yes, which is likely to be opposed by Antitrust Commissioner Ronit Kan, and most likely Elovitch will be forced to sell Yes.

The tender to buy cellular operator MIRS will also be affected by the sale of Bezeq. 012 Smile is one of the three firms competing to buy Israel's fourth and smallest cellular company, with Bezeq subsidiary Pelephone being the leading bidder. If Elovitch does buy Bezeq, then his 012 Smile will probably exit the bidding.

Elovitch was in the running to buy Partner, and reached the final stage along with Ben-Dov, but chose to withdraw after the seller, Hutchison Whampoa, insisted on a NIS 500 million cancellation fee for the deal. Elovitch was worried he would not be able to receive all the necessary regulatory and antitrust approvals required in time, and would be hit with the huge fine.

The same problems will exist in the Bezeq sale, but it seems the conditions proposed by Bezeq's owners in such a case are more acceptable to Elovitch.

He has had contacts in the past with Bezeq's controling owners over such a sale. He has attempted to make a large buy in the communications sector many times over the past 10 years, including two attempts to buy Partner, an attempt in conjunction with Cellcom to compete with Bezeq - that cost him an estimated $30 million - and previous attempts to buy Bezeq.

If the deal closes, Elovitch will be firmly at the forefront of the Israeli communications industry.

Elovitch, like Ben-Dov, started in the Israeli communications market by importing cellular phones: Elovitch imports Nokia while Ben-Dov sells Samsung cellular devices. Both made huge fortunes from the very profitable business.

To buy the controlling share in Bezeq, Elovitch will need to come up with about NIS 7 billion. Based on local credit conditions, he should be able to receive at least 60% of that amount through the capital markets, as Ben-Dov is doing. He may also us bank loans for that sum, or part of it, as the Apax-Saban-Arkin group did.

In any case, Elovitch will have to find about NIS 2.5% in equity for the deal.

Elovitch's Eurocom Group, of which he is chairman and CEO, also has holdings in two regional radio stations: Radius and Radio Hashfela, and in communications and electronics equipment: Eurocom Cellular Communications and Eurocom Digital Communications. Eurocom Cellular represents Nokia in Israel and sells cell phones. In addition, Elovitch has real estate holdings through Eurocom Real Estate and owns Pilat Media as well as an investment firm, Sahar Investments.

Bezeq's controlling shareholders made one of the most profitable deals in recent Israeli history. Even for a world-class tycoon like Saban, who has admitted that he invested in Bezeq mainly out of Zionism, the profits are very impressive.

According to TheMarker's calculations, the internal rate of return for Bezeq controlling shareholders in the four years since privatization was 55%. That is a phenomenal rate of return, particularly for a mature company such as Bezeq. The Saban-Apax-Arkin consortium realized a pretax profit of NIS 4.9 billion in just four years, giving Saban and the Apax Partners a pretax profit of NIS 2.21 billion each, with Mori Arkin chalking up profits of NIS 490 million, on paper. With the exercise of options and dividends, the new owners made a profit of 300%.

Where did all these profits come from? First, there's the enormous, steady stream of dividends that Bezeq has been issuing ever since it made the switch from public to private - NIS 7.92 billion, all told. About NIS 3 billion of that was from accumulated profits from before privatization, for which the company made a NIS 1.8 billion reduction of capital in early 2007. The remaining nearly NIS 5 billion in dividends resulted from current operations. Since the privatization, the board of directors has seen to it that 100% of cumulative profits are distributed as dividends twice a year.

In August and September of this year, the controlling shareholders sold off a total of 245 million Bezeq shares for NIS 7.5 and NIS 7.83 each, respectively, netting them NIS 1.9 billion. They had purchased the shares from the state in October 2005 according to a value of NIS 3.7 per share.