Taking Stock / A Partner for Cable

1. When Shmuel Dankner, chairman of Matav Cable Systems and a co-founder of Partner Communications, voted in a management board meeting in March 1998 to name Amikam Cohen as CEO of Partner, he never thought the day would come that the man he had just promoted would negotiate to take Matav away from him.

Back then, Dankner Investments was one of Israel's most powerful holding companies, Matav was a cash cow, and Partner was a bitty startup trying to carve itself a place in Israel's cellular sector while weighed down by the massive $400 million permit fee it had paid the state.

2. Five years later, Israel's telecommunications sphere is unrecognizable. Many a deal has gone down. But Partner's acquisition of Matav, which is poised to merge with Tevel, is the only one that looks like a real turning point.

If Partner succeeds in pulling off its takeover of Matav, and then of Tevel, and later of Golden Channels - meaning that it would buy the entire cable industry - then we will have, for the first time, a company capable of competing with the domestic communications monopoly, Bezeq.

3. For the last five years, the IDB-Recanati group has been fighting with the Fishman-Mozes group and the Dankners over supremacy in the united cable arena, as the united cable company was seen as the only possible competition to Bezeq.

By 1998, IDB and Fishman seemed to be best positioned to win. Around the time that Partner was established, IDB group firm Discount Investment Corporation and Aurec proposed that Shmuel Dankner sell Matav to them for $500 million.

In 1999, Dankner had developed an appetite. He refused to sell Matav to Fishman even at a whopping price per subscriber of $3,000.

At that stage, Aurec and Bellsouth bowed out, and Fishman and IDB stepped in. Come 2000, Fishman was in place to take over a merged cable company. He even began preparing a prospectus for a Wall Street offering.

And then came the telecoms crisis. The huge investments made with borrowed money slammed the cable owners. Tevel went bust, and both Fishman and Shmuel Dankner's group were effectively paralyzed by the tremendous weight of their loans.

The power struggles between the cable owners and the huge loans they had taken torpedoed the much-vaunted cable merger time and again. The three cable TV companies, formerly perceived as the most predacious firms in the telecoms arena, turned into prey.

And then Partner popped up.

4. Partner? Let's look at it just a year ago. The telecoms crisis did not spare Israel's youngest cellular player. A year ago, the company was trading at a market capitalization of just $500 million and investors were shunning its bonds. The company had been a leader in technological innovation and growth since its inception, but its equity structure led many to doubt whether the firm, which had accrued massive losses, could ever stand on its own two legs.

Suddenly Partner began producing ever finer financial statements. From quarter to quarter, its ability to generate cash from operations became clearer. Its stock rose 150 percent, analysts started upgrading it, and within a year it had become the leader in the cellular sphere.

5. Amikam Cohen has been fantasizing about investment in cable for years. At the start of 2000, he told a young economist named Yaron Zelekha to check whether investment in a united cable entity would be wise. Zelekha liked the idea.

But Partner's owner, Hutchison Whampoa of Hong Kong, said that it knew

nothing about television and Partner should remain in cellular. Zelekha, disappointed, left Partner and became the accountant general of the Finance Ministry.

But Cohen could not forget the idea. A few weeks ago he tried again, and this time Hutchison Whampoa gave him a thumbs-up to try and take over Matav. "You can't imagine how hot I am for this deal," Cohen told a friend this weekend.

6. Why Partner? What is the secret of Partner's success? Three answers: network, ownership and management.

l Network: The company chose GSM technology, the most prevalent and also the cheapest. While Cellcom and Pele-Phone Communications have to keep assigning most of their cash flow to investment in their networks, Partner invested only half its cash flow in 2003, yet it continues to grow faster than its two rivals and is also preparing for third-generation service.

l Ownership: While Pele-Phone Communications had been subject for years to the interests of Motorola and to the Bezeq management culture, and Cellcom was torn between its warring shareholders, Partner had a lot of shareholders but only one party calling the shots - Hutchison Whampoa.

l Management: When you have one shareholder knowing what it wants, you have focused management.

Just ask Nochi Dankner, who Amikam Cohen left gasping in the dust. Three years ago IDB (which Dankner has since bought) was the only one with holdings in both cable and cellular. IDB held a quarter of Cellcom, 10 percent of Partner and 50 percent of Tevel. Everybody figured that IDB would be the one to present competition to Bezeq.

But the management vacuum at IDB lost Tevel to the banks and reduced Cellcom to paralysis, unable to make major decisions such as barging into cable.

Unless Cellcom hastens to counter-bid for Matav and Tevel very quickly, the Partner-Matav-Tevel deal will close, and it is clear that the man who had been expected to conquer cable, Nochi Dankner, will remain outside.