Taking Stock / C'mon Cheryl, Let's Go

1 "Cheryl, let me introduce you: This is the most important man in Israel," said billionaire Haim Saban, introducing his wife to Shaul Elovitch at the Bezeq conference two months ago. A few moments later Saban took the stage and said that his investment in Bezeq had been motivated by Zionism. Had it been a Spanish company, for instance, he probably wouldn't have bought it, Saban said.

What Saban could have told Cheryl was, "Let me introduce you. This is Shaul Elovitch. This guy has been dreaming about buying Bezeq for 10 years now. We may make his dream come true. You remember me telling you that we made 300% on Bezeq, which we bought when it was privatized? This, Cheryl, is the guy who can turn that theoretical profit into hard cash."

Cheryl presumably already knew that her husband has an extraordinary knack for buying and selling businesses at the right time. She was by his side in 2001 when at the last second, just before the great media crisis hit, Saban sold Fox Family to Disney's Michael Eisner for $5.3 billion, from which the Israeli expat pocketed $1.5 billion. All too soon afterward it became clear that Disney had overpaid Saban and his partner Rupert Murdoch by around $1 billion or $2 billion for Fox Family.

At Bezeq, the story is different. While Saban et al could thank Disney for the grandness of their exit from Fox, Elovitch had nothing to do with the tremendous returns Saban and his partners made on the Israeli telecommunications company.

What happened with Bezeq is that the group bought it far below its market value. The origin of that 300% profit made on Bezeq by Saban and his partners, the private equity fund Apax and billionaire Mori Arkin, is diverse.

2 When Saban, Apax and Arkin close the deal to sell their controlling interest in Bezeq to Elovitch in about six months, they'll have exited one of the most lucrative takeovers in Israeli history. To make 300% in four years works out to more than 40% a year. During that time the Tel Aviv Stock Exchange returned less than 10% a year and the best private equity funds aspire to 20% or 25% a year.

The Saban group isn't the first to make a killing on Israel's telecom companies. It was predated by the king of Hong Kong, Li Ka-shing, who agreed two months ago to sell the 51% controlling interest in Partner Communications to Ilan Ben-Dov for NIS 5.29 billion.

As in the case of Saban and Bezeq, Li Ka-shing's profit stemmed from three elements. One is that the company's share price soared along with its earnings. Two is powerful cash flows that financed creamy dividends. Third is that they didn't risk much of their own equity.

That third element tends to attract little attention. It's complicated and doesn't leap to the eye. But sometimes it's the main element. The mammoth returns that Saban and Li Ka-shing posted on their Israeli telecom investments were largely based on the fact that they didn't put much of their own money into the deals.

Li Ka-shing returned most of his investment when Partner held a giant issue shortly after the Hong Kong billionaire's takeover. With Saban, it was simpler. Bezeq's jump in market capitalization and vast cash flows enabled him and his partners to "refinance" the deal after just two years. Which means, they withdrew enough dividends from the company to cover their entire personal investment.

3 Over the last decade Shaul Elovitch and Ilan Ben-Dov made hundreds of millions of shekels from importing cellphones to Israel. Elovitch imported Nokia phones and Ben-Dov brought in Samsung devices. Yet neither could have pulled off deals worth billions of shekels if investors hadn't been willing to lend them the money. Yup: It's exactly the same sort of leverage that Saban and Li Ka-shing arranged, which in turn arranged their gorgeous returns.

How is it that all these people buying Israeli telecom companies manage to obtain such huge loans? It's the same reason the Israeli companies are so profitable. There is no competition in most areas, and no regulatory effort to introduce any.

The companies' owners and their managers have perpetuated a theme in the business press that regulation in Israel is tyrannical. But when the time comes to close a deal, cash out profit and take the money home, suddenly we see something bizarre.

The most profitable deals in Israel turn out to be in sectors with regulatory regimes.

Note the phrase "regulatory regimes" rather than "regulated," because in practice, the companies' owners and managers lead the regulators by the nose.

Now Elovitch's dream is coming true, but from the public's perspective, the outcome is a keen disappointment. Instead of bringing a message to consumers, instead of forcing the company to become more efficient and lower prices, Elovitch is joining the club.

The only reason investors are so eager to help Elovitch finance his takeover of Bezeq, and Ben-Dov to pay for Partner, is that they assume no regulator would try to break the club. The status quo will remain.

As Communications Minister Moshe Kahlon put it, "The Bezeq deal attests to the strength of the communications market." So instead of the communications minister joining hands with the Finance Ministry and Antitrust Authority, instead of taking advantage of Bezeq's takeover to create competition in telecommunications, Kahlon applauds the sector's strength.

Which means, its structure that turns him, his colleagues in politics and the regulators into marionettes controlled by the oligarchs of Israel's telecommunications industry.