Taking Stock / Partners in Cream

What do Shaul Elovitch, Itschak Shrem and the Dankner family have in common?

All run major business groups that invested widely in high tech and telecommunications during the boom, and belly-flopped.

Elovitch came a cropper with Ofek, which was supposed to compete with Bezeq but lost $30 million and collapsed. Shrem invested hundreds of millions of shekels in tech startups whose shares imploded. And the Dankners, well, do we really need to go into it?

They have another thing in common, too. All three were partners in the great multichannel television fiasco. Shrem and Elovitch invested hundreds of millions of shekels, which they'll most likely never see again, in the Yes satellite TV venture. And the Dankners sank tremendous amounts into cable, via Matav Cable Systems.

But the threesome have yet another thing in common. They were all saved by one purely astonishing company this year, a telecommunications company with practically no equity at all, but that is traded at a market cap of $1.4 billion. All of five years old, its stock doubled in 2003, allowing its shareholders to exchange some of its shares for NIS 400 million cash in hand.

Yes, it's Partner Communications, which provides cellular communications under the "Orange" brandname. Elbowing into the supposedly saturated cellular market five years ago, it paid the state an exorbitant $400 million cash for its operating permit. It then took all the money it raised on Wall Street to return loans to its owners, who then threw it into the roaring capital market to sink or swim, with no backing at all.

Partner, the last company to join Israel's cellular arena, was forced to contend with the first-on-the-scene Pelephone Communications, a subsidiary of Bezeq, and with Cellcom, a well-oiled cash machine belonging to the richest, most powerful business groups in Israel. Yet Partner made it, wresting away the crown as Israel's leading cellular provider.

Ilan Shiloach, manager of the McCann-Erickson advertising agency, put it beautifully on the occasion of dumping Pelephone for Cellcom in November: "The two companies stopped looking at each other this last year. They are looking mainly at what Partner is doing."

Not only they; the entire capital market has its eyes glued on the Partner-orange phenomenon. Partner's whole business is in the domestic Israeli arena, it was launched during the bubble days, it paid tremendous fees to the state, yet it managed to create great value for its original shareholders.

From the start of 2003, Partner has netted NIS 358 million, compared with NIS 53 million in the same nine months of 2002. Yet more importantly, its cash flow was NIS 700 million before interest, and only NIS 337 million of that was directed to investments in equipment and fixed assets.

The fact that bears best testimony to the company's performance is that despite the competition and huge investments required in its sector, Partner is scaling back its liabilities to the banks. From the start of the year it has reduced its debt burden by NIS 400 million.

Wait a moment, did we mention the competition? Caution is necessary when talking of competition in telecommunications. The great fight over the marketplace seems to be behind us. Competition today is largely over new subscribers, and as for the existing ones, certain companies seem to be starting to regard them as a captive audience ripe for milking.

It might be premature to say the cellular market has settled into a triopolistic equilibrium, but that's the general direction. It may explain why analysts have started to call Partner a "cash cow", meaning a company operating in a stable market that generates strong and relatively reliable cash flows.

For the sake of caution, we should note that Partner still has an elephantine NIS 3.6 billion debt and zero shareholder equity. The market valuation, $1.4 billion, harks back to the pricing of happier times. But even if Partner seems highly priced, clearly the many question marks hovering over the company in particular, and over the cellular arena's capacity to feed three rivals, are disappearing.

It is therefore unsurprising that Partner is the only player in the telecommunications sphere to still have its original manager, Amikam Cohen. The rest have changed the hand on their rudder once or twice. Any CEO looking at Partner's results, or Cohen's share of the stock that makes him one of Israel's richer men, can understand why he isn't on the lookout for new thrills, and why he prefers to keep riding his cash cow.