Outgoing Minister of Communications Gilad Erdan initiated the constriction and consolidation of networks, aimed at making it possible to establish only three networks in Israel, with ownership divided among the operators. In other words, Golan Telecom and Hot Mobile will have to convert the investment in 3G that they undertook into investment in 4G in the form of a joint network owned in equal shares together with the veteran operators.

In practice, the agreement that released the two new companies from their obligation to set up a 3G network is very generous to them; it enables them to substantially reduce the investment required of them, and to convert it to into a generous and broad consolidation agreement with the veteran operators.

The agreement between Hot Mobile andPartner Communications Ltd. (Nasdaq:PTNR; TASE: PTNR) is very close to gaining approval, but it turns out that the Ministry of Communications believes that the agreement between Golan Telecom and Cellcom needs changes, because in the Ministry’s opinion, the agreement does not really convert Golan Telecom’s 3G investment into a joint 4G network, and the Ministry is therefore demanded that the agreement be revised to take this into account.

Keep in mind that the main complaint against Golan Telecom is that the company is in effect becoming a virtual operator on the Cellcom network, and that the Ministry of Communications is thereby releasing Golan Telecom from the obligations imposed on it as a full cellular operator that maintains and operates a network. The chief criticism of the Ministry is that it is allowing Golan Telecom to plow into the market without the burden of investment and setting a network, with all the resulting consequences, thereby enabling the company to sell cellular services at such low prices and imperil the veteran companies.

Published by Globes [online], Israel business news - www.globes-online.com - on March 29, 2015

Cellcom’s share price is currently up strongly, by 3.99%, on the Tel Aviv Stock Exchange.

Cellcom will not distribute a dividend for the fourth quarter. “The company’s board of directors decided not to distribute a dividend for the fourth quarter of 2014, given the continued intensified competition in the market and its adverse effect on the company’s revenues and in order to further strengthen the company’s balance sheet,” Cellcom’s announcement said.

Cellcom CEO Nir Sztern said, “Even in this year of intense competition in the cellular market, Cellcom group continues to present good financial results, demonstrated by a free cash flow of approximately NIS 1.2 billion, net income of NIS 354 million and an increase in revenue from sales of end user equipment. We continue to take cost-efficiency measures in order to adjust our cost structure in response to heightened competition level in the market. The efficiency measures we implemented following the merger with Netvision have led to savings at an annual run rate of approximately NIS 850 million.

“We are pleased with the successful launch of “Cellcom tv” and expect to conclude the first quarter of 2015 with more than 20 thousand customers. During 2014 we prepared to create new growth engines for the group, and we expect 2015 will be marked by growth in the operation in the fixed-line market. The combination of “Cellcom tv” with the opening of the fixed-line market to competition through the wholesale market, presents an opportunity for growth in revenues, among others, through marketing triple packages at attractive prices.

“The aggressive price competition in the cellular market continued to lead to erosion in revenues and to a high costumer turnover. Still, the company managed to recruit a record number of subscribers, so that the company’s cellular subscriber base eroded this year by 4.0% only, alongside an increase in its subscriber base in the fixed-line fields.

“Recently, we successfully completed the negotiations for a collective employment agreement with the employees’ representatives and proved that it is possible to reach understandings, that put the employees’ benefit alongside the company’s benefit”

A senior communications source told “Globes,” “Partner acquired Mobile 012 for NIS 1.5 billion in 2010, and now all of Partner is worth only NIS 2 billion. It’s understandable that investors are worried that their profits will continue to fall in the coming year, creating a situation in which the companies will have to decide how to continue servicing their debt. That will be the turning point, because it’s clear to everyone that something will happen, and this situation cannot continue. The problem is also that there is no Minister of Communications, and won’t be one until at least June, so you can’t expect the regulator to step in and prevent a collapse.”

Other market sources believe that the declarations by the Ministry of Communications that it does not intend to allow mergers in the sector in the coming year will further exacerbate the investors’ anxiety. It appears that the price war in the market will last to the bitter end, which will of course threaten the veteran companies.

In the middle of all this, the Ministry of Communications is introducing another player into the cellular market Xfone, which bought frequencies in the tender. The result is additional pressure on prices, because it is clear that Xfone will have to make a splash with its price; the guarantee that it deposited in the tender depends on its ability to acquire market share.

“Unless it gains a market share according to the formula set by the Ministry of Communications, Xfone won’t be able to regain its NIS 17 million guarantee. That means that they have poured more oil on the fire,” senior market sources said.

Partner received NIS 200 million in bank loans only a few weeks ago, and arranged for two future loans of the same amount from institutions in 2017.

Raising money when possible

Cellcom is raising cash now to recycle debts because it is able to do so, and because it does not know what will happen in the future, capital market sources believe, following the company’s announcement of its planned bond issue, and the warning it gave last week that competition in the cellular market was intensifying.

2015 has started with a bang in the cellular market. Cellcom, which has launched new television services, finds itself under powerful attack in its core business, following bargain campaigns by its competitors that have pushed cellular prices down to a new low. The bargains by Golan Telecom Ltd., HOT Mobile Ltd., and 012 cellular (Partner’s cheap brand) are putting the prices of cellular packages in the NIS 15-40 a month range. Since the average per subscriber revenue is currently about NIS 70, the veteran cellular companies fear a wave of contract re-openings by large business customers, leading to a steep fall in revenue. Such a development is liable to pose a challenge to the companies.

It should also be kept in mind that the cellular companies are in the midst of building 4G networks that require additional investment (Cellcom will have to invest tens of millions of shekels in the purchase of content).

Investors in the market, who see the price war in the sector and the 4G cellular frequencies tender that enabled an additional player (Hezi Bezalel) to enter the cellular market, are concerned that his entry will further intensify the competition. At the same time, they realize that mergers in the sector will not be allowed over the coming year, and believe the regulators when they say that they will not allow them. This means that the stiff competition will continue, and it is entirely possible and reasonable that one of the veteran companies will find it difficult to repay its debts.