haaretz 24-10-2012
Telecom turmoil as cellular companies look for buyers
The flurry of recent mergers and acquisitions activity has been boosting share prices of telecom companies.
Israel’s telecom industry is preparing for reorganization again, with Cellcom and Partner Communications on the block, while Patrick Drahi attempts to consolidate his control over HOT Telecommunication Systems.
Just recently, in 2009 and 2010, the sector underwent a rash of mergers as all companies but Cellcom changed hands. But the industry looked much different then, with profits soaring, thanks largely to lax regulation and highly leveraged buyouts. Since then, however, much of the market has gone into a tailspin: as regulation has toughened and market conditions have changed, company values have come crashing down.
The owners of Cellcom, Nochi Dankner through Discount Investment Corp., and of Partner, Ilan Ben-Dov through Scailex Corporation, are now trying to pick up the pieces by selling to the highest bidder, to reduce the leverage at the tops of their pyramids and repay billions of shekels to the banks and bondholders who put up the money for their purchase in the first place.
Ben-Dov is now said to be wooing Haim Saban into buying at least 16% of Partner. Dankner has already talked to Saban, and is now reportedly in talks with others.
Some companies, though, appear to have emerged strengthened amid the turmoil that has hit the industry, particularly those still holding cash. While it appears the main owners of cellular companies cannot recover without relinquishing control, the ownership of landline companies, Bezeq and HOT, seem to have come out relatively unscathed, thanks largely to prudent financial planning and a more solid asset base.
Drahi exploits opportunities
Patrick Drahi, who completed his takeover of cable company HOT in 2010, seems anxious to turn the slump in its share price to his advantage. Certain that HOT is currently trading well below its real worth, he wants to keep all the chips on the table to himself and enjoy the full future increase in its value.
Drahi is pursuing two deals these days, worth over $400 million together. One is delisting HOT from trading in the stock exchange and taking it private at an estimated cost of NIS 852 million, while the other is for Cool Holdings, HOT’s parent, to buy back about NIS 850 million in private debt from institutionals.
But bondholders are currently balking, demanding an early redemption fee of NIS 220 million. If Drahi reaches agreement on the price of a purchase offer and obtains the financing, mainly from foreign banks, he could complete the move within several months.
Drahi will also need to satisfy his former partners, Eliezer Fishman and Noni Mozes, who still hold 6% and 3% stakes in HOT respectively. Two years ago they sold Drahi shares in the company at prices that were substantially higher than the current value, and they will probably also demand some form of additional compensation.
Only Bezeq remains off the shelf
Meanwhile, the flurry of recent mergers and acquisitions activity has been boosting share prices of telecom companies. The market has begun stabilizing, adding 23% to 35% to the prices of Bezeq, Cellcom, and Partner while HOT’s shares continue fumbling, remaining even a bit lower than the NIS 38 per share offered the public by Drahi.
It appears the only company in the industry not involved in the process of acquisition or change of ownership is Bezeq, under the guidance of CEO Avi Gabay. Bezeq, however, hasn’t been overlooked by the market correction either, rising about 20% since mid September to NIS 4.80 per share, reflecting NIS 13.5 billion in company value, although still remaining 13% less than at the beginning of the year.
The latest recovery in Bezeq’s stock is certainly good news for Shaul Elovitch. Last year he made a notional profit of about NIS 3 billion from his investment in Bezeq through B Communications, which owns 31% of the telecom company. Now, thanks to the hefty NIS 8 billion in dividends distributed by Bezeq since he acquired control in 2009, his theoretical NIS 300 million on the investment as of the beginning of September has been wiped out and his position has been evened out. B Comm bought Bezeq at NIS 8 per share and received NIS 3 per share in dividends, so its adjusted price for the purchase is NIS 5 per share – roughly the same price at which it is now trading.
B Comm shares, which can be considered leveraged options of the first degree for Bezeq shares, have jumped 110% in the last month and a half, now trading at a company value of NIS 831 million. Its bonds have also risen by 16% over the same period, lowering their yield to maturity to the single digits: 5% to 9.9%. If this trend continues the company will be able to refinance its debts without any problem.