There was once a government company called Bezeq Israeli Telecommunication Co. Ltd. (TASE: BEZQ). Like many companies of its kind, Bezeq was privatized in order to improve its efficiency and administration and to make possible the huge investment needed in communications without having to deal with state budget constraints.
Several years have since gone by, but Bezeq continues to be perceived as an oddball in the Israeli telecommunications market. Its market share is still very large, it essentially owns the nation's primary telecommunications network, while having a fairly low debt ratio, which means that it is readier than its rivals to deal with unexpected developments.
But the penny dropped yesterday. Bezeq, under its new controlling shareholder, Shaul Elovitch, made an announcement that will bring it in line with the other telecommunications companies, by reducing its capital and increasing its debt through a NIS 3 billion dividend - 64% of its shareholders equity.
It is no secret that the basis for this decision is Elovitch's wish to get back his investment from Bezeq's own coffers, as the company has no substantial profit balance for distribution. He is relying on the company's cash flow as the main safety cushion. This expected step does not deviate from the norms that have developed in Israel in recent years, as the examples of Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR), Alon Holdings Blue Square - Israel Ltd. (NYSE: BSI; TASE: BSI) and other companies demonstrate.
The dividend can be judged from two perspectives: Bezeq's shareholders, beginning with Elovitch, who undoubtedly welcome such a large dividend; and Bezeq's stakeholders, i.e. every person affected by what goes on in the company.
In the case of Bezeq, that means the entire Israeli public, and the question whether the decision benefits the public is, to put it mildly, problematic. The question is who will bear the actual burden and the risks from the decision to so radically increase Bezeq's debt?
Although Bezeq's management has promised that it will go forward with the dividend only if it obtains two authoritative opinions testifying that its credit rating will not be affected. The courts will also have to approve the capital reduction. Nonetheless, recent events in global finance ought to be borne in mind.
For many years, financial transactions were based on credit ratings issued for companies or various assets. Then came the latest global crisis, and showed what should have been known to everyone: ratings are based on assumptions, which sometimes do not exist. This is why financial companies are required to pad their safety cushions against various exposures.
Bezeq is not a financial company, but the principle of coverage against the risk that some of its assumptions might not materialize should apply to it. Who will deal with the risk that in future Bezeq will lag in technological development of its infrastructure? Who will expand the company's capital base if unexpected developments occur in Israel or abroad?
As a company that it too big to be allowed to fail, if Bezeq's cash flow deviates sharply from the assumptions, the regulator will be called into action. This might involve small steps, beginning with rate hikes, the provision of government guarantees, and up to radical measures of direct intervention.
All this raises the basic question about the public interest in the expected capital reduction at Bezeq, and the extent to which the regulator can ignore this question, which has become increasingly relevant in an industry that has fallen under financial planning more than technological planning and the general good.
Published by Globes [online], Israel business news - www.globes-online.com - on December 21, 2010
© Copyright of Globes Publisher Itonut (1983) Ltd. 2010