The Cable Broadcasting Council is presently discussing the application of cable TV company Tevel (owned by Discount Investments and the US cable companies UPS and TCI), to acquire cable company Gvanim, (owned by Monitin Publishers, Telrad Holdings and Cable Com of Switzerland). The price is $240 million. The deal is expected to be approved, subject to certain stipulations, as in a previous deal, in which Golden Channels and Fishman Properties acquired Idan.
In two senses, this deal constitutes a milestone. Firstly, it represents the second stage of cable television companies’ convergence, following the acquisition of Idan, so that three large companies will replace the erstwhile five. Secondly, the high price to be paid by Tevel for Gvanim will from now on set a precedent where cable companies are concerned.
In 1997, Gvanim earned NIS 42 million after tax. The company’s 1997 revenues amounted to NIS 173 million. Proportionate to its subscription list (141,430 at April 1, 1998), Gvanim is the most profitable of the five cable companies and evidently also the most efficient. It also posts the highest cash flow and the highest profit percentage on turnover. By comparison, the 1997 profits of Matav, serving 272,000 subscribers, reached NIS 73.4 million, on a turnover of NIS 334.7 million. Tevel, serving 240,000 subscribers, earned NIS 56.3 million in 1997, on a turnover of NIS 358.5 million. As a proportion of turnover, Gvanim posted a 24.2% profit, compared to 21.9% for Matav and 15.6% for Tevel.
Menahem Ackerman was appointed general manager of Gvanim in 1994, succeeding Amos Lasker, the company founder. He was previously finance manager at Telrad and a director of Gvanim on its behalf. Ackerman very proudly explains why Gvanim is worth an "American price" of more than $1,700 per subscriber, numbering off the company’s advantages one by one. But the smiles and the brave front may also conceal some misgivings.
As regards infrastructure, Gvanim differs from the other companies, apart from Matav, in that it laid its entire infrastructure without resorting to the services of Bezeq. From the first day, the shareholders decided to set up an independent network. Gvanim’s infrastructure is also noteworthy for its good optical fibre/subscriber ratio. In the north, the level is less than 1,000 households per fibre. In Modi’in, the level is 30 households per fibre.
The town of Modi’in is a chapter in itself, and Gvanim regards it as one of its biggest assets. The town’s master-plan calls for some 60,000 households. So far, 15,000 have been planned and 9,000 implemented. Gvanim’s technological solution for Modi’in is to set a ring around the present populated area, consisting of seven inter-connected "chambers" (communication centres). Present penetration of Modi’in amounts to 65%. Gvanim’s overall penetration level is 70%, reaching more than 75% in east Rishon LeZion and 82% in Karmiel. Gvanim, however, has access to all households in Modi’in, since it provides even non-subscribers with Channel 1 and Channel 2 services. Tel-Aviv residents find this hard to understand, but Modi’in is a non-antenna town. Taking a future perspective, this is an excellent infrastructure for telephony services.
The burning problem of the cable companies is the competition looming from satellite multi-channel TV broadcasts, effected through the DBS companies. Ackerman’s answer to the DBS threat is to digitise the system, but a no less important answer is the content development of Gvanim’s local channel.
Said Ackerman: "From the outset, we regarded the local channel as an ensign. It carries significant weight. Its specific contribution is hard to quantify, but it is important. We believe that one of the most important tools for competing with DBS is the local channel, which is actually a countrywide one. We are constantly innovating. We have faith in this field, and believe it to be the only way to bind the subscriber to us".
Gvanim’s growth potential is most impressive, especially in comparison with Tevel, which has nowhere to grow. The two development areas are Modi’in and west Rishon LeZion, which together represent a growth potential of some 100,000 households. Gvanim has another advantage. In most of the areas assigned to it, the concession is for 15 rather than 12 years. According to the Rosenne committee’s recommendations, Bezeq cannot compete for video broadcasts in the cable companies’ concession areas as long as the concession is in force and as long as they do not supply telephony services in those areas. Accordingly, Tevel, purchaser of Gvanim, has a window of opportunity of an extra three years in those areas, free of competition from Bezeq.
And as regards concession areas, Gvanim also has an overseas investment in the shape of a 50%-owned cable company in one of the Caribbean islands of Guadeloupe. This company already has 20,000 subscribers and is starting to make a profit this year.
What Happens After the Deal
Ackerman comments, regarding his personal angle on the transaction: "I will see how it works and decide what to do. I will do everything to ensure that the company continues to function as it is accustomed to function. The changes will be minor ones only. I hope Tevel will get to know Gvanim within a short time. This is a critical period in which the company is deploying vis-a-vis DBS, and care must be taken not to create tension among the staff".
"Globes": Did you foresee what would happen?
"It was obvious to me that five cable companies could not continue to exist. Fewer companies can organise more efficiently in face of the competition. This is an inevitable process. I was surprised at the timing, but I hope the process will unfold smoothly and people will understand that, as far as they are concerned, there is no change".
When Ackerman says he was surprised at the timing, he is not referring to the sale of Gvanim, but to Tevel’s take-over of Gvanim. Two scenarios were making the rounds of the cable industry as regards the inevitable reduction in the number of companies in face of the competition. One was that the two smaller companies, Idan and Gvanim would merge, and the other was that the two small companies would be swallowed up by the two large ones. But all this was seen happening not in early 1998, but in two years time, maybe more. The idea of the convergence was to head off competition on the part of Bezeq rather than to cope with the present evil of DBS.
But actual events threw a spanner in the works, proving that timing is a very relative thing. The Israel Corporation, for reasons of its own, decided that this was a good time to realise its investment in Idan, and that company thus became part of the Golden Channels group. The shareholders did not, on the other hand, intend to sell Gvanim. Not now, at least. However, Marcus Katz, a Mexican Jewish billionaire and the holder of one third of the Monitin publishing house that held a third of Gvanim, decided to dispose of his various holdings in Israel, and took steps to have them re-valued by an American firm. The latter, valuing Gvanim at more than $1,700 per subscriber, not only gave a high price, it also put together a consortium of US investors, to become known, in the course of time, as Cable-Tel, to acquire Gvanim. This consortium did not have an interest in the Israeli communications market. Its members did not intend to settle in Israel. It regarded Gvanim as an excellent investment that would be realisable two or three years hence at a large premium. Together with Gvanim, the consortium was also about to acquire Marcus Katz’s other holdings in the Monitin group, which is, inter alia, the owner of "Globes". Gvanim’s shareholders, although they had not intended to sell, were seduced by the high price, and signed the agreement.
But fate shuffled the cards once more, and Cable-Tel encountered difficulties in raising the money. Yet that was a minor obstacle compared with the terms of the Gvanim concession, whereby control in the company could not be held by a foreign concern. When it seemed as if there were no way out, Cable-Tel turned around and offered the option held by them to UPS, Discount Investments’ partner in Tevel; and the option thus rolled onto Tevel’s doorstep.
It seems reasonable to assume that if Gvanim’s shareholders had directly offered the company to Tevel at that price, without the US intervention, they would have met with a refusal. But here was a signed option, following a serious revaluation of the company by a neutral element, which was also prepared to pay the price per its own valuation. In face of all that, Tevel could hardly bicker about the price, and could only decide either to take the option or leave it.
Tevel faced the choice of either remaining a small company, compared to Golden Channels, with 23% of the market, while the possibility existed that Matav would acquire Gvanim, even at the higher price. Tevel has nowhere to grow in Tel-Aviv, and almost its entire periphery is networked. In Tel-Aviv today, building tends to luxury rather than quantity. Gvanim, on the other hand, has big development areas in Modi’in, in west Rishon LeZion and in the Krayot. This represents a potential for another 100,000 subscribers, in neither minority communities nor kibbutzim, (both very reluctant customers where cables are concerned), and in areas furnished with Israel's most advanced infrastructures.
This was the strategic decision of the three Tevel partners, especially that of Discount Investments. Tevel paid a $50 million premium in excess of market price in order to be bigger and to create itself room to develop. Gvanim’s shareholders recovered their investment in spades. Each of the three partners, it seems, made a capital gain of tens of millions of dollars. Also, the Israel Corporation and US company Omega, which sold Idan at a price of $1,100 per subscriber, seem to have come out of their cable adventure not at all badly.
Note: Some of Gvanim’s shareholder are also shareholders in "Globes".
Published by Israel's Business Arena April 22, 1998