The upheaval in the local cellular market is continuing, and the value of the veteran companies is still falling. The shares of Cellcom Israel Ltd. (NYSE:CEL; TASE:CEL) and Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR) fell 7% and 5% today, respectively, after falling 31% and 30%, respectively, since the beginning of the year, preceded by declines of 29% and 37%, respectively in 2014.
The plunge in the Cellcom share has led controlling shareholder Discount Investment Corporation (TASE: DISI) (45.2%), controlled by the IDB Development Corporation Ltd. (TASE:IDBD) (whose controlling shareholders are Eduardo Elsztain and Moti Ben-Moshe), to warn of a possible write-down in its upcoming financial reports and issue a profit warning. At the end of last week, Discount Investment announced, "The market value of Discount Investments' investment in Cellcom has fallen significantly in recent months, and competition in the cellular market in Israel has intensified."
Discount Investment added that it would consider a decrease in the goodwill value of its investment in Cellcom; it will conduct a similar assessment for its investment in Shufersal Ltd. (TASE:SAE). No other financial particulars were disclosed about the possible write-down. Discount Investments' third quarter financial reports assigned a NIS 2.6 billion goodwill value to Cellcom and an NIS 877 million goodwill value to Shufersal.
Cellcom, which last Thursday announced its plan to raise NIS 430 million in additional debt, has increased the size of its planned financing round. S&P Maalot today published its rating for the Cellcom's expanded bond issue up to NIS 580 million. The rating itself was unchanged at A+. According to Maalot's economists, Cellcom plans to expand its Series H bonds by up to NIS 425 million (instead of NIS 300 million), and its Series I bonds (by up to NIS 155 million (instead of NIS 130 million). Both bond series fall due for payment in 2018.
Partner is also working on a restructuring of its debt. Controlled by the Saban group, the company today announced it had contracted an agreement with a banking institution for two immediate loans totaling NIS 200 million.
The first loan of NIS 120 million is for six years, unlinked, at 3.17% annual interest. The principal will be repaid in 12 quarterly installments starting in the fourth year. The second loan of NIS 80 million is for six years, unlinked, at 2.75% annual interest. The principal will be repaid in 22 quarterly installments starting in October 2015. Neither loan is secured with collateral.
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.
Published by Globes [online], Israel business news - www.globes-online.com - on January 18, 2015
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