The announcement by HOT Telecommunication Systems Ltd. (TASE: HOT) that it wants to acquire Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR) is leading Cellcom Israel Ltd. (NYSE:CEL; TASE:CEL) to reconsider its options. It is now believed that the right thing for Cellcom to do is merge with Golan Telecom. No formal negotiations are taking part between the parties so far, but sources close to the companies said that the matter is on the table. A Hot-Partner merger will make all of the players reassess their merger options.
In view of the developing circumstances, Cellcom led by recently appointed CEO Avi Gabbay, and parent company Discount Investment Corporation (TASE: DISI) believe that Cellcom will have to act quickly on a deal with Golan Telecom in order thwart a possible merger between Hot and Partner, and in order to create the largest communications group in the market.
It is believed that a merger between Cellcom and Golan Telecom will be relatively easy to push through, because it will easier for the Israel Competition Authority and the Ministry of Communications to accept. A merger between Hot and Partner is more difficult, because it involves two large players whose merger is liable to reduce competition, especially in the landline communications infrastructure, television, and mobile telephone markets.
On the other hand, Discount Investment realizes that going back to a merger with Hot is impossible right now, because a merger with Partner is more natural for Hot, while a merger with Hezi Bezalel's Xfone 018, which operates the We4G mobile telephony brand, offers Cellcom no significant advantage whatsoever. The problem is finding money to pay for such a deal when Discount Investment already participated in Cellcom's latest offering. A share swap is therefore feasible.
As reported in "Globes," Cellcom believes that not only does a merger with Xfone have no strategic benefit to offer, and not only is the company unwilling to pay what Bezalel is asking, but an acquisition of Xfone will give other players, including new players, an incentive to enter the market in order to create problems for the big players in the hope of being acquired by them.
Furthermore, a merger with Golan Telecom enables Cellcom to impose higher maintenance costs for the joint mobile network on Bezalel, which is likely to be difficult for him. Golan Telecom and Xfone, which share a joint mobile network with Cellcom, will have to invest in the network according to their shares in it. If a merger between Golan Telecom and Cellcom is agreed, the costs of the network will be divided between two players, instead of three, which makes it more difficult for Bezalel to compete.
The Israel Competition Authority previously struck down a merger between Cellcom and Golan Telecom out of concern about a decrease in competition in the mobile phone market, even before Xfone entered it. The situation in the market has now changed, and the market now believes that such a merger will encounter little opposition.
It is also important to mention in this context that, as reported in "Globes," Golan Telecom was interested in acquiring Cellcom. Golan Telecom believed that Cellcom would experience difficulties late last year because of the need to repay debt to its bondholders, and that it was therefore worthwhile waiting to acquire the company on better terms. This assumption was confounded when Cellcom raised NIS 300 million last December, enabling the company to buy time and meet its debt payments without any pressure.
Published by Globes, Israel business news - en.globes.co.il - on February 4, 2020
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