Control of Cellcom Israel Ltd. (NYSE:CEL; TASE:CEL) is not enough for Eduardo Elsztain, who is prepared to relinquish the company in order to obtain control of Israel's largest communications company - Bezeq Israeli Telecommunication Co. Ltd. (TASE: BEZQ). This was announced today by Discount Investment Corporation (TASE: DISI), through which Elsztain controls Cellcom, Shufersal Ltd. (TASE:SAE), Property and Building Ltd. (TASE: PTBL), Elron Electronic Industries Ltd. (TASE: ELRN), and Epsilon Investment House Ltd..
Discount Investment, whose controlling shareholder is Elsztain-controlled company Dolphin Holland, today announced that it was "considering the possibility of devising a way for making a bid for a creditors arrangement in Eurocom Communications and/or companies in the Eurocom Group." At the same time, the announcement stated that the principles of its proposed arrangement had not yet been formulated, and that it was not at all clear whether such a bid would eventually be submitted.
Discount Investment did not say so explicitly, but it is completely obvious that the main Eurocom holding of interest to it is the pyramid of control in Bezeq. For this reason, Discount Investment also announced that if it eventually does propose an arrangement, and if it is approved and carried out, it will divest itself of its current holding in Cellcom.
Replete with cash
Discount Investment is a company with a lot of debt, but also a lot of cash. The company's debt currently totals NIS 5 billion, but it has NIS 1.8 billion in cash. In addition, Discount Investment owns 45.5% of Cellcom's shares with a market value of NIS 1.57 billion, so that the sale of this stake will give Discount Investment the liquidity it needs to pay for the acquisition.
Bezeq is Israel's largest communications company, with a NIS 15 billion market cap, compared with NIS 3.5 billion for Cellcom. At the same time, Discount Investment is aware of the regulatory difficulties involved in taking over Bezeq, and the matter is therefore in doubt.
Beyond the need to obtain a permit for holding a controlling interest in Bezeq, an acquisition will be subject to restrictions under the Promotion of Competition and Reduction of Concentration Law. Under this law, no new ownership pyramid with three or more layers can be established for public and bond companies, and any existing pyramid with three layers must be reduced to two by December 2019.
Eurocom Communications is a private company, but it controls Bezeq through a three-layer pyramid of public companies. Even if Discount Investment initially has several possible ways of taking over Bezeq, it must therefore also consider in advance the measures it will have to take in order to comply with the legal requirement by the end of next year.
Discount Investment's options
The first and simplest, but also the most expensive, option is a direct acquisition of a controlling interest in Bezeq from B Communications Ltd. (Nasdaq:BCOM; TASE: BCOM). The value of a controlling core in Bezeq (25% of the shares, as required by the regulator) is NIS 3.8 billion. Even if the regulator agrees to reduce the minimum controlling core to only 20%, the deal will still cost a daunting NIS 3 billion.
The second option is the acquisition from Internet Gold Golden Lines Ltd. (Nasdaq: IGLD; TASE:IGLD) of a controlling interest in B Communications, which holds 26% of Bezeq's shares. Internet Gold currently owns 65% of B Communications' shares, currently worth NIS 1.2 billion, making this a less expensive option - the price will be less than the proceeds from the sale of Discount Investment's Cellcom stake. At the same time, Discount Investment will have to take steps to meet the overconcentration requirements by the end of 2019 by exchanging B Communications' NIS 2.47 billion public debt for private debt and delisting the company from the Tel Aviv Stock Exchange (TASE).
The third option and initially least expensive option for Discount Investment is acquiring Eurocom's 55% controlling interest in Internet Gold, the current market value of which is NIS 350 million. This measure, however, can take place only if it is accompanied by another simultaneous step in which Internet Gold's dual listing on the TASE is eliminated and all of its NIS 820 million public debt is converted into private debt.
If this option is taken, the same measure involving B Communications as in the second option will have to be taken by December 2019 - exchanging its public debt for private debt and delisting the company from the TASE.
Published by Globes [online], Israel Business News - www.globes-online.com - on January 16, 2018
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