The IBC fiber-optics venture is approaching the moment of truth. Cellcom Israel Ltd. (NYSE:CEL; TASE:CEL) has made it clear to IBC heads that unless the terms of the license issued by the Ministry of Communications for the venture are changed to require deployment of the infrastructure for only 40% of the population, it will not invest in IBC. This will probably make IBC collapse.
As reported in "Globes," Cellcom has already discussed the required deployment for the venture, which has encountered difficulties, with the Ministry of Communications. Cellcom's talks with Israel Electric Corporation (IEC) (TASE: ELEC.B22), a key partner in the project, have also been revealed. After many months of negotiations, Cellcom concluded that investing in a project with deployment for more than 40% of the population was not economically viable. Any demand for additional deployment beyond that will not be viable, and Cellcom will therefore not invest in it.
IBC therefore contacted the Ministry of Communications and made an official request for a change in the terms of its license. Behind this formal request is Cellcom's statement that it will not participate in the venture without this change. Cellcom is willing to commit to deployment for 20% of the population within 10 years and 20% more in another 15 years, and is also willing to maintain the ratio of deployment between the central region and outlying areas. This ratio means that after five years of free deployment at IBC's discretion, it must deploy at a ratio of 8:2, i.e. two households in the outlying areas must be connected for every eight households connected in the central region.
Cellcom therefore has to discuss with IEC, the sole party carrying out infrastructure work for IBC, a reduction in its prices. The company will also have to reopen agreements with important suppliers, particularly Cisco Systems, which will also be asked to lower its prices or make some other arrangement enabling Cellcom to buy equipment for the venture at reasonable prices. Since Cisco is the main supplier for the project, and because it provides owners' loans, there is no way to price its services against competitors that could take its place.
The IBC venture uses the IEC grid. IEC is a 40% partner in the project, while the rest belongs to private owners. The venture ran into problems 18-24 months ago, after the state gave it NIS 150 million. The project simply did not get off the ground, and encountered severe financing problems. The recovery plan for IBC requires an initial investment of hundreds of millions of shekels in order to restart the project.
The venture began looking for investors, and as of now, Cellcom is the sole party expressing interest. The big question is whether the Ministry of Communications will agree to change the deployment terms. Bezeq Israeli Telecommunication Co. Ltd. (TASE: BEZQ) and Hot Telecommunication Systems Ltd. (TASE: HOT.B1) are likely to take steps to prevent such change.
Published by Globes [online], Israel Business News - www.globes-online.com - on September 12, 2017
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