Why does Fortissimo want Cellcom?

Fortissimo Capital managing partner Yuval Cohen  credit: Shlomi Yosef
Fortissimo Capital managing partner Yuval Cohen credit: Shlomi Yosef

A telecommunications company with high debt does not look like a natural fit for Israel second biggest private equity firm.

Israeli private equity firm Fortissimo Capital is on its way to control of telecommunications company Cellcom (TASE: CEL). Discount Investment Corp. (TASE: DISI) reported yesterday that it had signed a non-binding MOU for the sale of its 36% controlling stake in Cellcom to Fortissimo for NIS 926 million, valuing the company at NIS 2.6 billion, 20% above its market cap before the announcement. Under a "no shop" clause, Fortissimo has two weeks in which to carry out a due diligence examination at Cellcom.

Following the announcement, the prices of Discount Investment’s bonds, which until recently had been at junk yields of 20% and more, shot up, and the yields on two series fell back to the high single digits. Cellcom’s share price also rose sharply, closing 9.42% higher yesterday.

Fortissimo, headed by Yuval Cohen, is one of the leading private equity firms in Israel. The firm was founded in 2004. To date, it has raised $2.7 billion in four funds (placing it second in Israel only to FIMI Opportunity Funds) from investment institutions in Israel, the US, and Europe.

Cellcom is not a natural deal for Fortissimo, which mainly focuses on technology and industrial companies with global activity and growth potential. Just eighteen months ago, the firm exited from a company in the same field, telecommunications equipment company Telrad Networks, which it had floated on the Tel Aviv Stock Exchange in 2017. Fortissimo sold its stake for less than the flotation price.

The timetable for the Cellcom deal is short. Within two weeks, Fortissimo will have to decide whether to go ahead, but market sources describe the chances that the deal will be completed as "good".

The first important step that Fortissimo will seek to take at Cellcom will be to reduce its leverage. At the end of the third quarter, the company had net debt of NIS 1.94 billion, much more than its competitors Partner and Bezeq, whose debt at the same date amounted to hundreds of millions only.

Why is Fortissimo interested in a company with such high debt? It has reasons for optimism. Firstly, much of Cellcom’s debt is at low, fixed rates of interest. Secondly, in the past year Cellcom has reduced its debt by NIS 150 million. Still, private equity firms like Fortissimo generally look for much lower debt.

Fortissimo will also set as a goal to enhance Cellcom’s monthly average revenue per user (ARPU). In the third quarter of 2023, this stood at NIS 48.3. Partner’s ARPU was NIS 55 and Bezeq’s was NIS 57. So as far as Fortissimo is concerned, Cellcom, a mature company with activity in television and Internet and about to become a power supplier, has room to improve.

Unattractive stocks

The report of the likely deal breathed life into all the telecommunications stocks. Partner rose by over 3.4% yesterday, and Bezeq by nearly 1%. Still, it’s hard to say that the telecommunications sector has become attractive on the stock exchange. While the Tel Aviv 125 Index is flat for the year, telecommunications stocks are down by double-digit percentages. Earlier this year, an analyst at Psagot explained to "Globes": "The decline in telecoms stocks partly stems from the fear of a quantum leap in competition in the television market, with the advent of FreeTV. Besides that, the telecoms sector is not the fastest growing one in the market, and not one with a very high dividend yield."

In fact, the local telecommunications companies stopped distributing dividends in previous years because of a deterioration in their results. Partner and Cellcom have not distributed dividends for nearly a decade, while Bezeq, which stopped its dividend distributions later, restored them only last year. In addition, all three companies stated in their quarterly financials that they were affected by the war. Cellcom reported that the closure of shopping malls at the start of the war led to a decline in sales of end-user equipment and in revenue from roaming services.

Cellcom’s share price is down 23% for the year to date, a weaker performance than Bezeq, which is down 15%, but better than Partner, which is down 33% (at yesterday’s close). All the same, Cellcom shares have shown positive momentum recently, and are 54% higher than the 52-week low they reached just six weeks ago.

For the third quarter, Cellcom reported similar trends to those of its competitors. Revenue grew by 1% to NIS 1.1 billion, and net profit grew by 29%, to NIS 53 million. EBITDA totaled NIS 337 million, 8.4% higher than in the corresponding quarter. EBITDA rose at Partner and Bezeq as well, but more moderately, by 2.5-3%.

Published by Globes, Israel business news - en.globes.co.il - on December 6, 2023.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.

Fortissimo Capital managing partner Yuval Cohen  credit: Shlomi Yosef
Fortissimo Capital managing partner Yuval Cohen credit: Shlomi Yosef
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