Golan Telecom sale marks the end of insane prices

Gad Perez

Golan Telecom was an opiate for the masses aimed at lowering mobile phone prices.

The fantasy referred to as Golan Telecom Ltd. came to an end yesterday with the company's sale to Elco Holdings Ltd. (TASE: ELCO) subsidiary Electra Consumer Products Ltd. (TASE:ECP). Thus ended one of the dizziest rollercoasters ever put in motion by the Israeli regulator for the purpose of dealing with the high prices in the cellular market. The market expects Electra Consumer to behave rationally, and that is the reason why the Cellcom Israel Ltd. (NYSE:CEL; TASE:CEL) and Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR) share prices rose yesterday.

Everyone believes that Electra Consumer is a serious company that signed an agreement with the intention of meeting the Ministry of Communications' requirements. It will not be able to go on selling cellular services at insane prices. Everybody now realizes that the only reason why Golan Telecom did what it did to the Israeli market and got away with it was that it had no costs - because the state gave it all its costs.

Golan Telecom could not operate and maintain itself under a lawfully run company. It was living a lie - an opiate for the masses aimed at lowering cellular prices. The moment it had to operate as a commercial company obeying the law, without manipulating the system, the magic disappeared, and we found out that there was no such thing as a cellular package for NIS 20 a month.

It took Cellcom Israel Ltd. (NYSE:CEL; TASE:CEL) CEO Nir Sztern longer than he expected, but as he sees it, he eventually got Golan Telecom out of the market in a way that was above all good for Cellcom, and then good for the entire market.

Completion of the deal raises several questions about the future of competition in the cellular market. First of all, the Ministry of Finance, which took an aggressive position against approval of the sale of Golan Telecom to Cellcom, must be given credit for a significant achievement with the help of the Antitrust Authority. A buyer for Golan Telecom was duly found, and a new player is entering the market. This was the goal from the beginning - to manage things so that there would not be fewer players in the market. As for the Ministry of Communications, well, in this case, it depends on whom you ask and when. For Ministry of Communications director general Shlomo Filber, who wanted to see Golan Telecom out of the market, it was bad news, but for the professionals who put together an opinion opposing the merger with Cellcom, it looks like the news was better.

The big question is what will happen to prices, since the rising cellular shares prices indicate a great wish for the level of competition to subside. Indeed, it is by no means sure that this scenario will materialize, despite the optimism, because it is difficult to predict the competitors' responses to the deal.

HOT Mobile Ltd. has already said that as far as it is concerned, its goal is to catch up to the veteran operators in the number of subscribers. If this is the case, and it maintains the current low level of prices, it will force Golan Telecom to maintain the same price level of less than NIS 50 a month for a cellular package. That is not an easy task when you have to pay Cellcom NIS 210 million a year for using its network. As long as Golan Telecom let things ride and did not pay the full amount to Cellcom, it could make a nice profit, but when the full amount is paid, it is a different story. Golan Telecom had a good reason for refusing to pay Cellcom this amount and agreeing to pay only NIS 130 million. Even Golan Telecom knows how to add and subtract. It might possibly have survived a payment of NIS 150 million or NIS 160 million, but with a payment of over NIS 200 million, the business was not worthwhile.

Why is the deal worthwhile for Electra Consumer? That is a good question, which surely involves the company's desire to expand into fields tangential to its retail business. Electra also acquired the importer of Huawei cellphones, and it is reasonable to assume that it will integrate this activity in its stores. It is well known that any profit that the cellular companies are making now comes from sales of end-user equipment, and Electra Consumer already has a strong marketing arm, with a cellular brand that is only getting better.

There is also a question about whether Golan Telecom's competitors will behave aggressively to take its customers away in the period before the deal is closed. An interim period is sensitive, and uncertainty can lead competitors to take action, so it is difficult to predict what their interest will be. Will they take advantage of the negative moment when Golan Telecom is losing subscribers (the company lost 70,000 subscribers in 2016), or will they keep the market calm and maintain a reasonable price level in order to avoid further bloodletting?

In any case, it is the end of an era in the cellular market. Michael Golan, who drove an entire country crazy, will certainly not be missed by his competitors, and it is questionable whether the customers will miss him. He unquestionably spurred continual downward pressure on prices, and the question of whether this pressure continues obviously depends on the factors we have mentioned.

Keep in mind that Michael Golan and his partners do not really know whether they are making a profit or losing money. What is sure, however, is that they lost a lot of the NIS 1.17 billion price (excluding a NIS 600 million debt) at which they hoped to sell their company to Cellcom. Michael Golan could only lower cellular prices because the state subsidized him. He hoped to bow out in a deal for billions, but eventually had to settle for much less than he expected.

Published by Globes [online], Israel Business News - www.globes-online.com - on January 3, 2017

© Copyright of Globes Publisher Itonut (1983) Ltd. 2017

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