Hot is offering its HOT Telecommunication Systems Ltd. (TASE: HOT) subsidiary for sale at a company value of NIS 5-7 billion, sources inform "Globes." Hot is willing to sell up to 75% of the shares in HOT Telecommunication, which will mean surrendering control of the company. At the same time, Hot is demanding a NIS 3 billion investment commitment for fiber optic deployment, and is undertaking to pay an investor a fixed per customer price for use of the new network.
As reported by "Globes," Hot's controlling shareholder, Altice, has large debts, leaving it with no alternative to recruiting a partner for HOT Telecommunication's core activity. Hot is seeking an investor for HOT Telecommunication in order to both repay part of its controlling shareholder's debt and to cope with an even more difficult problem: the need to construct a new home communications network based on fiber optics. Hot's network is deployed in 92% of households in Israel, but its technology is rather out of date. The company can provide surfing speeds of up to 500 megabytes per second, but the company requires very substantial investment in order to replace this network with a fiber optic network.
According to investors who met with Hot, the company is proposing a model of separating service from infrastructure. The infrastructure on which the company operates will be separated from its television and Internet services, enabling the infrastructure company to sell services to any of the players in the market. To some extent, the model is the same as that of Unlimited, Israel Electric Corporation's (IEC) (TASE: ELEC.B22) fiber optic venture. The concern that invests in HOT Telecommunication will receive certainty about the price it will receive from Hot for each customer upgraded to the new network.
The prices that Hot is demanding are exorbitant. No communications company is likely to enter such a deal; it appears that Hot is actually aiming at is a financial investor, who will grant the company a loan for the investment it so badly needs. Even assuming that Hot sells only 50% of HOT Telecommunication, the network needs a substantial upgrade that will require a huge investment.
Another problem is the nature of the investment. There is no certainty that the investment will be worthwhile, because there is no certainty about the price that Hot's competitors will be willing to pay for using Hot's infrastructure. Cellcom Israel Ltd. (NYSE:CEL; TASE:CEL) and Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR) are independently deploying fiber optic infrastructure, so they know exactly how much deployment will cost, and know the usage costs for both Bezeq Israeli Telecommunication Co. Ltd. (TASE: BEZQ) and Unlimited. Since they know what these costs will be, it is by no means certain that they will want to buy services from Hot's new network.
As of now, it appears that the fiber optic investment project is not worthwhile for any company as long as prices are so low. Partner is selling a triple package for NIS 139 a month, does not charge for getting connected to its network, and requires no commitment from the customer. Cellcom and Partner are trying to avoid deployment in the same areas of high-level construction, but it can be assumed that the entry of additional competitors will lower prices, making future prices very unpredictable.
Published by Globes, Israel business news - en.globes.co.il - on January 15, 2019
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