The rise in the share prices of Cellcom Israel Ltd. (NYSE:CEL; TASE:CEL) and Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR) in the past couple of weeks expresses nostalgia for the glory days of the mobile telephony market. Several indications have made investors think that the market is about to undergo consolidation, reducing the number of players in it, and that a consequent rise in prices will lead to higher profits and the return of dividends. The chances of this actually happening are very low, and the crazy rush back to the sector is not rational.
Four signs are making investors believe in the return of mobile's heyday. The first is the closure of two MVNOs (mobile virtual network operators), YouPhone and Home Cellular. The fact that these two players are out of the game makes investors think we are on the verge of a new era. That's a mistake. The ones generating competition in the market and bringing down prices are Golan Telecom and Hot Mobile. Both are here to stay, and the signal from the MVNOs is therefore false.
The second point relates to Golan Telecom. As "Globes" has already reported, Golan Telecom has been keeping a very low profile in the past few months. Ostensibly, the company is gathering itself in preparation for its entry into television. But let's not be diverted. The reason for Golan Telecom staying quiet is the fact that it is entirely concerned about one thing, namely the network consolidation agreement with Cellcom.
The company is holding its breath in order to avoid provoking any reaction or noise, with the aim of getting the agreement past the Ministry of Communications. Anyone familiar with the market realizes that approval of the agreement in the format that Golan Telecom seeks is more than winning the lottery. As far as it is concerned, the agreement is a gift that will enable it, with minimal investment, to continue biting the legs of every other player in the market. As in the recent past, minimum expenditure, predatory prices, and achieving ever greater market share, in order to topple an existing player.
If the agreement passes, it could be that it will not be worthwhile for Golan Telecom to buy Cellcom, at least in the foreseeable future. It would make much more sense for it to continue operating independently, rather than embarking now on the adventure of heavy investment and turning Cellcom into a twin of Golan Telecom, with all that that implies.
This is where the problem lies. Or rather, this is what worries all the carriers who understand Golan Telecom's strategy but don't exactly understand the strategy of Ministry of Communications director Shlomo Filber. His laissez faire approach is likely to lead to Golan Telecom receiving approval of the agreement as he wants, and not as the professionals in the ministry think, which is that the agreement should not be approved unless substantial amendments are introduced into it compelling Golan Telecom to invest in both third and fourth generation networks so that it will operate as an equal among equals, and not as a company from which all fetters have been removed, as though it was told to go and tear the market apart.
The third point is connected to the second, and is that the downward price trend may have halted in the past few months, but it has halted because of Golan Telecom. The company can't run wild with bargain offers now when it hasn't yet secured the agreement. That would bring the other carriers down on it, and they are already attacking it for the beginner's protection it receives from the Ministry of Communications, and constantly reminding Filber that this infant already has more than 800,000 subscribers. The network consolidation agreement on the concessionary terms that it wants will enable it to go back to its predatory behavior on the market with the aim of eliminating one of the other players.
The fourth sign that led to the change in trend on the market is connected to Filber, who last week, at the Globes MAD (Marketing, Advertising and Digital) conference, spoke out as no ministry director has dared, and said what he believed in with great courage. Filber expressed concern at what is happening in the mobile telephony market, because he understands that the structure of the market does not make sense, and leads to a situation in which companies cut back on investment, which is a worry. That's a completely legitimate point of view. It was enough to once again fire the imaginations of investors, who think that what Filber said means he will recommend mergers in the market.
Filber said what he said, but the ball is in another court altogether, that of the Antitrust Authority. All they see there is continued competition in the mobile market in the current format. In plain language, that means forget about mergers. There is no chance that the Antitrust Authority will approve a merger between carriers, for the simple reason that none of them is in danger of collapse.
When one of the carriers falls, that will be a different story, but even then it is not going to be easy to approve mergers within the market, and the Antirust Authority will give preference to the a new player coming in from outside and buying the failed carrier before it considers allowing a merger between existing carriers. As is well known, the Antitrust Authority is an autonomous body, with considerations different from those of the Ministry of Communications, and independent in it decision making.
Why should the Antitrust Authority reduce competition if consumers are benefitting from low prices and reasonable service? This is reminiscent of a similar but reverse situation, when the Ministry of Communications wanted to approve the merger of telecommunications company Bezeq Israeli Telecommunication Co. Ltd. (TASE: BEZQ) and satellite broadcaster Yes, and saw no problem in it, and the Antitrust Authority opposed it. Later, the Antitrust Authority changed its stance and agreed to the merger, but then the ministry objected. All this shows that regulators in Israel have different interests, and that his does not always work in the public's interest, certainly not in the interest of the investment community.
On a final note, this is an appropriate juncture at which to remind everyone of Hezi Bezalel's ambitions in the mobile market. In case anyone has forgotten, Bezalel bought fourth generation frequencies, and means to enter the market with them. At what prices this will happen, and how, are still unknowns.
Published by Globes [online], Israel business news - www.globes-online.com - on July 19, 2015
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