Elsztain's plan: Buy Bezeq low, sell Cellcom high

Eduardo Elsztain  photo: Eyal Izhar

The IDB controlling shareholder believes that Cellcom's share price is as high as it can get.

Pursuit of the remaining fragments of Eurocom Group has been shifting into high gear in recent weeks with the addition of IDB Group and its controlling shareholder, Eduardo Elsztain, to the race. Even the Antitrust Authority's announcement that it would not allow IDB Group to compete unless it first sold Cellcom Israel Ltd. (NYSE:CEL; TASE:CEL) did not deter Elsztain, and it may even have spurred him on.

Many market sources, however, doubt the seriousness of Elsztain's intentions regarding Eurocom. Some of them think that he is engaged in a sophisticated maneuver designed to create an image that will facilitate a rapid sale of Cellcom. Why? The sources say that Elsztain has concluded that Cellcom's value is about to fall, and it is best to sell IDB's holdings in Cellcom as soon as possible.

The mobile telephony market has been in a sorry state for nearly six years, ever since the 2012 reform. Competition in this market is unprecedented, and is even expected to intensify with the anticipated entry of 018 Xfone's new WE network in the coming weeks. The three major carriers - Cellcom, Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR), and Pelephone Communications Ltd. - are mired in a swamp, with their business declining quarter by quarter - some more, some less.

Some analysts believe that Cellcom's share is preferable to that of Bezeq Israeli Telecommunication Co. Ltd. (TASE: BEZQ). Some are engaged in wishful thinking, looking forward to a future for the mobile telephony companies with higher average revenue per user and distribution of dividends to investors. The analysts have been proclaiming this for several years, and although reality has not borne out their predictions, they are still waiting for a turnaround. Some investors, however, have forgotten that Accounting Standard IFRS 15, which was implemented in 2017, bolstered short-term profits by tens of millions of shekels, and some of the companies are already rushing to implement IFRS 16 in order to prolong the accounting illusion into 2018.

Some of the analysts also see that Cellcom has begun posting profits from its television services, and especially how it is consolidating itself as Israel's third largest communications group. It is no secret, however, that Cellcom was the best-prepared company for the wholesale market reform, and also recruited the most subscribers. This, however, is not enough.

For his part, Elsztain knows that he has already made his profit on Cellcom, which is now worth far more than when he acquired IDB. Bezeq's price, on the other hand, is attractive, so he could theoretically buy Bezeq cheap and sell Cellcom dear.

At the same time, the years of intense competition have opened gaps between the mobile telephony companies. In retrospect, it can be seen that Cellcom has made the best decisions (entering the television market early, better preparation for wholesale market reform, and as few mistakes as possible) and has positioned itself above the two other operators, especially Partner, which kept stride with Cellcom for years.

Cellcom is the largest carrier in the sector. As of the end of the third quarter of 2017, Cellcom had 2.8 million subscribers, compared with 2.68 million for Partner and 2.48 million for Pelephone. Cellcom's revenue and profit are the highest in the sector: NIS 4.02 billion in revenue in 2016, compared with Partner's NIS 3.54 billion. Cellcom's revenue and profits are greater in every area of activity: mobile phone services, landline services, and end-user equipment sales.

Cellcom continued its mobile market dominance in 2017, and also holds indisputable sway in wholesale infrastructure services (sale of infrastructure provider and Internet services together). It has substantially more subscribers than Partner, its main rival,  in the Internet service provider (ISP) sector as well. Furthermore, Cellcom was smart enough to enter the television market early, grabbing a substantial market share and forcing Partner, which entered the market two years later, to offer services at a significantly lower price plus other benefits (a six-month Netflix subscription at no cost and sports channels at no cost). The heavy cost of the benefits granted by Partner will probably position Cellcom as the only company to both grow and earn a profit in the television market.

Cellcom's performance has not escaped the eyes of capital market investors, who are giving the company a significantly higher valuation for its business than Partner (no comparison with Pelephone can be conducted, because Pelephone is not listed separately, but as part of the Bezeq group). Cellcom's market cap is NIS 2.9 billion, reflecting a NIS 5.4 billion valuation for its business. Partner's market cap is NIS 3.1 billion, which implies a NIS 3.9 billion value for its business. In other words, the market is pricing Cellcom 40% higher than Partner. That is an enormous difference if you take into account that just three years ago, the two companies' businesses were valued the same.

It appears that Elsztain wants to take advantage of this value while he still can. By dint of great effort, the company's management has managed to generate a substantial premium for the company, which he wants to exploit. Elsztain also realizes that the mobile telephony market will continue to hemorrhage, the landline market will continue to shrink, and the television market is not expected to generate profits.

Will he really acquire Eurocom? It is hard to say. What seems clear is that Elsztain intends to sell his holdings in Cellcom as soon as he can.

Published by Globes [online], Israel Business News - www.globes-online.com - on February 12, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

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Eduardo Elsztain  photo: Eyal Izhar
Eduardo Elsztain photo: Eyal Izhar
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