Both Prime Minister Benjamin Netanyahu and the Israel Antitrust Authority are officially opposing the merger between Cellcom Israel Ltd. (NYSE:CEL; TASE:CEL) and Golan Telecom Ltd. The Antitrust Authority today announced that it opposed the merger, arguing that it would eliminate an entity that increases competition, thereby restoring a situation in which the major cellular companies have no incentive to compete, and follow each other in raising their prices for the consumer.
An analysis by the Antitrust Authority shows that Golan Telecom's disappearance from the market is liable to also have a negative impact on the policy of HOT Mobile Ltd., another company that intensifies the competition in the cellular market, because the pressure on it to compete will drop significantly. The analysis is based on quantitative figures from the players in the market, internal papers from all the market players, and talks with the relevant parties.
Effect of the reform
The Israeli government introduced reform in the cellular market in 2011-2012, featuring the entry of Golan Telecom and HOT Mobile into the market. This reform resulted in a substantial fall in the prices paid by cellular subscribers.
The veteran operators view Golan Telecom and HOT Mobile as responsible for the intense competition in the cellular market, and have had to respond to this competition. Golan Telecom and HOT Mobile have offered lower prices than the other market players, and have succeeded in recruiting a substantial proportion of subscribers and increasing their market share.
The fall in prices following the entry of Golan Telecom and HOT Mobile into the market is reflected in a 38% drop in cellular market revenue from NIS 17 billion in 2010 to NIS 10.5 billion in 2014. The average revenue per subscriber for the veteran operators dropped by NIS 73 a month in January 2011-May 2015, a 60% decrease; in other words, cellular company subscribers pay NIS 73 less per month on the average than they did before the reform.
Chief concern: Elimination of a competitive entity
The Antitrust Authority's main concern is that as a result of Golan Telecom's disappearance from the market, the market will revert to a state of no competition and tacit agreement between the major companies that it is better for them to maintain the absence of competition.
The primary indications in support of this concern cited by the Antitrust Authority are (1) the absence of competition in the cellular market before the reform; (2) Golan Telecom arouses competition and generates competitive pressure on all the other companies; (3) the small number of players in the market; (4) the difficulties faced by any new company entering the market (investment of hundreds of millions of shekels in setting up a network and buying frequencies); and (5) the major companies in the cellular market operate in several segments of the communications sector, enabling them to "punish" each other for competition by introducing competition in another market.
For example, HOT Mobile is likely to "punish" Cellcom for entering the television market by lowering its cellular prices. A structure like this gives HOT Mobile and Cellcom an incentive to reach a point of equilibrium at which Cellcom does not provide strong competition in the television market, and HOT Mobile does not compete energetically in the cellular market.
Golan Telecom told the Antitrust Authority that if the merger is not approved, it would withdraw from the market. Although the Antitrust Authority cannot dictate what Golan Telecom will do if the merger is not approved, the Antitrust Authority believes that Golan Telecom has several options that do not require leaving the market.
These options include joining the already existing network sharing agreement between Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR) and HOT Mobile, revising the network sharing agreement with Cellcom to meet the Ministry of Communications' requirements, and the sale of Golan Telecom's business to a party that will not detract from competition.
HOT Mobile and the virtual network operators will not provide adequate competition
As part of its consideration of the merger, the Antitrust Authority examined whether HOT Mobile and the virtual operators can maintain the same level of competition in the absence of Golan Telecom from the market.
The survey revealed that the virtual operators have very limited ability to lower prices and challenge the level of competition in the market, because they depend on the willingness of the host operators (the veteran cellular companies) to open the agreement to renewed negotiation, and to agree to a drop in the price charged for the veteran companies' services.
As for HOT Mobile, one of the likely consequences of Golan Telecom's leaving the market is reduced pressure on HOT Mobile to compete. One of the main reasons is is the fact that HOT Mobile is part of a communications group with many interests in the television, landline telephony, and Internet markets. In addition, HOT Mobile is currently affected by Golan Telecom's competitive policy. It is therefore feared that after Golan Telecom leaves the market, HOT Mobile's incentives will change, and it will stop generating competition in the market.
Golan Telecom: A black day for Israel's economy
Golan Telecom said, "This is a black day in the history of Israel's economy. We regret the decision, which is completely opposed to continued competition. The decision in this matter is entirely political, with no economic context. Then-Minister of Communications Moshe Kahlon's reform was never completed, then-Minister of Communications Gilad Erdan never approved the networks consolidation agreement, and by failing to approve the agreement, Prime Minister Benjamin Netanyahu is sealing the company's fate.
"Due to petty and personal considerations, the politicians are not acting in the public interest and on behalf of the consumers. The politicians have chosen Golan Telecom as a scapegoat and victim, even though it is the only example in Israel's history of real competition that has saved NIS 5 billion and NIS 10,000 per household a year since it was founded. In addition to the harm done to every household and consumer in Israel, the broader and more dramatic effect will be a halt in foreign investments in the Israeli economy, due to Israel's unsuccessful management and absolute violation of OECD rules."
The Ministry of Communications said, "We respect the decision by the Antitrust Authority director general to disallow the merger agreement between Cellcom and Golan Telecom. Acting as Minister of Communications, the Prime Minister also decided to reject the request, in line with the position taken by the Minister of Finance when the merger request was submitted. The Ministry of Communications is prepared to continue its safeguarding of service and competition in the cellular market. A detailed and reasoned decision will be published in the coming days."
Published by Globes [online], Israel business news - www.globes-online.com - on April 12, 2016
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