Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR), controlled by Ilan Ben-Dov, is facing risks and challenges in the near and not so near future, which will bring about another erosion in profitability and an additional weakening in debt coverage. This is according to Midroog Ltd.. As a result, even though the rating for Partner's A-series bonds remains Aa3, Midroog has changed its rating outlook from stable to negative. The series that was launched in 2005 at a nominal value of NIS 500 million is linked to the CPI and gives an interest rate of 4.25%. The balance on the company's books is NIS 587 million, to be repaid by 2012.
Analyst Guy Drori writes that, "Partner is the leader in Israel's mobile industry. It has the ability to bring in high revenue and to be highly profitable on the basis of strong and stable demand." Drori noted, however, that regulatory changes meant to increase competition in the mobile industry, and the lowering of connectivity rates, have eroded mobile companies' revenue and profit.
Competition is expected to grow with the introduction of two new operators (Mirs Communications Ltd. and Golan Telecom), as well as a number of mobile virtual network operators (MVNO). As a result of the above and of only moderate growth in the mobile industry, Midroog believes that the intensification in competition will prevent Partner from continuing to show such high profitability as it has in the past.
Midroog says that Partner's controlling shareholder, Scailex (44.5%), relies on dividends from Partner as the main source for paying off the debt that financed the takeover of the company. "The leveraged ownership structure creates pressure to distribute dividends, and is making it difficult for the company to improve its cash flow in an effort to reduce its debt," Midroog said. Partner did not distribute dividends last quarter.
Midroog's analysts continue, "Continued erosion in the company's profitability and/or an increase in debt resulting from the aggressive distribution of dividends and massive investment in fixed assets, will make it difficult for the company to keep its current rating." Partner is traded on Nasdaq and the TASE at a value of $1.73 billion. Last week, "Globes" reported that Partner would have to fire 1,000 employees.
Published by Globes [online], Israel business news - www.globes-online.com - on November 14, 2011
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