NIS 1.9 billion was erased from the market cap of Bezeq Israeli Telecommunication Co. Ltd. (TASE: BEZQ) in the past two weeks, as its share price fell by over 10%. Barclays Capital analyst David Kaplan today offers good news for Bezeq investors, saying that the correction in the share is over.
Kaplan believes that the selloff in Bezeq shares was due to competitive fears; regulatory pricing of the wholesale market (a model in which competitors buy the line for customers from Bezeq and provide direct customer services - S.H.V.), and outperformance relative to the Tel Aviv 25 Index. (Bezeq's share price almost doubled in value from the beginning of the year until two weeks ago).
"Fixed-line market dynamics are different than mobile and so the fears over competition in the fixedline side are misplaced," says Kaplan. He adds that Bezeq's share price jumped because it was cheap compared with its EU peers. He reiterated his "Overweight" recommendation for Bezeq with a target price of NIS 6.50, a 7.4% premium over today's opening price.
"Despite the challenges that the industry faces, we view Bezeq as the most likely to outperform. Its advantages stem from the fact that it owns infrastructure in all four of its operating businesses," says Kaplan.
Bezeq, controlled by Shaul Elovitch, includes landline activity, mobile carrier Pelephone Communications Ltd., ISP Bezeq International Ltd., and satellite television company DBS Satellite Services (1998) Ltd. (Yes). Bezeq currently owns 49.8% of Yes, with Elovitch's private company, Eurocom DBS Ltd., owning the rest.
Kaplan mentions the hot-button issue of a possible merger of Bezeq and Yes. On Sunday, Bezeq notified the TASE that it had received a preliminary draft from the Antitrust Authority that includes required conditions to proceed with its merger with Yes, although it did not disclose the conditions. However, last week "Globes" revealed these conditions, which are supposed to increase competition, and include a ban on Bezeq from capping Internet consumption, cancellation of the giga agreement (payment that Bezeq collects from traffic for ISPs), but only for television, and a ban on Bezeq and Yes from offering low-cost plans that competitors cannot offer.
Approval of the merger will probably involve a lengthy process, because it is a parties at interest deal, which means that different valuations will be necessary.
Kaplan says that the merger with Yes creates an upside for Bezeq. "Although the conditions were not disclosed, we believe they may include one that Bezeq would have to offer Yes’s content to potential competitors at a “fair” price," he says, but warns, "If the regulator approves the merger with Yes, Bezeq would likely pay in the range of NIS 1 billion for Yes, on our estimates. Although Bezeq’s current balance sheet and cash flows could handle such a transaction, based on our analysis, we believe that the funding of such a transaction may lead to some volatility in its share price."
Bezeq will publish its financial report for the third quarter on Thursday, November 7.
Published by Globes [online], Israel business news - www.globes-online.com - on November 4, 2013
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