Gad Perez Electra Ltd. (TASE: ELTR) is negotiating with Cellcom Israel Ltd. (NYSE:CEL; TASE:CEL) for an estimated NIS 100 million in financing to pay for Electra's acquisition of Golan Telecom Ltd. The financing is to be in the form of loans and credit from suppliers. This financing plan is likely to draw scrutiny from the Ministry of Communications and the Antitrust Authority.
Electra is negotiating to acquire Golan Telecom for NIS 350 million, as reported by "Globes" and reported to the Tel Aviv Stock Exchange (TASE) several weeks ago. These negotiations have been going on for some time. The complicated deal is likely to also include financing elements from Electra to pay for the acquisition.
The entry of Electra, a subsidiary of Electra Consumer Products Ltd. (TASE:ECP), into the cellular sector is rather problematic. It involves risks, given the prevailing prices in the market, the need for heavy investments in advanced technology, and the growing competition in communications services. The financing question and the extent of aid that Cellcom is willing to give the acquiring company therefore affect Electra's interest in the deal.
Sources inform "Globes" that if the deal goes through, Electra's equity in it will be only NIS 70 million out of the NIS 350 million to be paid to the Golan Telecom shareholders. The rest of the financing will come from Cellcom and bank or non-bank leverage in the form of a non-recourse loan.
The sources also said that Cellcom will also provide Electra with major financing in the form of credit from suppliers for purchasing half of the radio equipment needed for cooperation between Cellcom and an Electra-controlled Golan Telecom. Such a financing agreement benefits all the parties involved. The Golan Telecom shareholders will receive the equity they have invested in the company and tens of millions of shekels more, after having received a large direct government subsidy.
Electra gets a company with a large customer base at a minimum equity risk, which the Electra group can afford, due to its financial soundness. The rest of the equity will come from other parties, including Cellcom, which is both an important competitor and a prospective partner in the joint network venture. The Antitrust Authority will have to consider the idea of Cellcom financing its future competitor. It is common practice for the party making the sale to lend the buyer part of the sale price by converting it into a long-term loan, as was the case when Hutchison Telecommunications International sold its shares in Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR) to Ilan Ben-Dov. In most of these cases, however, the seller leaves the market on which the sale was carried out. In Cellcom's case, it is a dominant player in the market offering financing to the party acquiring its competitor.
Published by Globes [online], Israel business news - www.globes-online.com - on December 21, 2016
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