Senior cellular companies sources are warning of a severe crisis in the cellular sector this year, in which some of the companies may sink into a hopeless situation, and be unable to repay their debts.
As of now, after the sensitive state of the cellular market was demonstrated in recent days, following the clear and consistent policy of HOT Mobile Ltd. and Golan Telecom Ltd. of cutting prices in order to undermine the veteran companies, there is real anxiety about the companies' stability.
Concern about financial stability is being expressed in confidential conversations at the veteran cellular companies, due to the fact that this business sector is expected to adapt itself to the private market. The prices of Golan Telecom, HOT Mobile, and also Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR) are pulling down the entire private market, but this sector, which is locked into long-term agreements, is seeing the gaps between what it is paying and the private market prices, and is demanding a renegotiation of its contracts. When a company refuses, the customer waits until the contract expires, and then switches to a competing company. In most cases, the cellular company gives in and reopens the contract.
The result is that business clients who currently have 1,000 lines, for example, or tens of thousands of lines in large customers like Elbit Systems Ltd. (Nasdaq: ESLT; TASE: ESLT), Israel Aerospace Industries Ltd. (IAI) (TASE: ARSP.B1), the Ministry of Finance Accountant General department, the IDF, Israel Electric Corporation (IEC) (TASE: ELEC.B22), etc. see that they are paying NIS 70 per line, and are demanding a reduction in prices to match those of Golan Telecom, 012 Mobile, or HOT Mobile.
This is a process, but later in the year, this phenomenon will spread, given the intense competition. In the bottom line, large business customers will demand the prices prevailing in the private market, and the result will be a steep drop in the companies' revenue.
Enormous loss of revenue
For the sake of a basic calculation, a sample is taken from previous stories in "Globes": If the average revenue per subscriber is currently NIS 75, and the market prices are below NIS 50, what will happen is a downtrend in the price.
Taking into account only a theoretical drop to NIS 50 in average revenue per subscriber, a crude calculation can be made by multiplying this by three million subscribers in a month: NIS 25 in average revenue per subscriber, times three million subscribers, times 12 months equals NIS 900 million in lost revenue in a year, and a NIS 1 billion loss definitely sounds likely, because Golan Telecom's prices are below NIS 50 a month.
A loss of NIS 1 billion in revenue a year at one of the older companies will bring its board of directors face-to-face with the question of the company's future. Any crude calculation like this does not take into account the older companies expenses for 4G technologies, which they will have to spend hundreds of millions of shekels to buy next week in the scheduled tender. Nor does it take into account the possibility of an interest rate hike; even a 1% hike will send the companies' financing expenses soaring, and cause an almost immediate loss. In addition, there are cash flow problems, due to lower sales of end-user equipment in 2011, for which payment ended in 2014.
It is true that the companies will make profits in 2014, and all those opposed to intervention will claims that there is no crisis when companies are reporting profits of several hundred million shekels a year, but this is an optical illusion, as all the signs indicate. The state's interest is making prices cheap, but with the companies not losing money, continuing to invest, and giving good service.
How are Golan Telecom and HOT Mobile going to make a profit this way? "Globes" has already shown this several times, but put succinctly, the strategy is clear: the networks unification agreements that the regulator forced the older companies to sign are enabling the two new companies in the market to enjoy production costs amounting to only a quarter of the costs of an older company. In other words, a conversation minute costs Golan Telecom a quarter of what it costs Cellcom Israel Ltd. (NYSE:CEL; TASE:CEL), and the same is true of Partner and HOT Mobile.
Furthermore, the Israel regulator also decided to make concessions to them, so that they will be able to purchase the frequencies and receive a refund for them. What is happening in practice is that under the regulator's sponsorship, the state is subsidizing Golan Telecom and HOT Mobile's takeover of Partner and Cellcom. That is part of what the press is now calling rethinking the results of networks unification and the concessions accompanying it. Anyone can understand that.
Now, of all times, there is no Minister of Communications
What is most unfortunate now is that there is no Minister of Communications, and Gilad Erdan, who approved this policy, has finished his term exactly as he wanted to: no cellular company collapsed on his watch, and as Louis XV said, "Apre moi, le deluge."
It turns out that the networks unification agreements are the writing on the wall. Erdan had good intentions: he just wanted to reduce the number of antennas in Israel, and he was right about that. There is a difference, however, between unification of networks and bring about a situation that gives a new player an option to cause the collapse of an older player by providing excessive concessions that are liable to create a real crisis, about which "Globes" has been warning for a long time.
Since the state has already signed, and no shareholder in the communications companies has the courage to say things clearly, because everyone is afraid that some Minister of Communications will attack them in return, the ball is in the employees' court, because it is their jobs that are at stake. It is fairly obvious that the management at these companies will demand to reopen agreements and to lay off additional workers, because there is no economic law enabling them to do otherwise.
Can a new Minister of Communications do anything about it? Since it is clear that Prime Minister Benjamin Netanyahu will not deal with this issue in the course of his duties as Minister of Communications, because he is busy with the elections at the moment, it remains to wait for a new Minister of Communications, or a crisis created by the workers.
The problem is that as it stands now, laying off employees will not be enough. It will get much worse before it gets better.
Published by Globes [online], Israel business news - www.globes-online.com - on January 7, 2015
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