Pyramid Regulation Spurs Internet Gold Plunge: Israel Overnight

Internet Gold-Golden Lines Ltd. (IGLD) sank to the lowest level in more than two years in New York on concern tighter regulation by the Israeli government will hurt holding companies that control telecommunication companies.

Internet Gold, a Petach Tikva, Israel-based holding company, dropped to the lowest price since July 2009 yesterday, extending its decline this year to 39 percent. Bezeq Israeli Telecommunication Corp. (BEZQ), the country’s largest fixed-line operator, which is owned by a unit of Internet Gold, said on March 14 that net income fell because of regulatory changes. Internet Gold gained 0.6 percent at the 4:30 p.m. close in Tel Aviv, while Bezeq rose 0.2 percent. The Bloomberg Israel-US Equity Index (ISRA25BN) of the largest New York-traded Israeli companies was little changed at 87.69 yesterday.

Israel’s committee on economic concentration submitted to Prime Minister Benjamin Netanyahu yesterday recommendations on simplifying corporate structures and strengthening the power of minority shareholders that may change Internet Gold’s composition and Bezeq’s dividend payout, according to DS Securities and Investments Ltd. The Communications Ministry has also forced providers to cut connection fees and issued licenses to new wireless and virtual operators to boost competition.

“Internet Gold suffers twice from all of this regulation, first because of the changes in the telecommunication market and second because of the government trying to flatten the pyramid structures of companies in Israel,” said Eran Jacoby, the head of research at DS Securities in Tel Aviv, who rates the company market perform meaning it will probably provide returns in line with the overall market.

Pricing Regulation

Tel Aviv-based Bezeq, down 12 percent this year in Israeli trading, is 31 percent owned by B Communications Ltd. (BCOM), which in turn is 80 percent held by Internet Gold, according to data compiled by Bloomberg.

Bezeq declined to the lowest level in a month yesterday after TheMarker newspaper reported the Communications Ministry won’t ease regulation on the company’s pricing and structure.

The ministry will recommend continued supervision of Bezeq on rates and structural separation, TheMarker reported, without saying where it got the information. Yechiel Shabi, a spokesman for the ministry, declined to comment on the report when contacted yesterday.

Bezeq’s net income fell to 524 million shekels ($138.3 million) from 575 million shekels a year earlier as revenue dropped to 2.65 billion shekels from 3.06 billion shekels. The company announced 3.16 billion shekels in dividends for 2011 after distributing 3.73 billion shekels in 2010.

Investors ‘Concerned’

“Investors are concerned that under the new regulation the dividend payout will be changed because of the current ownership structure,” Zach Herzog, a trader at Psagot Investment House Ltd. said by phone from Tel Aviv.

Shaul Elovitch controls the dividends paid out by Bezeq through B Communications’ 30 percent stake in the fixed-line provider, and the concentration committee may require at least a 50 percent stake to exercise such control in future, Herzog said.

Internet Gold dropped 4.1 percent to $6.81 yesterday. The Tel Aviv shares climbed to 25.55 shekels today, the equivalent of $6.84.

Protesters demonstrated in Israel last year, calling for more affordable housing and lower prices for food and other consumer products. Netanyahu appointed a committee led by economist Manuel Trajtenberg to boost competition in the market in response to the protests.

‘On Top of the Pyramid’

The committee on economic concentration recommended last month that companies limit their pyramid structure to no more than three public layers and proposed a four-year deadline for corporations to comply with the new rules.

Israeli groups will need to reduce cross-holdings in financial and industrial businesses and the holding companies at the third level will see increased regulation to boost minority shareholders’ power.

“The concentration committee is changing the structures of some of these companies and hurting the holding companies that are at the top of the pyramid,” DS Securities’ Jacoby said.

Israel, whose population of 7.8 million is similar in size to Switzerland’s, has about 60 companies traded on the Nasdaq Stock Market, the most of any country outside the U.S. after China. The nation is also home to more startup companies per capita than the U.S.

Syneron Medical Ltd. (ELOS), an Israeli company that develops aesthetic medical devices, dropped 2.1 percent to $10.97, the biggest one-day slide in two weeks.

Mellanox Slides

The Yokneam Illit, Israel-based company said it will take a one-time charge of as much as $3.5 million during the first quarter of 2012 after European regulators suspended approval for its dental laser system, Syneron said in a statement yesterday. The company said that it will upgrade current products to meet the new standards.

Mellanox Technologies Ltd. (MLNX), the Israeli adapter maker that is 9.6 percent owned by Oracle Corp. (ORCL), gained 3.4 percent to 152 shekels in Tel Aviv today, or the equivalent of $40.67.

Oracle, the largest maker of database software, reported fiscal third-quarter profit and new license sales that topped analysts’ estimates as the company sold more databases and business applications. New software-license sales, a predictor of revenue growth, rose 7 percent, while analysts had estimated 3 percent growth, according to Barclays Plc.

To contact the reporters on this story: Tal Barak Harif in New York at tbarak@bloomberg.net;

To contact the editor responsible for this story: Emma O’Brien at eobrien6@bloomberg.net

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