For Israel's Bezeq Telecommunications Corp., it's a tumultuous time in the Middle East phone business. Despite the ups and downs of the peace process, the state-owned phone monopoly's international traffic is soaring as phone lines buzz between Israel and its Arab neighbors. The Israeli government is opening up the international market to competition, forcing Bezeq to compete for foreign traffic for the first time. And on Apr. 28, Britain's Cable & Wireless PLC snapped up 7% of Bezeq's shares.

The purchase could mark the start of a major new alliance--and boost Bezeq's chances of staying ahead of the coming competition. "This is merely one step toward a strategic partnership," says Cable & Wireless Chief Executive James H. Ross. "We are looking to make a contribution to shaping Bezeq's future." The British company paid $101 million, or about 18% more than the Tel Aviv Stock Exchange market price, to buy the shares from private Israeli


Industry analysts see the Cable & Wireless move as a bid to get its foot in Bezeq's door ahead of its global rivals. Although the 7% stake is big enough to get a seat on Bezeq's board, it does not guarantee the British company a strategic role in Bezeq. But Cable & Wireless is already talking about upping its interest to at least 20%. That could happen later this year when the government, which currently owns 76% of the company, plans to sell off 25% more of Bezeq's shares.

A Bezeq-Cable & Wireless partnership could benefit both companies. Bezeq, which was spun off a decade ago from Israel's Communications Ministry, needs help with pricing, technology, and investment strategies to compete against international giants lining up to enter the Israeli market. AT&T, MCI, Sprint, British Telecom, and Deutsche Telekom are all teaming up with Israeli partners to take part in bidding to provide international phone service from Israel. The government is expected to award two new licenses this summer.

KEY STAKE. For Cable & Wireless, an alliance with Bezeq would give it a key stake in the growing Middle East market. The company owns minority stakes in telecommunications companies all over the world but is strongest in the Far East, Europe, and the Caribbean. "We see enormous growth in the Middle East," says Ross.

Bezeq Chief Executive Issac Kaul calls the Cable & Wireless purchase a "vote of confidence" in his company. In recent months, the Israeli company has reduced its workforce by 13%. At 4.83 employees per 1,000 direct phone lines, Bezeq claims to be one of the world's 10 most efficient telecom companies. Its detwork is already 85% digital, and within two years will be all digital.

Moreover, even after competition arrives, Bezeq will enjoy advantages. The company will retain its monopoly status as provider of domestic phone service, and international consortiums will have to pay Bezeq access fees when they hook into its domestic system. Bezeq earned net income of $100 million on $2 billion in sales in 1994. International calls produced one-third of revenues and more than half of profits.

While Bezeq seems to be ready for big-time competition, it could still be in for some surprises. Despite its entrenched position, the company was severely challenged by its first rival in the cellular-phone market. Last December, Cellcom, a joint venture between BellSouth Corp., Brazil's Safra brothers, and Israel's Discount Investment Corp., launched a cellular-phone network to compete with Bezeq's one-year-old joint venture with Motorola Inc., Pelephone. Offering cut-rate prices that it claims are the lowest in the world, the company signed up 80,000 subscribers in just four months.

Cellcom captured 33% of the market, but then its growth stalled because of technical glitches. Now, by cutting prices and improving network quality, Pelephone is trying to win customers back. Even so, the company's share of the cellular market is expected to fall below 50% once Israel licenses a third cellular operator when the market reaches 300,000 subscribers.

As Bezeq gears up to compete, its goal is to keep growing even as its market share declines. "The market itself is going to grow rapidly," predicts Bezeq's Kaul. As competition picks up in the Middle East phone business, Cable & Wireless hopes to be the strategic partner to help Bezeq stay on top.

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