Barclays to UBS Hang Tough as Plan Batters Bezeq: Israel MarketsShoshanna Solomon
Barclays Plc and UBS AG are telling investors to buy Bezeq shares even as the Israeli government says a planned shakeup of the telecommunications industry may cost the company more than half a million customers.
Bezeq Israeli Telecommunication Corp. will be a “long-term winner” as the leading fixed-line operator becomes more efficient following the integration of its units, according to Barclays. The company’s cash flow and dividends will prove more resilient to the new competition than “is feared by many investors,” UBS said. Bezeq shares fell to a four-month low this week.
The government is seeking to revamp Israel’s fixed-line segment, which Bezeq dominates with a more than 50 percent share, by introducing a wholesale market that it hopes will lead to lower costs for customers. While the Ministry of Communications said Jan. 19 Bezeq may lose revenue equivalent to about 30 percent of its 2012 fixed-line total, Citigroup Inc. said the forecasts are “too pessimistic” in a note Jan. 20.
“Bezeq is positioned to be a long-term winner even if in the near term the potential for disruption from competition in the fixed-line space is high,” David Kaplan, a Tel Aviv-based analyst at Barclays, said by phone Jan. 20. “The ability to merge units will enable it to cut costs and that could unlock significant value, offsetting the negative impact of competition.”
Bezeq offers fixed-line, international calls, mobile and television services via units that operate as separate entities due to regulatory constraints. The changes will allow the subsidiaries to merge. The wholesale market, which would allow competitors to lease lines at predetermined prices, could cost Bezeq as many as 600,000 users and as much as 1.3 billion shekels ($372 million) in revenue annually at the end of four years of competition, the ministry said.
The end of structural separation “will enable the company to lower costs from the merger of its units by at least 600 million shekels a year by 2018,” Roni Biron, a Herzliya, Israel-based analyst at UBS AG, said by phone Jan. 20. “The ministry’s forecast is a pessimistic scenario.”
Biron has a price estimate of 6.5 shekels on the shares, which closed at 5.461 shekels in Tel Aviv today, after falling to as low as 5.335 shekels Jan. 20, their weakest since Sept. 8, according to data compiled by Bloomberg. UBS AG held a 0.18 percent stake in Bezeq as of Oct. 31, while Barclays Plc owned 0.04 percent of the company at the end of July, data compiled by Bloomberg shows.
New competitors in the wireless market wiped out a combined 4 billion shekels in revenue over three years through the third quarter 2013 at incumbent cellular operators Cellcom Israel Ltd. and Partner Communications Co., according to ministry data. Cellcom, Partner and Bezeq were the worst performers on Israel’s benchmark index in 2012.
Bezeq’s market share is also threatened by a group backed by Cisco Systems Inc., which plans to this year begin deploying a high-speed fiber-optic network. Analysts are split on Bezeq’s stock, with five recommending to buy, five to sell, and three to hold, according to a Bloomberg survey.
The ministry’s wholesale market forecasts are aggressive and “don’t take into account competition from the fiber optic network that can lead to an additional revolution,” Ori Licht, head of research at Israel Brokerage & Investments Ltd., with more than 27 billion shekels in assets , said by phone Jan. 20. “We are telling investors to sell the shares.”
The stock traded at an estimated price-to-earnings ratio of 7.9, through yesterday, compared with an average multiple of 16 for stocks in the MSCI World/Telecommunication Services Index. The Israeli company’s 12-month dividend yield of 19 percent is more than six times that of London-based BT Group Plc and more than three times that of Newbury, U.K.-based Vodafone Group Plc, data compiled by Bloomberg shows.
Wholesale market prices will be set by the regulator following a hearing. Bezeq is studying the terms outlined, Guy Hadass, a spokesman for Bezeq, said by phone Jan. 20. The company expects the reforms as proposed will hurt results, it said in a filing last week. Bezeq is “fully prepared for any competition ahead,” Chief Financial Officer David Mizrahi said in an interview with Bloomberg on Nov. 11.
“Once the price is set this will be the basis for the competition, so there’s less incentive for cut-throat pricing,” Avshalom Shimi, a trader at Deutsche Bank AG in Tel Aviv, said by phone Jan. 20. “This reform doesn’t have the ingredients to reshuffle the infrastructure-based market as it did on the mobile side.”