Foreign Investors Tire of Waiting for Big Changes at Bezeq

  • T. Rowe Price among investment houses to cut Bezeq stake
  • Bezeq has dipped 16% this year, underperforming European peers

Foreign investors are cutting their holdings in Bezeq Israeli Telecommunication Corp., tiring of waiting for a promised change in government regulation that could save the company millions of dollars.

Some of the world’s biggest investment houses, including T. Rowe Price Group Inc. and Janus Henderson Group Plc, have sold substantial portions of their stakes in Israel’s largest telecom company this year, according to data compiled by Bloomberg. They were driven to invest by talk that the Israeli government would finally let Bezeq merge its operating units under one roof, which analysts say could save the company more than $100 million a year. 

"Competitive pressures are causing profits to come down across all segments and the regulatory improvement that was supposed to come from canceling structural separation keeps being pushed off," said Gil Dattner, an analyst at Bank Leumi Le-Israel Ltd. in Tel Aviv. "An investor focused on the near-term is then suffering and not seeing the upside happening."

A representative for T. Rowe, which manages $862 billion in assets, declined to comment. Janus Henderson, which manages $331 billion, did not immediately respond to a request for comment. A Bezeq spokesman declined to comment.

Bezeq shares soared early last year after reports that Israel’s government was going to end so-called “structural separation.” As well as streamlining its management structure, the move would have allowed Bezeq to bundle its television, mobile, internet and fixed line services at more competitive prices. Before the government sold its Bezeq stake to private investors in 2005, it imposed structural separation to guard against the company’s monopolistic power.

Political Overtones

The issue is politically sensitive. Critics such as lawmaker Miki Rosenthal have accused Prime Minister Benjamin Netanyahu, who until recently also served as communications minister, of trading the regulatory change for favorable media coverage, given Bezeq’s ownership of Israeli online news outlet Walla!

Others oppose the move on the grounds that it would strengthen Bezeq -- which still has a monopoly on Israel’s fixed-line telephony market and is the country’s dominant internet service provider -- at the expense of smaller competitors.

The slow pace of government action has cost Bezeq. Rivals have picked up market share across all of its key businesses, and first quarter revenue fell 4.1 percent to 2.45 billion shekels ($692 million).

The stock has dropped 16 percent this year, trailing the average 13 percent gain among 31 European peers with a market capitalization above $1 billion, data compiled by Bloomberg shows.

Hurdle Passed

Still, there are signs of progress. The communications ministry issued a directive last month allowing Bezeq’s competitors to use its telephone network, which could be seen as “another hurdle passed on the long road” toward ending structural separation, Citigroup Inc. analyst Michael Klahr wrote in a May 25 note.

In another note June 5, Klahr said the selloff in Bezeq shares was overdone and upgraded the stock to a "buy" rating.

"Investors need to look beyond ongoing regulator uncertainty" to Bezeq’s ability to generate cash flow and its dividend that are "best in class in a European context," he said. At 8.44 percent, Bezeq’s 12-month future dividend yield is almost double the average of its European peers, according to data compiled by Bloomberg.

"Bezeq has a unique position in the local market with a strong product and service offering in every telecoms segment, with advanced infrastructure (mobile and fixed) in a long-term growth market," Klahr wrote.

‘Gradual Outline’

Yechiel Shabi, spokesman for the communications ministry, said the office is working with the finance ministry on the matter of structural separation for Bezeq and its competitor, Hot Telecommunication System Ltd.

"This is one of the main issues in the annual work plan," Shabi said. "A gradual outline is being examined to eliminate the existing separation and replace it with other kinds of separation and alternative mechanisms that will ensure the ability of the other suppliers to compete with Bezeq and Hot."

For some foreign investors, gradual progress isn’t quick enough.

"Feeling the stick but not being able to eat the carrot isn’t enough for some investors," Dattner said. "That pushes them out of the share."

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