Why a Telecom Merger Is Netanyahu's New Headache: QuickTake Q&A

Another investigative wave is crashing close to Israeli Prime Minister Benjamin Netanyahu. A district court ordered house arrest for a senior government official and top executives at Bezeq Israeli Telecommunication Corporation Ltd. as part of a securities probe that’s now looking into possible collusion to benefit the company. Though Netanyahu himself is not a subject of the probe, looming in the background are his personal ties to Shaul Elovitch, Bezeq’s controlling shareholder.

1. What are the allegations?

The Israel Securities Authority launched a probe into whether Elovitch and other executives cooked financial reports to inflate the value of Bezeq’s "Yes" television unit during a 2015 merger with the parent company. The more it dug, the wider the ISA extended the investigation’s scope. Investigators also are examining whether Space Communication Ltd., a satellite company Elovitch controlled, provided services to Yes at exaggerated prices.

2. How does this involve Israel’s government?

The ISA says Shlomo Filber -- whom Netanyahu appointed as Communications Ministry director general -- allowed Bezeq secret access to internal documents for the company to review and suggest changes. In other words, the ISA alleges that Bezeq, Israel’s largest telecommunications company, was dictating policy for the body charged with regulating it. In December 2016, Filber notified Bezeq of his intent to cancel regulation that keeps the company from merging its various units. The state comptroller, in a July 2017 report, said Filber’s decision was rushed and not transparent.

3. Why does it matter if Bezeq can merge its units?

Bezeq is a holding company with four operating units -- television, fixed-line telephony, Internet and mobile -- that must remain "structurally separate" under Israeli rules meant to boost competition. If the Communications Ministry allowed Bezeq to merge the units, the company could streamline management and bundle its offerings -- something its competitors already do -- potentially lowering prices for consumers. The company could save about $100 million a year in operating costs and deduct billions of shekels of past losses from its tax bill. 

4. Why is Bezeq important to Netanyahu?

The prime minister has a tense relationship with the Israeli press and often accuses the media of being dominated by liberal voices hostile to his conservative constituents. That has left him pining for more favorable coverage. Bezeq owns a popular news outlet called Walla!, which critics say has featured fawning coverage of Netanyahu -- now serving his third consecutive term as prime minister -- and his wife, Sara. Netanyahu held the communications portfolio until February, when he stepped down amid calls to recuse himself from Bezeq matters because of his friendship with Elovitch. That didn’t satisfy critics, who say party loyalists Netanyahu appointed as communications minister -- first Tzahi Hanegbi, and now Ayoob Kara, plus Filber as director general -- have continued advancing policies favorable to Elovitch and Bezeq.

5. Is Netanyahu in legal jeopardy?

No charges have been leveled at the prime minister so far. However, the state comptroller said Netanyahu didn’t disclose his potential conflict of interest regarding Bezeq early enough, and described his communications ministry appointees as Bezeq patsies who shaped regulation in the company’s favor. The Bezeq investigation adds to the pressure on Netanyahu, who is the subject of two other investigations -- one into the receipt of gifts from rich friends, the other into possible collusion to pass legislation benefiting a newspaper publisher in exchange for favorable coverage. In addition, Netanyahu’s lawyer has been questioned in a third investigation into potential bribery in the purchase of submarines from Germany, though Netanyahu himself is not a subject of that probe.

6. What does Netanyahu say?

“We are in the midst of an unprecedented media campaign to smear me with empty accusations with the intention of replacing the government,” he said in an Israeli television interview, denying any wrongdoing. The Israeli media “knows one thing: I am the obstacle preventing the rise of the left. So they have to get rid of me.”

7. Who’s faced consequences so far?

Elovitch has been hit hardest: He stepped down as Bezeq chairman, was barred from company offices and has been placed under house arrest. The investigation has wiped out 3.1 billion shekels ($868 million) from Bezeq’s market capitalization, losses that have reverberated through Elovitch’s pyramid of holdings. An Israeli court also placed Bezeq CEO Stella Handler and Filber under house arrest, confiscated their passports and prohibited contact with their offices. Elovitch’s son, Or Elovitch, who holds senior positions throughout the family empire, is also under house arrest.

8. What’s the outlook for Bezeq?

The company is still pushing for the end of "structural separation," though any such relief will likely be delayed, since lawmakers won’t want to be seen as siding with a tycoon under investigation. There have been calls for changes in corporate governance to show investors that senior management is independent from ownership.

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