B Communications Ltd. (NASDAQ: BCOM) (TASE: BCOM) today reported its financial results for the second quarter ended June 30, 2010.

Consolidation of Bezeq Results

On April 14, 2010, B Communications completed its acquisition of the controlling interest (approximately 30.42%) of Bezeq - The Israel Telecommunication Corp., Ltd. (“Bezeq”) in consideration for approximately NIS 6.5 billion (approximately US$ 1.75 billion). B Communications began consolidating Bezeq’s results into its financial statements as of the transaction date. In contemplation of its acquisition of the controlling interest in Bezeq, on January 1, 2010, the Company adopted International Financial Reporting Standards as issued by the International Accounting Standards Board, which are the financial reporting standards utilized by Bezeq, to replace its previous reporting standard, the generally accepted accounting principles in the United States (US GAAP).

To provide investors with transparent insight into its business, the Company has also provided its results on an unconsolidated basis in which its interest in Bezeq’s net income is presented as a single line item (see below, “B Communications’ Unconsolidated Q2 Financial Results”).

B Communications Financial Results for Q2

B Communications’ revenues for the second quarter are derived entirely from Bezeq, whose results have been consolidated into the financial statements of B Communications as of April 14, 2010. As such, B Communications’ revenues for the second quarter were NIS 2.6 billion (US$ 671 million), a nine-fold increase compared with NIS 291 million reported in the second quarter of 2009, when its revenues consisted of the Company’s legacy communications business that was sold to Ampal-American Israel Corporation as of January 1, 2010.

B Communications’ net loss for the second quarter was NIS 11 million (US$ 3 million), reflecting the impact of three significant items:
  • One-time expenses of NIS 47 million (US$ 12 million) related to the Bezeq acquisition, primarily for legal and financial advisory fees.
  • Financial expenses of NIS 88 million (US$ 23 million), consisting primarily of NIS 73 million (US$ 19 million) in interest on the long-term loans incurred to finance the Bezeq acquisition and NIS 9 million (US$ 2 million) in expenses related to prevailing interest rates and changes in the CPI and their effect on the Company’s CPI-linked debentures.
  • Amortization (net) of NIS 42 million (US$ 11 million) related to the Bezeq purchase price allocation (see Note B below).

B Communications’ Loan Repayment Plan
  • Outstanding loans: At June 30, 2010, the Company’s unconsolidated total gross debt was NIS 4.75 billion (US$ 1.2 billion) and unconsolidated net financial debt was NIS 4.36 billion (US$ 1.1 billion), representing 68% of the total NIS 6.5 billion Bezeq acquisition price. The Company financed part of the Bezeq acquisition cost with loans totaling NIS 4.4 billion from a consortium of banks led by Bank Hapoalim and the Migdal Insurance group. In addition, a NIS 700 million bridge loan, which was incurred during the second quarter of 2010, was repaid during the second quarter from a NIS 746 million dividend payment from Bezeq that was received by the Company upon the closing of the acquisition.
  • Bezeq’s dividend policy: Bezeq has announced a dividend policy of paying out, on a semi-annual basis, cash dividends amounting to 100% of its net income attributable to the shareholders. On August 2, 2010, Bezeq’s Board of Directors recommended the distribution of a cash dividend to its shareholders of an aggregate NIS 1.28 billion (US$ 330 million), or approximately NIS 0.48 per share. The dividend, which is subject to shareholder approval, would be payable on October 7, 2010 to shareholders of record as of September 20, 2010. B Communications expects to receive approximately NIS 390 million (approximately US$ 101 million) as a dividend on the payment date.
  • Loan repayment plan: The terms of B Communications’ loan agreements specify the repayment of interest and principal over a period of seven years . Payments to be made during the second half of 2010 will total approximately NIS 293 million, depending upon the prevailing interest rates and changes in the CPI.

B Communications’ Unconsolidated Cash Position
(in NIS millions)  

As of March 31, 2010 (pre-Bezeq transaction)
  As of June 30, 2010 (post-Bezeq transaction)
Cash and cash equivalents 1,806 389
Total gross debt (412) (4,741)
Net cash / (debt) 1,394 (4,352)
 

B Communications’ Unconsolidated Q2 Financial Results
   

Q2 2010 (NIS millions)
 

Q2 2010 (US$ millions)
Revenues - -
One time acquisition expenses (47) (12)
Financial expenses (88) (23)
PPA amortization, net (42) (11)
BCOM's interest in Bezeq's net income

166

43
BCOM's net loss (11) (3)
 

Comments of Management

Commenting on the results, Mr. Eli Holtzman, CEO of B Communications, said, “We are excited to report our results for the first reported quarter since completing the Bezeq acquisition, a quantum step that has transformed our Group into the clear leader of the Israeli telecom market. Our transition into the Bezeq era has been rapid and smooth. Our shares are now positioned as a Nasdaq-traded vehicle for making leveraged investments in Bezeq, and we are focused fully on the execution of a sound and relatively low-risk loan repayment plan.

“Our financial statements for the second quarter reflect substantial one-time and other acquisition-related expenses. Going forward, our income will be derived from our interest in Bezeq’s net income, which we believe will be more than sufficient to cover our loan-repayment needs.”