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Elovitch's straight flush

Ofek blames its woes on sluggish regulators. But maybe it was saved from wasting millions more

After six months of high-stakes poker, of raising the ante by a million a month, Shaul Elovitch had enough. He threw down his cards and threw in the towel, walking away from losses of about $30 million.

His move to establish Ofek The New World communications company hadn't begun as gamble. It just ended that way. Up to a year ago it had a clearly defined business and financing plan.

Ofek's goal was to build a domestic communications network competing with state-run monopoly Bezeq. It would use state-of-the-art wireless technology merging Internet and TV services into an enticing mélange of broadband, all financed by foreign money provided by banks, suppliers and later, the capital market.

The plan sounded great in the pre-crash world. Two years later, the company's declared goal of recruiting 2,000 people and building a broadband empire sounds like a hash dream.

The poker game commenced in deadly earnest six months ago, when the capital market collapsed and the company's chiefs realized their chances of roping in foreign money were slim. Elovitch didn't need a crystal ball to tell him that Ofek's chances of making it alone were smaller than vanishing. But the truth is, it may not be able to make it in partnership with another company either.

Anyway, Elovitch commenced an aggressive negotiation with Cellcom. At first he talked outright merger, but as time grew short, so did his negotiating clout. Finally he had to bow to the terms the powerful mobile carrier dictated: that it would rule the roost and set the strategy, including technologically.

Show your cards
What was Elovitch actually bringing to the table? It's a good question, one that kept the Israeli telecommunications scene scratching its head for two years.

Cellcom's contribution was clear enough: 2 million customers, a big technology department, sprawling cellular infrastructure, a billing system, a massive marketing machine and polished customer services.

What about Ofek? Well, it had "knowhow" and "plans". But its knowhow couldn¿t be quantified, especially as certain Cellcom tech masterminds couldn't figure out why they needed Ofek's knowhow at all.

Elovitch had already sunk $20 million into Ofek. So he decided to play poker and go for broke. Instead of closing the company and axing its staff of 180, which cost him $1.5 million a month, he kept it rolling in clover with its people intact ¿ after all, they were the repositories of all that precious "knowhow", all to impress Cellcom with his strength and resolve.

Cellcom knew perfectly well that even if the merger went ahead in this or that form, Ofek would have to shed most of its staffers. Elovitch knew it too, but he preferred for that to happen after the merger, not before.

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When the talks with Cellcom blew up again last week, Elovitch decided: That was that. He'd lost enough. He declared he was backing out of plans to compete with Bezeq for now, and fired most of Ofek's employees.

Truth is, the dream died a year ago when the stock markets crashed. Canadian colossus Nortel (NYSE:NT) had agreed to finance most of the Ofek project. But then it posted losses that wouldn't shame a small nation, partly because of its penchant for financing newfangled projects like Ofek's. Yesterday was merely the official notice of a funeral held a year back.

Nobody's got the winning hand
Nor will money be available for Ofek-type ventures in the foreseeable future. Other Israeli communications companies boasting of plans to compete with Bezeq, such as Barak and Golden Lines, are also blowing bubbles. No sane bank or investor would put a penny into competing with Bezeq these days, especially given the recessionary environment.

Even Israel's cable companies are chanting "competing with Bezeq" mainly in order to persuade the Antitrust Authority to allow their merger. But the truth is that the cable companies are up to their ears in debt. No right-thinking bank would lend them a red agora to open a new front of hostilities with Bezeq.

Cellcom seems to be the best positioned to go to war with Bezeq. It has infrastructure and can raise money. But it won't rush to do so. It will probably compete with the national phone company in select niches, investing small sums. Its talks with Ofek apparently served other purposes, such as squeezing out more spectrum from the chintzy Communications Ministry.

The bright side of losing
Will Bezeq reign alone forever? Let's have some proportion here. Bezeq is already facing competition in certain areas. The mobile communications companies are one major factor, as are the long-distance communications companies. The cable companies will be launching high-speed Internet services, which will also bite into Bezeq's market. Within a couple of years, Cellcom will be fighting it tooth and nail in the business sector.

Conclusion: Bezeq will face competition. In time. Lots of time.

Israel's telecommunications community wonders what would have happened if the authorities had been on the ball, and had issued licenses before the capital market crash.

"If the market had opened to competition when the hype was hot, everything would be different," groused Ofek manager Reuben Sgan-Cohen. "We were being wooed by suppliers. Nortel promised us 120% financing."

Maybe. But there could be another scenario. If Ofek had raised the money, it might have burnt up $300 million instead of $30 million, and ended in the pits anyway. Money raised when the hype is hot has a habit of evaporating fast. Straight flush - down the toilet.

Elovitch, one of Israel's savviest communications entrepreneurs, is hurting as badly as his former employees. His dream of founding the "second Bezeq" is dead. But he might take comfort in the thought that ultimately, Nortel and the capital market did him a favor. The pain might have been much, much worse.