How Tevel went bankrupt

1. Despite the fact that the company's petition for a stay of liquidation proceedings could technically be called "bankruptcy", in practice the company is in far better shape than it appears.

As opposed to a large number of the technology and communications companies that did go bankrupt in the past two years, there is no real concern about Tevel's continued existence. Tevel's only problem is the huge loans it took in recent years to finance aggressive investment and competition policies.

Despite current operating losses, everyone understands this is a temporary situation. It could take two or three years to correct the managerial errors, but Tevel will return to operating profitability. Its massive debt does weigh heavily on the company and there is cause for concern regarding its ability to service the debt.

2. The clearest evidence that Tevel's bankruptcy is fundamentally a managerial problem is that the second largest cable television company, Golden Channels, dealing with exactly the same market ¿ didn't end up in Tevel's situation. It continues to honor its commitments to banks and suppliers.

Golden Channels, like Tevel, was partner to some of the managerial blunders of the cable television sector, first and foremost the agreements to buy movies and TV series at outrageous prices that the companies signed in the summer of 1999, when Wall Street was on fire and the cable companies forgot the need to eventually produce a positive difference between income and expenses. Those agreements tripled and quadruples te companies content costs and are the primary reason for Tevel¿s deteriorated operating profitability.

The difference between Tevel and the other companies is that in late 1999, immediately after signing those agreements, Tevel bought a 35% stake in Golden Channels at an inflated price. Tevel paid NIS 800 million in cash for the shares, three times their current value.

3. The Golden Channels deal was weird: Tevel paid the sellers, Aurec and SBC, in cash and immediately, despite not having antitrust or Communications Ministry approvals for the move. Approval for the merger came only yesterday, two and half years after the deal, which prevented Tevel from merging its activity with that of Golden Channels.

The cable companies management complains about the delay in implementing the merger. But the greatest damage dame from being quick to buy the Golden Channels stake and pay the consideration in cash ¿ before receiving approval for the merger.

4. Even after the capital markets crashed in 2000 and competition with satellite television company YES began, Tevel continued to claim "business as usual". It kept thinking like a monopoly, it took no real efficiency steps, and was willing to invest any amount of money in destroying YES. In the past two years, Tevel has invested NIS 650 million in its cable network and in subsidizing digital set top boxes.

There is no argument that the investments in upgrading the network and the set top boxes were important for competition, but a company must also know its financial capability and stop investing when there is a real concern that it will not be able to finance ongoing operations. Tevel didn¿t even take a breather, continuing to invest as though the banks would always be willing to grant more and more credit.

5. It could be that Tevel relied on the fact that if not the banks, its shareholders headed by Discount Investments, would always inject monies whenever need be. But that was also a false assumption. Discount and Tevel have known for more than a year that the other shareholder, UPC, was circling the bankruptcy drain fast and wouldn¿t be able to send money.

6. And maybe Tevel and Discount Investment told themselves that if not UPC, then Discount itself would always be able to come up with the cash. That's possible, but that begs the question why they didn't take into consideration the possibility that UPC would refuse to inject capital and refuse to be diluted, which would prevent Discount injecting capital.

Apparently they should have considered that possibility, as they were familiar with the founders or partnership agreements they had with UPC and knew they couldn't force UPC to be diluted except by taking the Dutch company to court. Nonetheless, they waited until the last minute, and only when the company was in a financial stranglehold did they start seriously dealing with their problems with their partner.

7. It is impossible to ignore the market conditions under which Tevel labored and the obstacles raised by the regulators, but all that still doesn¿t explain what happened in Tevel over the past two years.

The company's managers and owners still have not provided an explanation for how a monopoly with NIS 650 million in revenue transforms, in less than six months, from a company that invests huge sums in subscriber acquisition, subsidizes set top boxes and massive ad campaigns, into a company that gets up one morning and needs the court's protection from creditors and shareholders.