New and improved

Now all we have to do is wait.

After half a year of stuffing us with numbers, data and explanations of how the cable television industry is on the verge of collapse and how its situation deteriorated at a frightening pace due to destructive regulations that made it difficult even to pay salaries, after reiterating and reiterating the scope of its debt and how expensive content is and how hard it is to make money in a world that is open to competition ¿ a revolution can be expected in the next few days.

After half a year of seeing nothing but the cable companies' losses and their huge debt ¿ they are about to change their tune. The whining, complaints and gloomy forecasts will be replaced by serious economic analysis that will demonstrate that cable television is actually a winning combination of huge cash flow, NIS 2.5 billion annual income and monopoly status even after the advent of satellite television company YES.

They will suddenly remember to tell us that despite the difficulties of the past two years, the big cable company to be born of the marriage of Tevel, Golden Channels and Matav, is the only company in Israel, except Bezeq and Israel Electric, that is linked directly to the bank accounts of 1.2 million households with a monthly direct debit order.

Is the theoretical turnaround of the cable industry the result of the upcoming merger? Of course not. What has changed is the cable companies interests.

For the past half year, the cable company shareholders had a clear interest in painting their future in shades of gray and black, so Antitrust Commissioner Dror Strum and the Cable Council would impose as few as possible restrictions and preconditions on the merger. Reports of the companies¿ financing difficulties and huge losses served the companies and their shareholders in negotiations with the regulators.

Now, after the cable companies have gotten what they wanted from Strum, immediate merger on one hand and future conditions that do not clearly create a competitive structure in the sector on the other hand, they will begin a new public relations campaign to reposition themselves. No more downtrodden, debt-intensive sector, but a business with strong cash flow and great potential with no problem servicing large debts incurred during the telecom market's euphoric period.

Battle for financing

While for the past several months the cable companies have focused on negotiating with the antitrust commissioner to reduce the conditions designed to ensure fair competition in the future, the arena for the next few months will be the battle for financing.

The merged cable company will need in the next year a few hundred million shekels to fund the losses and investments in broadband. Lacking internal resources or the shareholders willingness to reach into their own pockets and inject cash into the company, the only source of that funding will be debt: taking more loans.

The collapse of the banks¿ profitability and deterioration of their capital ratios will make Bank Hapoalim, Bank Leumi and First International Bank ¿ the cable television industry¿s primary financiers ¿ into far more cautious lenders. Their willingness to increase credit to the cable companies by another billion shekels in the next two years will not be too great.

The solution therefore will be to turn to the general public, the capital market. However, it will quickly become clear that the chances of issuing the merged Israeli cable company on Wall Street are slim at best. The price both local and foreign investors will be willing to pay will be low and drastically dilute the existing shareholders, making an IPO a pretty sorry option.

The alternative is apparently issuing bonds on the local market. The shareholders, going along with the banks, will try to raise a few hundred million shekels immediately for the merged company by issuing bonds to the general public.

The planned appeal to the capital market as the next source of funds for the cable television industry will require a radical change in the sector¿s image in the eyes of the business community. Instead of emphasizing the damages allegedly caused by regulations, the merged company¿s management will highlight its monopoly status, the enormous difficulty the satellite company faces in attempting to compete, the possibility YES will collapse, and the potential additional revenues of a company whose infrastructure reaches almost every household in Israel.

In the first months of this year, many companies that issued bonds succeeded in exploiting devaluation-invoked panic and fear of inflation to raise cheap money. Provident fund managers and insurance companies tripped over themselves in the race to buy various corporate bonds at low interest that offered no compensation for the inherent risks.

The Israeli banking system, which directly or indirectly controls most of the institutional entities on the local capital market, has a vested interest in improving the financial state of the cable companies. Not just because of the estimated NIS 5 billion in direct debt, but also because of the huge debts of the shareholders themselves.

Israeli¿s institutional investors will have to prove not just the height of the Chinese walls between them and the banks, but their own ability to price risk. They must prove they are committed solely to the welfare of their fund members, savers and insured, and that they have learned the lessons of the banks earlier mistakes in granting huge loans at low interest that did not reflect the business risk of the corporate borrowers.

The cable companies will apparently be the most significant test case, if they do try to raise a lot of money on the capital market. But the cable company will be both preceded and trailed by many companies trying to decrease their dependence on the banking system. We hope this will be an opportunity for institutional investors to buy bonds from leading companies with high yields, and not a rerun of the stock market cycle in which goods no one wants are pushed onto the public at the highest prices.