The rumors in the press last week regarding a Partner-Pelephone merger were apparently not the last rumors of potential deals within the beleaguered Israeli telecom sector. They were followed quickly with reports this week that Matav and YES are in merger talks, as are Israel's largest ISP Netvision and international call operator and ISP Barak.
First of all, these rumors would appear to me to be more logical than last week¿s set. Whether these deals will actually reach agreement or indeed regulatory approval is another story.
Why are so many companies in this space looking to merge? It makes for a compelling story. Israel is a relatively small market yet competition is fierce beyond belief. This makes it all but impossible for any of the international call operators, ISP's or CATV/DBS operators to ever turn a profit.
What are the solutions available? Cut costs, grow revenues, close down or merge. All companies are trying to cut costs, growing revenues in the current environment is more difficult than we could imagine and closing down is unlikely, unless companies are still at a relatively early stage in their existence, such as NonStop or Ofek.
This leaves us with mergers. On paper, a great idea. Huge chunks of operating costs can be taken out of the merged entities, boosting cash flow, while at the same time the customer can be offered bundled services that will help top-line growth.
Looking at the specific examples, Matav and YES can stop bidding up content prices and subscriber acquisition costs and stop the cash bleed at both companies. Barak and Netvision would become Israel's dominant ISP and would allow the company (Baraknet ???) to offer its clients a whole range of services.
However, I have three concerns about these or any other deals that may be mooted in this sector. First of all, the benefits on paper are often more difficult to extract in reality. Fierce management battles ensue as everyone fights to keep their job, and the original benefits are quickly forgotten. Mergers are never easy, especially in a small country like Israel.
Secondly, will the anti-trust authorities allow these deals? A year or two ago you would have assumed not. But with the parlous state of the industry right now, it is hard to see what choice they have. However, as the cable merger still hasn't been approved, no other deals can count on smooth sailing.
Finally, could these deals actually increase competition? If Matav and YES were to merge would this leave Golden Channels and Tevel as independent competitors given the ability to compete nationwide rather than just in their region? And will a Barak Netvision merger force the regulator to allow Bezeq to play a more direct role in Bezeq International? Were these circumstances to come about, it could lead to increased, not decreased competition.
In conclusion, it is hard to see what choice the shareholders of companies in this sector have but to merge. It is definitely worth a try. But whether these deals will be approved and whether they would help to stop the cash bleed is another question entirely.