The story doing the rounds in the local press this week relates to the possibility of a merger between Partner, Israel¿s third largest cellular operator, and Pelephone, the second largest and 50% owned by Bezeq. This has surely got to be one of the least likely deals to go ahead in 2002, for a whole host of reasons.

The most obvious reason, of course, is for competitive reasons. What chance is there that the anti-trust authorities would allow a merger between two companies that together would control around 60% of Israel¿s cellular subscribers? Everyone knows that the anti-trust authorities in Israel are particularly strict about approving mergers that consolidate control of the market into one large corporate hand. Surely this deal would be dismissed out of question?

Then of course there is the small matter of the diverse group of shareholders with interests in both companies. It is hard to see Bezeq, Shamrock, Hutchison, Matav, Polar and Elron sitting around the same table. Sure, some of these shareholders could exit, but Hutchison likes to maintain control of companies in which it is involved and has shown no sign of being keen to divest. At the same time, will Bezeq feel comfortable sitting at the table with Elron, owned by DIC who in turn owns Tevel and Cellcom? The same goes for Bezeq and Matav.

Third of all, there is the technological issue. Pelephone runs an analogue and a CDMA network, Partner a GSM network. Both will be building out 3G networks. How many networks will this merged entity run? Will it simply shut down networks where billions of shekels have been spent?

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Fourth, there is a management issue. Amikam Cohen and Yakov Gelbard are both highly capable yet active managers. Clearly, the two could not work together. This in itself is not insurmountable as one would be forced to leave but it is incredibly difficult to see how the workforces of the two companies could be integrated smoothly.

The clear positive to such a merger would be that if the hurdles above were overcome, the cost cutting that could eventually be carried out would allow the merged entity to return to profitability. However, what looks so easy on paper is far more complicated in reality. Merging two companies that are ostensibly service providers are always more difficult to carry out than one expects. Just take a look at the turmoil following any large bank merger in recent years for examples illustrating just how difficult such integration can be.

Having said all of the above, consolidation in the Israeli cellular market is far more likely than many would think. However, in my opinion the most likely candidate for consolidation is the niche player, Mirs. Despite its relatively small subscriber base, Mirs is not a big loss maker at present, but it also has very strong technology which could supplement one of the ¿big three¿ while its ARPU¿s (Average Revenues Per User) are the highest in the industry.