Bezeq probe examines a web of bad connections
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Bezeq probe examines a web of bad connections

Communication Ministry official and Bezeq chairman and CEO are suspected of fraud, breach of trust

The offices of Bezeq, the country's largest telecom group. (Kobi Gideon/Flash90)
The offices of Bezeq, the country's largest telecom group. (Kobi Gideon/Flash90)

With its CEO and chairman under investigation, Bezeq, Israel’s largest telecom operator which had some NIS 10 billion ($2.8 billion) in revenue last year, will find it hard to focus on its day-to-day business, which is already challenged by increased competition, analysts say.

The company’s shares have declined some 15 percent, as of end of day Monday, since investigators from the Israel Securities Authority (ISA) raided Bezeq’s offices on June 20 as it probed possible securities law violations. The investigation has now expanded to include dodgy dealings with the telecommunications regulator and shady deals between companies owned by one person, communications mogul Shaul Elovitch, who is also reportedly a friend of Prime Minister Benjamin Netanyahu.

On July 13 the Tel Aviv Magistrate’s Court ruled that several suspects, including Elovitch, the controlling shareholder and chairman of the board of Bezeq; Or Elovitch, a company director and the son of Shaul; and Stella Handler, Bezeq’s CEO, will be under house arrest until Friday and will not be allowed to be in contact with Bezeq officers and employees or those of Eurocom, a firm controlled by Elovitch. Other officers of the company were also subject to certain limitations, Bezeq said in a filing to the Tel Aviv Stock Exchange. Bezeq’s board appointed director David Granot as temporary acting chairman at the end of last month.

Shlomo Filber, the director general of the Communications Ministry, was also sent to house arrest last week under the same probe. The suspicions include reporting offenses under the securities law and fraud and breach of trust. On July 17, Filber’s deputy, Maimon Shalima, was appointed acting managing director of the ministry by Communication Minister Ayoub Kara.

Shaul Elovitz, Bezeq owner (Calcalist screenshot)
Shaul Elovitz, Bezeq owner (Calcalist screenshot)

 

“With restrictions on key personnel, the current situation is clearly sub-optimal from a management perspective and its ability to navigate the company,” Roni Biron, co-head of research at Excellence Nessuah Brokerage in Petah Tikva, told The Times of Israel. “We expect Bezeq’s share price to trade below its fair value until the dust settles around the ISA investigation and as the regulatory roadmap crystallizes.”

Biron on Monday cut the 12-month price target for a share of Bezeq to NIS six from a previous target of NIS 6.8. Its rating for the share was kept at neutral. Bezeq shares closed at NIS 5.508 on Monday.

“We don’t know how far this investigation reaches,” wrote Citi analyst Michael Klahr in a note on the company on June 26. “Key business managers may need to be replaced likely impacting operations for a short period.” The board of director’s attention is also “likely to be elsewhere in the interim,” he wrote.

Bezeq cannot comment on the investigations and is awaiting their completion to get a clearer picture of events, a spokesman said in a text message. “Alongside the investigation, the company continues its operations and its service to its hundreds of thousands of customers, invests in advanced infrastructure and provides quality products and services.”

“The company operates and has always operated according to law and regulations,” the text message said. The temporary chairman, David Granot, “an esteemed and experienced figure in the Israeli economy,” is aiding Bezeq “to continue to give customers the highest levels of service.”

A telecom giant

Bezeq is a diversified telecoms operator active in a variety of sectors in the Israeli market: Bezeq Fixed-Line provides internet and telephony services; Bezeq International provides international call services; Pelephone provides cellular services; Yes provides pay TV services; Walla runs an internet news portal service and there is also an online call center. All of these units are fully owned by Bezeq, but because the firm was historically a monopoly, and because it is still a dominant player in the market, regulatory curbs compel these units to operate as separate businesses, leading to higher costs for Bezeq.

Bezeq’s controlling shareholder is communications mogul Shaul Elovitch, who was also its chairman until the start of the ISA investigation. He owns a stake in Bezeq via a pyramidal company structure: his firm Eurocom Communications Ltd. controls Internet Gold-Golden Lines Ltd. which in turns controls B Communications Ltd. B Communications holds a 26% stake in Bezeq, and the rest of Bezeq, 74%, is held by the public via shares traded on the Tel Aviv Stock Exchange.

Elovitch, who also holds a 0.03 percent stake in Bezeq directly, used to hold a stake in Yes, which he sold to Bezeq in 2015 in a deal that has been estimated at a total of over NIS 1 billion. Elovitch also controls satellite communication provider Space-Communication Ltd. (or Spacecom Satellite Communications Ltd). Spacecom said Tuesday in a filing to the Tel Aviv Stock Exchange that the ISA searched its offices in the morning as part of the ongoing investigation.

According to a Bezeq investor presentation, at the end of 2016 Bezeq held 55 percent of the private sector telephony market and 73% of the business sector telephony market, with 2.1 million fixed line customers. Bezeq also holds 69% percent market share in broadband lines; its Pelephone subsidiary holds a 23% stake in the cellular market, with 2.4 million subscribers; and satellite broadcaster’s Yes’s market share in the pay TV sector is 40%.

Bezeq’s revenue in 2016 totaled NIS 10.1 billion, which represented 46% of the total telecom revenue generated by the key players in the Israeli telecom market, including Bezeq, Cellcom Israel Ltd., Partner Communications Co. and Hot Telecommunication Systems Ltd., the presentation showed.

The suspicions

The Elovitch sale of Eurocom’s stake in Yes to Bezeq started off at the center of the Israeli Securities Authority probe, which then widened to include Yes dealings with Spacecom and the dealings of Bezeq officials and Elovitch with the director general of the Communications Ministry, Shlomo Filber.

According to an ISA document presented to court on July 13, in March 2015 the board of directors at Bezeq approved the acquisition of Yes from Eurocom, the private company owned by Elovitch. In April 2017, Bezeq’s board also approved a deal to buy satellite segments from Spacecom in a deal that would add up to some NIS 920 million. For both transactions Bezeq set up independent committees to study the deals and to manage the negotiations. Because of Elovitch’s personal interest in these deals, he and his officials were required to desist from contact with the committees.

The July 13 ISA document also said that the ISA suspects that Handler and company secretary Linor Yochelman, who were involved in the committees, passed information and secret details to Elovitch and other Eurocom officials about the negotiations. Handler and Yochelman were instructed by Eurocom officials to promote some initiatives and thwart others within the committee and other professional entities to suit Eurocom’s interests, the ISA claims. This gave Elovitz and the other Eurocom officials involved in the negotiations a “significant and unfair advantage vis a vis the public investors in Bezeq” and the committee members, the document said.

In a separate document presented to court on June 21, the ISA also claimed that during 2015-2016 Bezeq officials, including Elovitch and senior officials in Yes and Bezeq, carried out various artificial manipulations in connection with the Yes deal, which affected the reports of Bezeq and its reporting obligations in its financial statements.

The July 13 document presented by the ISA also claimed that Filber, the Communications Ministry director general, operated in a “deceitful” manner to promote the interests of Bezeq at the ministry.

“The investigation has revealed a tangible suspicion” that Filber operated in a systematic manner and by withholding information from professional civil servants and legal advisers at the ministry, to transfer to Bezeq confidential documents and internal position papers and other papers. The Bezeq suspects, including Elovitch and Handler, would give Filber their feedback about the documents, adding adjustments that would help their “strategic, tactical and business needs.” These adjustments were adopted and used as a basis for continued discussions, the document said.

Stella Handler, Bezeq CEO (Courtesy)
Stella Handler, Bezeq CEO (Courtesy)

Handler’s lawyer told the court on July 13 that Handler “is convinced she did not commit any crime, she acted professionally and honestly and denies any suspicions attributed to her in the investigation.”

Elovitch’s defense team said he rejects all claims and is cooperating fully with the investigation.

As the Israeli government has implemented market reforms in the telecommunications market to lower consumer costs — a flagship project of former communications minister Moshe Kahlon, today Israel’s finance minister — Bezeq and cellular phone services incumbents Cellcom Israel Ltd. and Partner Communications Co. have come under increased pressure to cut prices.

When the cellular market opened to competition in 2010, the advent of newcomers like Golan Telecom and Rami Levy Hashikma Marketing led to a price war that slashed costs for consumers by as much as 90 percent and reduced market stakes and revenues for the incumbent cellular firms.

Because of the diversified nature of its business, however, Bezeq could count on its other activities to prop up its revenues, and its policy of paying out high dividends over the years made it the darling of many foreign investors.

Turning the focus on Bezeq

But then the Communications Ministry turned its attention to Bezeq’s lucrative fixed line business — telephony and broadband — and set out a roadmap for the creation of a wholesale market, requiring Bezeq to lease its infrastructure to competitors that would lower prices for internet, phone and digital TV services. The idea was that once competition in the fixed line market was in place, Bezeq would be finally allowed to merge with its units, allowing for the firm to trade market share for cost savings that are estimated to amount to millions of dollars a year.

A 2014 paper by Prof. Reuven Grunau for then communications minister Gilad Erdan and the then director general of the Communications Ministry Avi Berger forecast that the wholesale reform, which started at the beginning of 2015, could cut into Bezeq revenues by as much as NIS 1.3 billion after four years of competition. Berger also fined Bezeq for dragging its feet on the reforms and threatened additional fines.

But then Netanyahu replaced Erdan as communications minister in November 2014 in what critics saw as a power grab to give him increased control over the media and telecom industries in Israel. Netanyahu subsequently fired Berger over the phone in May 2015 and appointed Filber in his place. The move was perceived by analysts as a signal Netanyahu was looking for a less confrontational stance vis a vis Bezeq.

In June 2016, Attorney General Avichai Mandelblit said Netanyahu should keep out of issues relating to the competition between the Bezeq and other companies, due to his friendship with Elovitch. Netanyahy was barred from involvement with the company and handed over decision-making to Filber and to Tzachi Hanegbi, the regional cooperation minister. In February 2017 Hanegbi took over as communications minister and was subsequently replaced by Ayoub Kara in May.

Last week, a damning report by Israel’s State Comptroller Yosef Shapira said that a series of decisions made by the ministry, along with a failure to make “significant other decisions,” had resulted in practice in a “significant delay” in the implementation of the fixed line market reform and the development of competition. The report found that Netanyahu acted improperly when he held the portfolio of communications minister regarding involvement in the telecom giant.

Shapira said that Netanyahu did not originally report his personal connection to Elovitch in a conflict of interest declaration, casting a shadow over the way the Communicatons Ministry treated Bezeq.

“The promotion of Bezeq’s interests, without a professional examination of the implications, was likely to cause real damage to competition and the public interest,” the report read.

Shapira wrote that there was a lack of transparency over decisions made by Netanyahu regarding Bezeq before he was barred from involvement with the company.

The state comptroller also said that Filber may have acted in ways that benefited Bezeq, citing several cases. He also questioned whether it was possible for Filber to make unbiased decisions against Elovitch in light of the prime minister’s close connection with the Bezeq head.

Shlomo Filber, director general of the Communications Ministry, seen during a court hearing in the Supreme Court regarding the closing of the Israel Broadcasting Authority. May 15, 2017. (Miriam Alster/Flash90)
Shlomo Filber, director general of the Communications Ministry, seen during a court hearing in the Supreme Court regarding the closing of the Israel Broadcasting Authority. May 15, 2017. (Miriam Alster/Flash90)

Netanyahu has denied any wrongdoing or impropriety.

In a statement, Netanyahu’s office called the comptroller report “another futile attempt to create a scandal against the prime minister out of thin air,” according to Channel 10.

Netanyahu and Elovitch “are on friendly terms but nothing more,” and “all the decisions he made regarding the communications market were for the benefit of the public alone,” the statement read.

Regulatory process looks sidelined for now

Bezeq shares have declined almost 25 percent so far this year, as of end of day Monday, compared with a 1 percent drop of the benchmark TA-35 blue-chip index, as investors wait on news about mergers at the firm.

“The investigation sidetracks a much-needed regulatory process toward the removal of Bezeq’s structural separation,” Excellence’s Biron said. “In the absence of regulatory relief, Bezeq remains vulnerable” to growing competition from other companies that are allowed to offer triple-play deals, without being able to bundle up services of its own units, pending a merger, he said.

“While we still expect Bezeq’s structural separation to be lifted at some point based on a gradual roadmap with pre-conditions, the current investigation and the recent state comptroller report add another layer of complexity to the political backdrop and limit our visibility into this event.”

Steven Schoenfeld, chief investment officer of BlueStar indexes (Courtesy
Steven Schoenfeld, chief investment officer of BlueStar indexes (Courtesy

Corporate governance in Israel remains a concern for foreign investors, said Steven Schoenfeld, founder and chief investment officer of BlueStar Indexes, a financial firm that has developed indices and exchange traded funds (ETFs) with a focus on the Israeli capital markets.

“Many global investors still do not consider Israel’s independent directors (on the boards) to be fully independent, especially in the way they vote during interested parties transaction,” Schoenfeld said in an email message to The Times of Israel. “BlueStar considers this a risk factor of the Israeli market, since most of the Israeli companies have controlling shareholders as opposed to the US, Canadian and European markets.”

“Many changes were made to the companies law during this decade, but in practice there is not enough of a change,” Schoenfeld added. “The controlling shareholders determine the directors that the general meeting is voting for, and if directors vote against the controlling shareholder they might not be re-elected or elected to other companies. However, we believe that the fact the ISA is investigating the biggest communication company in Israel is a positive sign for foreign investors — there is ultimately law enforcement in Israel, no matter how big a company or who its controlling shareholders might be.”

Citi’s Klahr said Bezeq now “needs to restore investor confidence by showing that senior management has independence from the controlling group.”

Even so, Klahr is optimistic about the fate of the company and maintains a buy recommendation for Bezeq’s shares. “Although the investigation is likely to be prolonged and may result in senior management turnover, we still don’t see it impacting Bezeq’s top-line,” Klahr wrote in his July 12 note.

The investigation could also be “positive for minority shareholders if steps are taken to improve corporate governance and the YES transaction price is reduced,” he wrote. “Our view is that at this stage a major political upheaval would be needed to delay removal of structural separation indefinitely (beyond the next 2 years). Even against the backdrop of the ongoing ISA investigation and the SC report we don’t foresee that.”

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