Prospect of Bezeq telecom merging with its units raises hackles

Finance Ministry and others slam Communications Ministry’s plan to drop Bezeq’s ‘structural separation’ requirement

Shoshanna Solomon was The Times of Israel's Startups and Business reporter

Bezeq workers installing fiber optic cables. (Courtesy)
Bezeq workers installing fiber optic cables. (Courtesy)

A decision by the Communications Ministry that paves the way for allowing the Bezeq telecommunications company, the nation’s largest fixed-line provider, to merge with its subsidiaries is raising a storm inside and outside of the government.

Bezeq said in a filing to the Tel Aviv Stock Exchange last week that it has received notification from the Communication Ministry’s director general, Shomo Filber, regarding the “cancellation of the structural separation obligation in the Bezeq Group,” a move that would enable it to merge with its subsidiaries. On Monday, the company said its board of directors approved a merger with its Yes satellite broadcasting unit, subject to approvals and conditions.

Bezeq, which dominates the local communications market, has been subject to regulation that forces it to keep its mobile, fixed-line, satellite TV and internet subsidiaries as separate business entities. However, as the fixed-line market opens to competition, the ministry said in its notice to Bezeq that it is “advancing the cancellation of the corporate separation in the Bezeq Group,” something the phone provider has been clamoring for for years.

A merger with its units would enable Bezeq to cut costs by millions of shekels, analysts have estimated, and offer customers packages of phone, internet and TV, similar to those its smaller competitors already provide.

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

Permission to merge the units will be dependent on Bezeq’s commitment to invest in infrastructure and to speed up the deployment of a fiber optic broadband network in 2017, reaching 76 percent of households in three years, the ministry said in its notice. In addition, the ministry intends to hold a hearing on the matter during 2017.

The Finance Ministry reacted with displeasure. A merger of Bezeq with its units “has the potential of significantly hurting competition in the telecom sector, as the terms for a move such as this have not been met,” Amir Levy, the Finance Ministry’s budget director, said in a letter to Filber, according to Hebrew text in TheMarker business daily. The website reported that Filber’s decision was not coordinated with the Finance Ministry.

Finance Minister Moshe Kahlon’s popularity had soared when, as communications minister, he tackled the cellphone market, introducing competition and sending prices tumbling to the benefit of consumers.

“The Finance Ministry is an integral part of the regulation in the telecommunication sector,” said Levy, calling for a deeper discussion of the matter before any “significant decisions are made.”

Bezeq’s structural separation should be removed only once the fixed-line telephony reform, which it at its initial stages, is more advanced, Levy wrote, as Bezeq still dominates the market.

Bezeq’s merger with its units will enable Shaul Elovitz, the Bezeq chairman and controlling shareholder, to benefit from lower taxes for a total of around NIS 1.3 billion ($340 million) in the coming eight years, TheMarker estimated.

Elovitz is a personal friend of Prime Minister Benjamin Netanyahu, who currently also holds the position of communications minister. Because of their relationship, Netanyahu has refrained from dealing with matters relating to companies controlled by Elovitz, to avoid a conflict of interest. Decisions regarding Bezeq have been transferred to Tzachi Hanegbi, the regional cooperation minister.

The Movement for Quality Government in Israel, a democracy and good governance group, said that no decision about structural separation at Bezeq should be made until a State Comptroller’s report on the matter is published. The rush to decide on the matter before the wide-ranging report on the state of Israel’s fixed-line market is published “raises concerns that it stems from impure motivations,” the group said, according to TheMarker, and “smells like an illegitimate hijacking” of the process.

The prospect of the cancellation of the structural separation sent Bezeq shares, traded on the Tel Aviv Stock Exchange, up almost 5 percent on Sunday. The company said in its filing that it is examining implementation of the merger.

Knesset member Micky Rosenthal, of the opposition Zionist Union, told Army Radio on Sunday that Netanyahu “pulls the strings” at the Communications Ministry. The move has been “done in an invalid way,” he said.

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