|Shares Out. (in M):||2,762||P/E||14.3||13.5|
|Market Cap (in M):||5,956||P/FCF||12.6||11.7|
|Net Debt (in M):||2,553||EBIT||2,966||3,133|
Bezeq Israeli Telecommunication Corporation Ltd. (“Bezeq”) is Israel’s largest telecom provider based on revenue and subscribers. Bezeq operates the most comprehensive telecom infrastructure in Israel with market-leading positions in fixed line, mobile, ISP, and pay TV businesses. Bezeq is a top player in each of its core markets with ~65% market share in fixed line telephony and broadband internet, 27% market share in mobile, 40% market share in Israel’s ISP market (which is separate from the provision of broadband internet access) and 40% market share in pay TV.
Bezeq is publicly traded on the Tel Aviv Stock Exchange and is included in the TA-25 index, which includes 25 traded companies with the highest market value in the TASE. Bezeq is a subsidiary of B Communications Ltd. (BCOM), which is a public company in Israel whose only asset is its ~30% stake in Bezeq). BCOM is a subsidiary of Internet Gold Golden Lines (Nasdaq: IGLD), which is a subsidiary of Eurocom Communications, a member of the Eurocom Group. Eurocom was established in 1979 by Shaul Elovitch and has investments in telecommunications, satellite services, media, real estate, consumer electronics, and financial services.
Source: BCOM investor presentation
Bezeq is an attractive event-driven play with multiple catalysts to drive substantial increases in EBITDA over the next 2-3 years. We believe the following catalysts are not fully appreciated by investors and discounted in today’s closing stock price of ILS 8.41 per share.
Full implementation of fixed line voice and broadband wholesale markets: Media outlets and research analysts have routinely and significantly overestimated the ultimate negative impact to Bezeq as Israel implements a wholesale pricing regime that allows upstarts to piggyback on Bezeq’s infrastructure.
Removal of structural separation: Israeli law mandates that Bezeq’s four subsidiaries must be held in separate legal entities and must be outfitted with heavily duplicate back office, management, and other general and administrative infrastructure. In conjunction with the implementation of wholesale markets in fixed voice and broadband, the government is expected to permit the removal of structural separation over the next few years. We expect significant cost savings as these barriers to full legal integration are removed and believe these savings, while sometimes discussed, are not included in analyst estimates.
Wireless market consolidation: After years as a three-player market the Israeli government opened the wireless market to competition in 2011 on terms highly favorable to new competitors. At one point the market swelled to 10 competitors for a population of ~8 million people and new competitors led a brutally competitive race to the bottom in mobile pricing, which cost incumbents hundreds of millions of shekels in EBITDA. We believe that mobile consolidation will occur near term and that mobile ARPUs could conservatively recover ILS 20/month, a roughly one third increase from current levels.
Bezeq stock could be worth 10 shekels (ILS) per share in one year, representing a 25% total return inclusive of the 7% dividend yield on the current stock price of ILS 8.41. In a reasonably conservative upside scenario, Bezeq could be worth ILS 12 per share one year from today, representing a 48% total return from today’s stock price.
Bezeq's market cap is ILS 23.2bn, or ~USD 6.0bn at the latest USD/ILS exchange rate of 3.9 shekels to the dollar. Bezeq trades only in Tel Aviv but is fairly liquid, trading roughly ILS 30mm, or USD 7.8mm, worth of stock per day.
Bezeq Company Overview
Bezeq had 2.2 million active fixed telephone lines, 1.5 million fixed line broadband internet subscribers, 2.6 million mobile telephony subscribers and 639 thousand pay TV subscribers as of September 30, 2015. For calendar year 2015, we expect Bezeq to generate ILS 10.6bn in revenue and ILS 4.3bn in EBITDA. Bezeq’s services are provided by the following company segments:
Domestic Fixed Line Telephony and Broadband (ILS 4.4bn in revenue, ILS 2.9bn in EBITDA): Bezeq is the incumbent and largest provider of fixed line telephony and fixed line broadband internet access services in Israel. Products and services include basic telephony services on domestic telephone lines and fixed line broadband internet access services through Bezeq’s nationally deployed, high quality infrastructure. Bezeq’s next generation network is the most advanced fixed line communications network in Israel and covers 98% of Israel’s population. Bezeq is in the middle of a fiber rollout that is expected to reach 1.3mm households by the end of 2015.
Bezeq has consistently increased its market share in the broadband infrastructure market since 2012, with market share increasing to 67.6% in September 2015 from 60.3% in December 2012. Broadband ARPU has continued to rise, reaching ILS 87/month for LTM September 2015, up from ILS 81/month in 2012. Over the same time frame, HOT, Bezeq’s main broadband competitor, saw ARPU fall from ILS 62/month to ILS 51/month.
Mobile Telephony (Pelephone) (ILS 2.9bn in revenue, ILS 592mm in EBITDA): Pelephone is among the leading mobile telephony service providers in Israel. Pelephone’s nationwide 3.5G network supports download speeds of up to 42 Mbps and upload speeds of 5.7 Mbps, making it one of the fastest, highest quality and most advanced networks in Israel.
Since the Israeli government opened the mobile market up to wholesale competitors in 2012, Bezeq’s Pelephone subsidiary has done an admirable job stemming subscriber losses and mitigating EBITDA losses. Pelephone has lost only 73k subscribers since 2013, while competitors Partner and Cellcom have lost 260k and 216k subscribers, respectively, from similar beginning subscriber bases. Additionally, Pelephone cut almost ILS 800mm in operating expenses since 2012, supporting EBITDA margins of 21% in 9M 2015 (down 10% since 2012) vs. 19% at Cellcom (down 11%) and 14% at Partner (down 15%).
ISP, ILD, Data Services and ICT (Bezeq International) (ILS 1.6bn in revenue, ILS 377mm in EBITDA): Bezeq International is the leading provider of ISP services in Israel and one of Israel’s leading providers of international and domestic data transfer and network services. Israeli law mandates a separation in the provision of internet service and internet infrastructure; thus customers pay for the connection (in Bezeq fixed line) and for the ISP through which they access the internet (can be through Bezeq’s ISP or through a wholesale competitor). Bezeq’s ISP segment deployed the JONAH high-speed submarine optical fiber communications cable system connecting Israel and Europe in January 2012, providing increased bandwidth and positioning Bezeq International as Israel’s only ISP to own and operate an advanced international network.
Multi-Channel Pay Television (YES) (ILS 1.8bn in revenue, ILS 595mm in EBITDA): YES offers nationwide coverage through its DTH technology and is the only company in Israel licensed to provide multi-channel pay TV broadcasts via satellite and is one of only two companies in Israel licensed to provide multi-channel television services. YES is differentiated from its main competitor, HOT, through its wide range of high quality content on 178 channels, including 20 HD channels, and approximately 23,000 VOD titles. Of 220 new theatrical releases that aired in Israel in 2012, 60% were broadcast only by YES during 2013.
Bezeq’s YES has grown market share by 2 percentage points vs. its main competitor HOT since Q1 2014 despite maintaining stable ARPU at a premium to HOT.
The Telecom Industry in Israel
Israel has high penetration rates across all telecom services that are in line with developed economies in the European Union and the U.S. High levels of penetration are attributed to rapid adoption rates of new technologies, significant expenditures on telecom services by consumers and businesses and a relatively young population. Fixed line losses in aggregate have been lower than in other developed countries. Bezeq IR believes this is due to larger family sizes (doesn’t make sense to give each kid a cell phone) and general security considerations (families feel there is a need to have a fixed line in the home given enduring regional conflict).
The broader communication market is dominated by four players: Bezeq, the HOT Group, the Cellcom Group and the Partner Group, each of which have interests in some or all of the main telecom segments in Israel.
HOT (Altice subsidiary): HOT is the only competitor that matches Bezeq’s full offering of fixed line telephony, broadband internet access, mobile telephony, pay TV and ISP services. HOT had 19% market share in fixed line telephony, 38% market share in broadband, 8% market share in mobile and 60% market share in pay TV. HOT is owned by Patrick Drahi’s Altice.
Cellcom (TASE:CEL; ILS 2.5bn market cap): Cellcom provides fixed line telephony, mobile telephony and ISP services through its Cellcom and Netvision brands. Cellcom had 8% market share in fixed line telephony and 32% market share in mobile telephony as of 2013. Cellcom is publicly traded in Israel.
Partner Group (TASE:PTNR; ILS 2.7bn market cap): Partner provides fixed line telephony, mobile telephony and ISP services through its Orange and O12 Smile brands. Partner had 8% market share in fixed line telephony and 30% market share in mobile telephony as of 2013. Partner is publicly traded in Israel and is ~30% owned by Haim Saban, who was until a few years ago a large shareholder in Bezeq along with Apax Partners.
Golan Telecom (private): Privately owned by French entrepreneur Xavier Niel. Much of Golan’s success has been enabled by its ability to convert network rollout with a fixed payment to Cellcom, practically removing its variable hosting cost and capex needs. The Israeli Ministry of Communications (“MoC”) has recently opposed the inclusion of 4G within the scope of the agreement, calling for more active participation by Golan.