Israeli Wireless Consolidation scenario under the spotlight

Cellcom-Golan deal in perspective

As discussions over regulatory approvals continue, we view the Cellcom-Golan deal as an important directional event for the following reasons:

1. Even if regulatory approvals are not granted and competition intensifies in the short term, we do not see a return to  pre-deal fundamentals, as we believe Golan's stand-alone economics and motivation

are challenged by higher costs.

2. When the dust settles, approval with remedies may prove preferable over market shakeout, as the Israeli market is simply not big enough to sustain 5-6 MNOs over time. The MVNO consolidation earlier in the year and now Golan are merely a reflection of this reality. That said, politics has its ways and regulatory approvals remain challenging in the current Israeli environment. We believe this highly scrutinized regulatory process could take around 6 months.Potential for market repair but no U-shaped recovery Reading across from European consolidation in recent years (4-to-3) we see a positive impact on ARPU/SAC but timing and scope are shaped by market-specific

characteristics. In the case of Israel, there is a clear potential for market repair given the extent of price competition (sub-€10/mth) but a post-deal structure of 4-5 MNOs is still crowded. Should Xfone decide to enter into a network sharing agreement it will likely try to disrupt the market to gain subs and HOT Mobile could remain aggressive for its own reasons. We also note that current promotions in the market are priced below reported ARPU levels so some relaxation is needed just to stabilize current levels. Finally, based on previous experience, antitrust approval is most likely to come with remedies, particularly in the current environment in Israel.

Valuation:

We raise our PT for Cellcom to NIS30 from NIS27, reflecting higher network income from Golan. Although incrementally positive on mid-term sector trajectory, we make no further changes at this stage and keep our PT of NIS18 for Partner. Running a reverse DCF based on 9% WACC, we estimate current levels imply a cNIS5 recovery in longterm ARPU, with any NIS5 deviation either side having a meaningful impact on valuation. Our PTs are based on adjusted EV/EBITDA multiples of 5.75x (unchanged) and are rolled over to 2016e.

Roni Biron, Analyst UBS