Cellcom Israel Finds Partner for Fiber, Loses Profit in Q3

Cellcom Israel (NYSE:CEL;TASE:CEL) announced on Thursday (November 22) multiple updates, including its memorandum of understanding (MOU) with Israel Infrastructure Fund (IIF) and its third quarter financial results.

In terms of Cellcom’s MOU with IIF, the communications firm in Israel said that it is for a co-investment in Israel Broadband Company (IBC). As per the MOU, the companies shall carry out the funding in equal parts through a joint investment.

Established in 2007, IIF is the largest infrastructure fund in Israel with the firm managing US$1.9 billion in assets while IBC is a provider of fiber infrastructure services for service providers in Israel.

Although Cellcom said that the terms and conditions with regards to the MOU are subject to further negotiations, both Cellcom and IIF are set to enter as equal partners in IBC.

Crucially, the company noted that execution of the agreement with IIF would work in accordance with an already existing MOU for investment in IBC, which involves Israel Electricity Company (IEC).

“We believe that entering IBC in partnership with IIF and alongside Israel Electricity Company, will generate – already in the near future – a real revolution in the Internet infrastructure field in Israel and will place Cellcom Israel in a leading competitive position in the advanced landline infrastructure market,” Nir Sztern, CEO of Cellcom, said in the release.

According to the MOU for investment in IBC, Cellcom would be investing 100 million Israeli new shekel (approx US$26.75 million), leading to a 70 percent stake in IBC with the rest belonging to IEC. The license and agreements will let IBC deploy fiber optic over IEC’s infrastructure.

“Cellcom Israel’s investment in IBC will allow its continued operation and the ability to initially offer fiber-optic internet services to approximately 150,000 households in IBC’s current deployment areas,” Sztern said in a release in August. “Our objective for Cellcom Israel and IBC’s fiber-optic deployment is reaching over 500,000 households in 3 years, reaching approximately 900,000 and 1,200,000 households after 5 and 10 years, respectively.”

In the earnings call on Thursday, Sztern said that Cellcom would not get any monetary benefits from the transaction at this point in time. However, Sztern clarified that the MOU with IIF would mean that the 70 percent stake Cellcom was supposed to have in IBC would be split into two.

“..the Israeli new shekel 100 million that we are going to pay to get into the Company, we’re going to share. Any future investment in the Company is going to be equally shared between the two companies,” Sztern said in the earnings call.

Sztern said that the company is unsure when the transactions would conclude but believes that it won’t be long before all transactions close.

Separately, the company also announced its third quarter results on Thursday. Cellcom reported that its total revenues were Israeli new shekel 910 million (US$251 million) as compared to Israeli new shekel 975 million (US$269 million) in the third quarter in 2017. These 2018 numbers represent a 6.75 percent decrease compared its 2017 counterparts.

The company’s net income totalled Israeli new shekel 1 million (US$0.3 million) as compared to Israeli new shekel 32 million (US$9 million) in the third quarter of 2017, translating to a 96.9 percent decrease.

EBITDA numbers were Israeli new shekel 184 million (US$51 million) in the third quarter of 2018 as compared to Israeli new shekel 226 million (US$62 million) in the same period in 2017.

Cellcom highlighted that approximately 120,000 households are within the coverage range of its fiber optic network. Sztern further clarified in the earnings call that there won’t be further investments in this vertical.

“…there won’t be a need to do a double investment, not both in IBC and Cellcom. That’s going to make a big difference,” Sztern said.

The company recently increased its monthly price by Israeli new shekel 10 with Sztern stating on the earnings call that the company is “happy” with the reactions.

“We are operating to improve the results in the cellular segment despite the competitive environment in this segment,” Sztern said the release.

The company’s shares closed the most recent trading session on Wednesday (November 21) at US$6.78 and were up 4.31 percent as compared to its previous day close. The stock has gained 18.95 percent in the last month and 7.79 percent over a three month period. Cellcom has a “Buy” ranking on TradingView with 17 verticals in favor, nine in neutral and two against.

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Securities Disclosure: I, Bala Yogesh, hold no direct investment interest in any company mentioned in this article.