Bezeq’s rating: Under examination with negative consequences – the capital market

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According to Midroog, lowering the rates for using the landline phone could “significantly harm the company’s profit and cash flow, and hurt Bezeq’s revenues in the short and medium term.” The rating indicates that, according to the Ministry of Communications, the proposed change in tariffs “is expected to reduce the expenses of subscribers to the individual lines segment in a way that will reduce the expenses of the company’s fixed telephony consumers by NIS 331 million per year.”

Bezeq’s revenues from landline telephony services amounted to NIS 1 billion in the last four quarters, and a similar number during 2019, revenues that constitute about 25% of Bezeq’s revenues in the field of fixed domestic communications.

It is no secret that over the last ten years cell phones and internet calls have replaced the landline phone, and there has been a significant drop in demand for a landline phone, alongside an erosion in the amount of calls originating from landline networks. In the years 2019-2015, Bezeq recorded an average annual decrease of about 9% in revenues from the fixed lines. Although in the last year there has been a slowdown in the rate of decline in revenues (probably due to the corona epidemic), the horizon is not optimistic for Bezeq in this field.

On the other hand, the rankings indicate in favor of the start of the fiber deployment plan by Bezeq in recent months. According to the rating company: This is a “significant and positive development for the company, which can achieve significant coverage of households in Israel within a few years. Despite the high competition in the field, Bezeq will maintain a leading position in the fiber infrastructure.”

In the last four quarters, Bezeq’s adjusted free cash flow “Solo” (representing the activity of the field of fixed domestic communications, including landline telephony) amounted to NIS 700 million and in 2019 amounted to NIS 610 million. Bezeq’s free cash flow “Solo” was negatively affected during these years, among other things, by payments to employees for early retirement as part of the company’s efficiency program. According to the rating: “The free cash flow is Bezeq’s main source for repaying its financial liabilities and is also used, from time to time, to support its subsidiaries, and in particular the subsidiary DBS.

In conclusion, the rating states that “the Ministry of Communications’ recommendations for reducing the rates of landline telephony indicate a significant potential harm to Bezeq’s free cash flow, hence the ability to service debt and the potential for reduction in financial debt.”

In order to make a final decision on a change in Bezeq’s rating and assess the extent of the impact of the Ministry of Communications ‘recommendations on Bezeq’s revenues and cash flows, Madroog will wait for the Ministry of Communications’ final decision, The upcoming and other moves that Bezeq may make.

Last night it was reported in News 13 that Attorney General Avichai Mandelblit is expected to announce the filing of indictments subject to a hearing against the media bodies involved in the 2000 and 4000 cases, Bezeq Walla and Yedioth Ahronoth. A final decision on the matter will probably be made in the coming days.

It will be recalled that just before he resigned, the outgoing Minister of Communications, Yoaz Handel, landed another blow on Bezeq when the Ministry of Communications announced that it would recommend the acquisition of control of IBC by the Hot Group.

In the last 15 years, Midroog has twice downgraded Bezeq.