Cellcom Revived to DS as Pricing to Cut Rivals: Israel Overnight

Feb. 25 (Bloomberg) -- Cellcom Israel Ltd. will extend its rebound from the cheapest level in six months versus New York- traded peers on speculation newer rivals will be squeezed out of the market, according to DS Securities & Investments Ltd.

Shares of Cellcom, Israel’s largest mobile phone provider, rose 0.4 percent to $7.31 in New York Feb. 22, paring a weekly decline of 4.6 percent. The stock’s 100-day volatility dropped to 41.4, the lowest level since May 17, data compiled by Bloomberg show. The Bloomberg Israel-US Equity Index of the largest U.S.-traded Israeli stocks lost 0.6 percent last week. The benchmark TA-25 equities index added 0.2 percent to 1,220,89 at 10:26 a.m. in Tel Aviv.

Cellcom has slumped 48 percent in the past year, and traded for 5.35 times estimated earnings Feb. 21, 61 percent below the average valuation on the Israel-US gauge and the biggest discount since Aug. 9. New operators, including Golan Telecom Ltd. and Hot Telecommunication System Ltd., have lured customers from Cellcom and Partner Communications Co., Israel’s No. 2 mobile provider, by offering unlimited monthly wireless packages for less than 50 shekels ($13.49).

“Companies have been very cut-throat and the smaller players we don’t think will survive if the prices remain at these levels,” Richard Gussow, an analyst at DS, a Tel Aviv- based brokerage, said by phone Feb. 21. “We’re going to see consolidation of the mobile sector and fewer competitors means less chance of a price war,” he said, adding this would be a “positive catalyst” for both Cellcom and Partner.

‘Slash Costs’

Golan and Hot gained about 4.5 percent of the mobile market, or around 460,000 new customers, through September after less than five months of operation, according to a Dec. 10 note from HSBC Securities Inc. analyst Jean Kaplan. Kaplan covers Bezeq Israeli Telecommunication Corp., which owns mobile provider Pelephone Communications Ltd. Incumbent mobile network operators collectively lost 71,000 subscribers in the third quarter, according to Kaplan.

Due to the competitive landscape, “companies will have to slash costs, raise tariffs, and scale back investment,” Ori Licht, an analyst at IBI Brokerage and Investments in Tel Aviv, wrote in a 2013 outlook report. “If this does not happen, we expect to see one of the new operators disappear to be acquired by, or merged with one of the incumbents.”

Israel’s telecommunications sector has seen consolidation in the past.

In 2011, Partner acquired 012 Smile Telecom Ltd., an Israeli provider of international long distance, Internet and local fixed-line services. Cellcom acquired Internet and landline services provider NetVision Ltd. the same year for 1.57 billion shekels.

Yakum, Israel-based Hot bought MIRS Communication Ltd., a wireless operator, for 1.3 billion shekels in 2011. Hot was acquired by shareholder Cool Holding Ltd., controlled by French entrepreneur Patrick Drahi, at the end of last year.

Cellcom ‘Undervalued’

Golan is the new entrant that will probably suffer most from price cutting in the sector, DS’s Gussow said. An e-mail sent to the company’s address on its website Feb. 22 wasn’t returned. Israeli markets were closed yesterday for a holiday.

Both Cellcom and Partner, which trades at 7.3 times estimated earnings, are “undervalued for sure,” said Gussow, whose firm recommends buying shares of Netanya, Israel-based Cellcom and Partner, headquartered in Rosh Ha’Ayin. “They’re off their lows. We’re just waiting for investor sentiment to change.”

Cellcom shares traded in Tel Aviv lost 1.6 percent today to 27.14 shekels, or the equivalent of $7.29. Partner fell 1.7 percent to $5.64 last week in New York, while its Israeli stock rose 1.2 percent to 21.1 shekels, or $5.69, in a second week of gains.

MagicJack Tumbles

SodaStream International Ltd., the Israeli maker of home soda machines, slumped 7.4 percent in the week to $47.34, the biggest five-day drop since July. The Airport City, Israel-based company’s 2013 gross margin, a measure of profitability, will be “flat” from last year as expanding demand forces it to use outside manufacturers, Chief Executive Officer Daniel Birnbaum said on a Feb. 20 earnings call.

MagicJack VocalTec Ltd. sank 8.3 percent to $12.18 last week. The Netanya, Israel-based provider of voice-over-Internet services, has tumbled 33 percent in 2013, making it the worst performer on the Bloomberg Israel-US gauge. MagicJack jumped 33 percent in 2012.

--Editors: Emma O’Brien, Marie-France Han