August 23, 2018 / 7:17 AM / a year ago

UPDATE 2-Bezeq Telecom plans to merge businesses to cut costs as profits fall

* Plans merger of mobile phone, satellite TV, internet units

* Company wants to end full structural separation

* Q2 net profit 195 mln shekels vs 207.5 mln forecast

* Shares jump 6.5 percent in Tel Aviv (Adds detail, share reaction, analyst comment)

By Steven Scheer

JERUSALEM, Aug 23 (Reuters) - Bezeq Israel Telecom on Thursday announced plans to merge some of its businesses as part of efforts to cut costs after reporting a steeper than expected 46 percent fall in second-quarter profits.

Under the proposal, which still needs regulatory approval, Israel’s largest telecoms group would combine its mobile phone, satellite TV and Internet service provider businesses - Pelephone, YES and Bezeq International. Its fixed-line business, which controls much of Israel’s telephony and Internet infrastructure, would remain separate.

New chairman Shlomo Rodav said the plan would include steps to streamline and improve the company’s performance, including a voluntary retirement plan, maximising synergies between the various subsidiaries and the sale of non-core businesses.

“We intend to respond to the competitive challenges with determination ... while taking into account regulatory constraints,” Rodav said.

Bezeq’s Tel Aviv-listed shares were up 6.5 percent at 1405 GMT. The shares, which fell 29 percent in 2017, have suffered due to stiff competition and a police investigation into Bezeq for alleged securities offences.

“We trust that the launch of the strategic plan will help rebuild investors’ confidence and pave the way to the re-rating of the shares,” said Barclays analyst Tavy Rosner, who estimates a cost saving of 700 million shekels from the merger.

“We see today’s announcement as a first step in the right direction for the group.”

Bezeq, Israel’s former telecoms monopoly, began facing stronger competition in 2015 after the government opened the market to smaller rivals offering cheaper but more limited services.

Once a state-run monopoly, Bezeq’s long-term aim was to end the structural separation of its four businesses, including its fixed-line division.

But analysts believe a merger of all four businesses looks unlikely given the government’s desire to promote competition and that this situation prompted Bezeq’s new management to propose the latest plan.

Bezeq said in a filing to the Tel Aviv stock exchange that the aim of the plan was to bring into line the structure of the subsidiary companies with the current technological, economic and competitive situation in the communications marketplace.

In the second quarter, Bezeq earned 195 million shekels ($53 million), compared with 358 million shekels a year earlier, its lowest level since the fourth quarter of 2016. Revenue slipped 5.3 percent to 2.3 billion shekels.

Bezeq had been forecast to earn 207.5 million shekels on revenue of 2.35 billion, according to a Reuters poll of analysts. The company reiterated its 2018 forecast for net income of 1.0 billion shekels.

The company’s former chairman, chief executive and other officers have been arrested over the past year in relation to allegations of fraud, bribery other securities offences. They all deny wrongdoing.

Bezeq declared a dividend of 318 million shekels, or 0.11 shekel per share, for the first half of 2018.

Pelephone reported a 79 percent decline in second-quarter profit to 7 million shekels, although its subscriber base rose to 2.6 million. YES sharply narrowed its loss despite cutting prices to respond to the loss of customers to new competitors. ($1 = 3.6584 shekels) (Reporting by Steven Scheer Additional reporting by Ori Lewis Editing by Jane Merriman and Jeffrey Heller)

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