Elliott Welcomes Bezeq’s Governance Overhaul
Elliott Advisors (UK) Limited (“Elliott”), which advises funds that collectively comprise one of the largest shareholders in Bezeq The Israeli Telecommunication Corporation Ltd. (“Bezeq” or the “Company”), today sent a letter to Bezeq’s newly appointed Board Chairman Shlomo Rodav, sharing its views on Bezeq’s governance transformation and proposing that the Company consider a share buyback programme.
Elliott’s letter highlights the poor corporate governance that persisted at the Company over a number of years, leading to an Israel Securities Authority investigation, and a number of board members and executives being placed under house arrest and barred from the Company. Culminating in last week’s election of Chairman Rodav, the Company’s refreshed Board brings much needed independence and experience.
Now that the long overdue governance overhaul has been achieved, Elliott recommends that the following action items be undertaken without further delay: (i) appoint a new CEO; (ii) rebuild a constructive regulatory dialogue; (iii) develop a coherent new strategy for the business balancing growth with efficiency gains; (iv) review shareholder distribution policy, immediately seeking authorization to buy back shares and consider implementing a buyback programme when appropriate; and (v) conduct robust domestic and international engagement with shareholders, clearly communicating a plan to create value.
Elliott’s letter is latest in a series of communications with the Company this past year, and follows up on recent conversations with Chairman Rodav and other members of Bezeq’s board.
Full text of the letter can be read below.
Elliott Management Corporation manages two multi-strategy funds which combined have approximately $35 billion of assets under management. Its flagship fund, Elliott Associates, L.P., was founded in 1977, making it one of the oldest funds of its kind under continuous management. The Elliott funds’ investors include pension plans, sovereign wealth funds, endowments, foundations, funds-of-funds, and employees of the firm. Elliott Advisors (UK) Limited is an affiliate of Elliott Management Corporation.
May 17, 2018
|Mr Shlomo Rodav|
|Bezeq The Israel Telecommunication Corporation Ltd.|
|The Triangular Tower|
|3 Azrieli Center|
|Tel Aviv 61620, Israel|
|Attention: Shlomo Rodav, Chairman of the Board of Directors|
Dear Mr Rodav,
We appreciate our recent phone conversations about the future of Bezeq The Israel Telecommunication Corporation Ltd. (“Bezeq” or the “Company”). As the funds we advise are (collectively) one of Bezeq’s largest shareholders, we want to reiterate our optimism at your appointment as Chairman of the Board of Directors. Bezeq has undergone a major governance overhaul in recent months, providing a foundation for you and a new leadership team to drive shareholder value. We are writing today to offer our views on the importance of these governance changes and to propose that the Company consider supporting shareholder value by implementing a share buyback programme. Shares could be acquired from the market or, if feasible, from the Eurocom Group. To facilitate this, we believe Bezeq should immediately seek authorisation to acquire up to 10% of its shares, which would allow the Company to opportunistically buy back shares when appropriate.
Over the past year, Bezeq has operated under extreme uncertainty, with a lack of clear leadership and strategic direction, poor investor communications, and a stalled regulatory dialogue. These interrelated problems stemmed from the poor corporate governance that persisted at the Company over a number of years. This led to an Israel Securities Authority investigation and a number of board members and executives being placed under house arrest and barred from the Company. This has all occurred at a time of accelerating competition and change in the Israeli telecom market.
We are encouraged by the progress made in normalising Bezeq’s corporate governance. Following the AGM, and your subsequent election as Chairman, we believe that Bezeq now has a much improved Board of Directors. In contrast to when we first began our engagement with Bezeq, the Company’s refreshed Board is independent and brings experience of the Company itself and the Israeli telecom market as well as the management and governance of large companies. Having spoken with you and a number of your fellow directors, we are encouraged by your commitment to work collectively for the benefit of Bezeq and all its stakeholders without bias toward any shareholder who nominated you.
Valuation and Share Buyback
We continue to believe that Bezeq is fundamentally a well-positioned and resilient business, where—following a sustained period of poor governance and management—a new leadership team can drive performance improvements and rebuild shareholder value. Bezeq’s shares, in our view, are currently trading well below their fundamental value on multiple dimensions. Bezeq has one of the highest equity free cash flow yields (~11%) of any incumbent telecom company in the EMEA region. This yield is based on the 2018 earnings and cash flow, which we believe is likely to be a low point, reflecting the pricing initiative taken at Yes earlier this year, but none of the anticipated cost savings from combining Yes and Bezeq International. This also neglects the likely growth and efficiency initiatives that may be pursued by a new team. The shares trade well below the discounted cash flow valuations of every sell-side analyst covering the stock.
This discount to fundamentals implies that it would be accretive for Bezeq to buy back its own shares. This could be funded by the ~ILS 500m proceeds from the Sakia real estate disposal and by modest incremental borrowings, appropriately sized to avoid impacting Bezeq’s credit rating or significantly affecting borrowing costs.
Now that the governance problems at Bezeq have been resolved and a new Board of Directors is in place, it is imperative that the following steps be taken without further delay:
(i) Appoint a new CEO;
(ii) Rebuild a constructive regulatory dialogue;
(iii) Develop a coherent new strategy for the business balancing growth with efficiency gains;
(iv) Review shareholder distribution policy including immediately seeking authorization to buy back shares and consider implementing a buyback programme when appropriate; and
(v) Conduct robust domestic and international engagement with shareholders, clearly communicating a plan to create value.
Bezeq’s new Board should be well positioned to effectively govern the company in the interest of all shareholders. We appreciate your leadership in this new phase for Bezeq, and look forward to our continued dialogue.
Elliott Advisors (UK) Limited
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