Due Diligence and Valuation Report: Market Data

Due Diligence and Valuation Report
Arrowhead Code: 54-01-05 Company: B Communications Ltd.

Coverage initiated: 22 October 2013 Ticker: NASDAQ / TASE: BCOM
This document: 19 November 2014 Headquarters: Ramat Gan, Israel
Fair share value bracket - DDM US$20.46 and US$24.17 CEO: Mr. Doron Turgeman
Share price (18 Nov. 14): US$17.49i CFO: Mr. Ehud Yahalom
Analysts
Snehal Mahajan Website: www.bcommunications.co.il
[email protected]
+1 (212) 619-6889
Market Data Bezeq to Drive Growth

52-Week Range: US$12.55–US$21.61ii
Arrowhead is updating coverage on BCOM with a fair
Average Daily Volume: 4,470iii value bracket of US$20.46 (Low-Bracket estimate) and
Market Cap. (18 Nov 14): US$522.76MM US$24.17 (High-Bracket estimate).
Financial Forecast (in NIS)(FY ending - Dec) Key Highlights:(1) BCOM’s experienced management
NIS MM '14E '15E '16E ‘17E ‘18E ‘19E ‘20E team has displayed the ability to withstand and adapt to
changes happening in the sector;(2)Strong presence
High NI * (0.10) 0.20 0.23 0.25 0.28 0.29 0.31
across the Telecommunication spectrum;(3)Bezeq owns
High EPS (3.34) 6.84 7.57 8.29 9.41 9.71 10.30 most of the operating infrastructure in its area of
Low NI * (0.10) 0.17 0.17 0.18 0.25 0.24 0.27 operation in Israel;(4) One-of-its-kind Fixed line NGN
(Next Generation Network) network for the ultra-speed
Low EPS (3.35) 5.62 5.59 6.06 8.33 8.10 9.03
Internet; (5)Ultra- speed packages from 10 Mbps to 100
*Attributable to Shareholder Mbps at relatively lower rates to offer higher Internet
Company Overview: Based in Israel, B Communications, speeds to more customers;(6)Pelephone demonstrated
Ltd (hereinafter referred to as “BCOM” or “the Company”) higher customer satisfaction, witnessed through lower
is a holding company of Bezeq - The Israel increase in churn rate as compared to its peers during
Telecommunication Corporation Ltd (hereinafter referred to the time period 2011-13 despite intense competitive
as “Bezeq”),which is the largest telecommunication groups pressureiv;(7)Bezeq International through its submarine
in Israel. BCOM’s sole asset is its controlling stake of cable network has improved customer services as well as
30.81% in Bezeq as of September 30, 2014. Bezeq is increased its revenue stream; (8)By launching Israel’s
engaged in (1) Bezeq Fixed line provides Domestic Fixed sole satellite services, Bezeq has displayed its immense
line Services, Internet infrastructure and access services, understanding of customer needs and also its innovation
Transmission and data communication (2) Pelephone- capabilities; (9)BCOM improved its debt structure by
provides Cellular services (3) Bezeq International Internet successfully closing a private debt offering to qualified
access services (ISP), International Communication institutional buyers of $800MM, 7⅜% Senior Secured
Services and NEP (Network End Point) Services (4) DBS – Notes due 2021 on February 19, 2014.
Multi-channel digital satellite television (YES brand)- YES Key Risks (1) BCOM is a Holding company with only one
Pay TV is the only provider of multi-channel television asset; (2) Any decline in controlling interest below 30%
broadcasts via satellite (5) Others- This segment covers will lead to non-compliance with the ‘Control Permit’
operations of Internet portals such as Walla!, one of the norms and result in loss of authority in Bezeq; (3)
leading websites in Israel, Walla shops which is Israel's Ministry of Communications has released a list of services
largest e-commerce platform and BezeqOnLine, which which the infrastructure owners will be obliged to offer as
specializes in setting up, managing, and operating call wholesale services to service providers which is likely to
center services. result in an increase in competition in the coming years.v
9MFY2014: BCOM recorded consolidated revenue of Valuation and Assumptions: On the basis of due
NIS6.79 B in 9MFY2014, which represent a decline of 5.0% diligence and valuation estimates, Arrowhead believes
Y-o-Y. Cellular services revenue declined by 8.6% Y-o-Y that BCOM’s fair share value lies in the US$20.46 to
due to competitive environment as well as a 4.3% decline US$24.17 bracket.vi We have valued BCOM using the
in Fixed line revenue which in turn was impacted by a Dividend Discount Model (DDM) method to arrive at the
reduction in fixed line termination rate. The Net Profit for per share value of the Company. As per NAV method, the
the period stood at NIS828 MM, an increase of 8.8% Y-o-Y fair value of the Company comes to US$24.14 per share.
mainly due to Bezeq’s Yad2 Sale during the period.
B Communications Ltd. – Arrowhead BID 1 NASDAQ / TASE: BCOM

Due Diligence and Valuation Report See important disclosures on page 31 of this report
Table of Contents
1. SUMMARY AND OUTLOOK ............................................................................................................................... 3
2. BUSINESS OVERVIEW .................................................................................................................................... 4
2.1 Ownership Structure ..................................................................................................................................... 4
2.2 Company Milestone ...................................................................................................................................... 5
2.3 Business Model ............................................................................................................................................ 6
2.4 Products and Services ................................................................................................................................... 6
2.4.1 Bezeq Fixed line ................................................................................................................................ 6
2.4.2 Pelephone ........................................................................................................................................ 8
2.4.3 Bezeq International ........................................................................................................................... 8
2.4.4 Digital Broadcast Satellite (DBS) .......................................................................................................... 9
2.5 Company Premiums .....................................................................................................................................10
2.6 Company Risks ...........................................................................................................................................11
2.7 Corporate Strategy ......................................................................................................................................12
2.8 BCOM’s Shareholding Pattern ........................................................................................................................13
2.9 Listing and Contact Details ...........................................................................................................................13
3. KEY VARIABLE ANALYSIS ............................................................................................................................. 14
3.1 Variable 1 – Fixed-line Telephony: Total Access Lines Growth rate ......................................................................14
3.2 Variable 2 – Broadband Internet Lines Growth Rate ..........................................................................................14
3.3 Variable 3 – Cellular Communication: Subscriber’s Growth Rate .........................................................................14
3.4 Variable 4 – Cellular Communication: ARPU.....................................................................................................14
4. NEWS ........................................................................................................................................................... 15
BCOM ............................................................................................................................................................15
Bezeq Group ...................................................................................................................................................15
5. MANAGEMENT AND GOVERNANCE................................................................................................................. 17
6. TECHNOLOGIES AND MARKETS ..................................................................................................................... 18
6.1 Telecommunication .....................................................................................................................................18
6.2 Medium of Telecommunication: .....................................................................................................................18
6.2.1 Wire Line Telecommunication .............................................................................................................18
6.2.2 Wireless Telecommunication ..............................................................................................................19
6.2.3 Broadband Internet Services ..............................................................................................................19
6.2.4 Satellite Television ............................................................................................................................20
6.3 Telecommunication Industry - Israel ..............................................................................................................20
6.3.1 Industry Overview ............................................................................................................................20
6.3.2 Growth Drivers.................................................................................................................................20
6.3.3 Fixed Telecommunication Services ......................................................................................................21
Recent Development .................................................................................................................................21
6.3.4 Cellular Telephony ............................................................................................................................22
6.3.5 Internet and Broadband ....................................................................................................................22
6.3.6 International Telecommunications Services ..........................................................................................23
6.3.7 Multichannel TV ................................................................................................................................23
6.3.8 Competitive Landscape......................................................................................................................24
7. VALUATION .................................................................................................................................................. 25
7.1 Dividend Discount Model ..............................................................................................................................25
7.2 Net Asset Valuation (NAV) Method .................................................................................................................28
8. APPENDIX .................................................................................................................................................... 30
8.1 BCOM’s Financial Summary...........................................................................................................................30
9. ANALYST CERTIFICATIONS .......................................................................................................................... 31
10. NOTES AND REFERENCES............................................................................................................................ 32

1. Summary and Outlook
We are updating coverage on B Communications Ltd, headquartered in Israel, which is the holding company of Bezeq
-The Telecommunication Company Ltd, one of the largest telecommunication groups in Israel.
Key Highlights:
(1) BCOM’s strength lies in its experienced management team led by Mr. Shaul Elovitch, Chairman of Eurocom, that
has prepared the company to withstand and adapt to changes occurring in Israel’s Telecommunication sector.
(2) Bezeq’s strong presence across the telecommunication spectrum (fixed line, broadband services, cellular services,
and International services) gives the Company a competitive advantage.
(3) Bezeq is one of two groups in Israel that has its own infrastructure across the Telecommunication field in Israel in
which it operates.
(4) Bezeq’s one-of-its-kind fixed line infrastructure comprises an NGN (Next Generation Network) – FTTC (Fiber to the
Curb) network that offers ultra-speed Internet to cater to growing bandwidth requirements of its customers.
(5) Bezeq through its NGN network has launched various ultra-speed Internet surfing packages ranging from 10 Mbps
to 100 Mbps for its customers to experience high bandwidth rate at a lower price as compared to its peers. This is
clearly reflected in its Broadband revenue that grew by a Compound Annual Growth Rate (CAGR) of 10.5% between
2008 and 2013.
(6) Despite intense competition in cellular services, Pelephone has lost only 2.2% of its market share during 2011-13
as compared to much higher rates experienced by its peers, Cellcom (2.6%) and Partner (2.9%).
(7) Bezeq International through its submarine cable network has improved customer experience through increased
capacity and Internet speeds, and also simultaneously enlarged its revenue stream through additional capacity and
services.
(8) Also, in multi-channel television, through the launch of DBS (under the brand name of ‘YES’), Israel’s sole satellite
provider, Bezeq has proved its innovation capabilities and understanding of customers’ needs.
(9) BCOM displayed its ability to improve its financial and debt structure by successfully closing a private offering to
qualified institutional buyers of $800MM, 7⅜% Senior Secured Notes due 2021 on February 19, 2014.
Key Risks: (1) BCOM is a leveraged holding company with only one asset and due to this it is a fully exposed to the
Israeli communications market; (2) A fall in the controlling interest below 30% will lead to non-compliance with the
‘Control Permit’ norms and result in a loss of authority in Bezeq; (3) Ministry of Communications has released a list of
services which the infrastructure owners will be obliged to offer as wholesale services to service providers which is
likely to increase competition in the coming years.vii
Industry Overviewviii: Telecommunications services industry in Israel is a highly developed one and consists of
several segments all of which are highly competitive. The Israeli telecommunications market benefits from favorable
dynamics, including high penetration rates across all telecommunications services (144% in fixed-line telephony,
85.7% in fixed-line broadband Internet infrastructure access, 65% in pay television and 124% in cellular telephony as
of December 31, 2013), high penetration of postpaid contracts in the cellular telephony market, rapid adoption rates
of new technologies and significant expenditures on telecommunications services by consumers and businesses. The
market is dominated by four major groups, namely the Bezeq group, the IDB group, the Partner group, and the HOT
group with each of these having interests in some or all of the primary communications sub sectors. Major factors
contributing to the growth of the industry include the various technological advancements made by the country in the
sector, the massive inflow of foreign investments in the sector, and the favorable regulatory environment of the
country, which has consistently promoted competition in the industry. Intense competition within all sub sectors has
mainly been responsible for the sector witnessing downward pricing trends and higher churn rates. This has, in effect,
given rise to newer trends in the industry with existing companies investing in better technologies to constantly
innovate; they focus more on effective marketing strategies to introduce new products and services, differentiating
them from their competitors in order to win valuable market share in a highly competitive business environment. With
a view to provide high quality services at affordable price to consumers, Ministry of Communication (MoC) is in
process of developing Wholesale market for Fixed Communication. This Wholesale Regulation will enforce
infrastructure owners to share their existing infrastructure with other license holders which are expected to increase
competition.

2. Business Overview
B Communications Ltd. is a publicly traded holding company of Bezeq The Israel Telecommunication Corp Ltd., a
leading telecommunication company headquartered in Israel. Its shares are traded on the Nasdaq Global Market and
the Tel-Aviv Stock Exchange under the symbol BCOM. The ultimate parent company, Eurocom Group, holds
approximately 74% in Internet Gold Golden Lines (IGLD), a telecommunications group which, in turn, holds
approximately 66.7% in BCOM.
Since BCOM’s sole asset is its 30.81% controlling stake in Bezeq The Israel Telecommunication Corp, Ltd., Israel’s
largest telecommunications group, its key cash inflows are through dividends received from Bezeq. Bezeq follows a
regular dividend policy of distributing 100% of its net income on a semi-annual basis. Additionally, from 2011 to
September 2013, Bezeq has also distributed six semi-annual payments of NIS500MM (total of NIS3B) as special
dividends to its shareholders.
In October 2007, BCOM raised US$80.1MMthrough its IPO by offering 6.675MM shares (27.56% of its outstanding
shares) at US$12 per share and it was listed on the Nasdaq Global Market. The Company, shortly thereafter,
registered its shares for dual listing on the Tel Aviv Stock Exchange.
In April 2010 BCOM acquired 30.98% of Bezeq from Apax-Saban-Arkin for NIS6.5B (NIS8 per Share). The acquisition
was partly funded with the proceeds that BCOM received from the sale of its legacy Communications Business
(012Smile Communication) for NIS1.2B and through a private debt totaling NIS5.1B which has been taken from an
Israeli bank consortium and Israel's largest insurance company.
Since the acquisition of its controlling interest in Bezeq in April 2010, BCOM has decreased its net finance debt from
NIS 5.0B since its acquired Bezeq in April 2010 to nearly NIS2.5B as of September 2014.ix As of September 30, 2014,
the unconsolidated liquidity balances stood at NIS1.1MM. The unconsolidated total gross debt and net debt stood at
NIS3.5B and NIS2.5B respectively.
Bezeq is Israel’s largest telecommunication group with a clear leadership position. It provides services across the
telecommunication spectrum of domestic fixed line, mobile voice, Internet services, International Long Distance (ILD)
services, multichannel pay TV (YES brand in Israel), and Walla!, one of Israel’s leading Internet portals. Bezeq’s
shares are traded only on the Tel-Aviv Stock Exchange. The fact that the shares of BCOM, Bezeq’s controlling
shareholder, and IGLD, BCOM’s controlling shareholder, are listed on the Nasdaq Global Market, positions BCOM and
IGLD as vehicles for U.S. investors interested in making an investment in Bezeq.
2.1 Ownership Structurex
Exhibit 1: Ownership Structure

Eurocom Group, the ultimate parent is a privately held company with 80% of its stake held by the Chairman of the
Board of Directors Mr. Shaul Elovitch and 20% held by Mr. Yossef Elovitch, Director.
Eurocom Group holds a 74% stake in IGLD, which, in turn, holds a 66.7% stake in BCOM. Further, BCOM’s sole asset
is its 30.81% stake in Bezeq and IGLD's sole asset is its holding in BCOM.
Bezeq has stakes in the following companies across the telecommunication spectrum in Israel:
1. 100% stake in Bezeq Fixed line

2. 100% stake in Pelephone Cellular
3. 100% stake in Bezeq International
4. 49.80% stake in DBS (Remaining 50.20% stake is owned by Eurocom group)
5. 100% stake in Bezeq on line
6. 100% stake in Walla! Internet Portal
2.2 Company Milestone

Exhibit 2: BCOM’s Milestones
Year Event
1991  Israeli government started privatization process for the telecommunication industry
 Eurocom forms Internet Gold under the name of Euronet Golden-Lines Ltd to capitalize on the
1992
privatization process
 The Internet emerged as new channel for service delivery, and to seize the opportunity, Internet Gold
1995
launched its Internet Service Provider (ISP) services
1999  Internet Gold’s IPO – Gets listed on NASDAQ Global markets and Tel-Aviv Stock Exchange
 With Voice over Internet Protocol(VoIP) technologies maturing, Internet Gold introduced low cost ILD
services and also started converting low Average Revenue per User (ARPU) Internet access customers
2004 to high ARPU broadband service customers
 Internet Gold acquired its key competitor in ILD & ISP services 012 Golden Lines to expand its
operation significantly
 To efficiently handle this expanded operation, Internet Gold through restructuring created BCOM
(previously known as 012 Smile Communication) & transferred its ISP & ILD services and also merged
2006
012 Golden Lines into BCOM.
 BCOM’s IPO on NASDAQ Global market– Raised US$80.1MM through sale of 6.675MM shares (27.56%
2007 of its outstanding shares) at US$12 per Share.
 Shortly thereafter dual listed on Tel Aviv Stock Exchange
 BCOM signed a share purchase agreement for acquisition of the controlling interest (30.98%) in Bezeq
2009
from Apax-Saban-Arkin for NIS6.5 B (NIS8 per share)
 As part of a regulatory requirement in relation to the acquisition of a controlling stake in Bezeq,

2010
012Smile Communication divested its legacy telecommunication assets and was renamed as BCOM

2.3 Business Model
BCOM’s sole asset is its controlling stake of 30.81% in Bezeq, by far the leading telecommunication companies in
Israel, which provides services across the telecommunication spectrum. With Bezeq being the only asset of BCOM, the
key revenue stream is the dividend flow from Bezeq that follows a dividend policy of distributing 100% of “Profit after
Tax” as cash dividends on a semi-annual basis to its shareholders.
For Bezeq, the major business segments are as follows:
1. Bezeq Fixed Line - Domestic fixed line Services, Internet infrastructure and access services, Transmission
and data communication services
2. Pelephone Communications - Cellular Services
3. Bezeq International - Internet access services, International Communication Services & NEP (Network end
point) Services
4. DBS (Digital Broadcast Satellite) - Multi-channel satellite television (YES brand – shown as investments) -
Yes Pay TV is the only company in Israel currently operating in the satellite multi-channel television
broadcasting. Bezeq has a 49.78% stake in Yes Pay TV
5. Others - This segment includes Internet portals (Walla!) and customer call center services (Bezeq on line)
2.4 Products and Servicesxi

2.4.1 Bezeq Fixed line
This segment of the company provides a wide range of services like fixed line telephony, Internet access
infrastructure, Transmission and data communication services and various other services.
Products and Services Offered
- Fixed Line Telephony: The Fixed line telephony Exhibit 3: Fixed Line: Number of Access Line (Volume)
services mainly includes the basic telephony services vs. Average Revenue Per Line (Price)
on the domestic telephone line with associated value 2550 112 111 120
added services such as voice mail, caller ID, call 2500
forwarding and conference call. Bezeq also offers 100
2450
business customer services such as national toll free 2483
84 83
numbers and also allows their customers to make full 2400 74
80
or partial payments. 2350
2367
2366
Bezeq’s Fixed Line Telephony offers a variety of 2300 60
payment plans, ranging from a monthly subscription 2250
2268
fee per fixed telephone line and charge per second of 40
2200
use, to various fixed-line telephony packages 2216
comprised of monthly amounts of minutes for a fixed 2150

20
monthly fee. As of September 30, 2014, Bezeq had 2100
2.21 MM active fixed telephone lines with estimated 2050 0
market share of 63% in Israel. FY09 FY10 FY11 FY12 FY13
Seen as a trend across the globe, increased Total accress lines (000's) (LHS) ARPL - Voice & fixed fees (in NIS) (RHS)
penetration of mobile services & telephony services

using VoIP technology has led to a decline in both volume (number of access lines) & price i.e. Average Revenue
per Lines (ARPL) in the fixed line telephony market. In order to arrest this decline, Bezeq is currently working on
its innovation and marketing strategy by focusing on the development and penetration of new services, both in
the private sector and in the business sector (Bcloud, Free WiFi). The Company plans to launch more such
products on the basis of market trends and customer needs.
- Internet Infrastructure & Access Revenue: Bezeq provides broadband Internet access infrastructure services
in xDSL technology, which is one of the key growth drivers for Bezeq. The total numbers of Broadband Internet
lines were approximately 1.34MM as of September 30, 2014 representing an estimated market share of 63%. The
number of Internet lines increased by 105,000 in Q3FY2014, a Y-o-Y growth of 8.5%.
During the Q3FY2014, average broadband speeds reached 24.0 Mbps compared to 21.9 Mbps in Q2FY2014, an
increase of 9.6% on Q-o-Q basis and 38.7% on Y-o-Y basis.

Bezeq provides its services by utilizing VDSL technology with bandwidth of up to 100 Mbps (download) speed. As
on December 31, 2013, Bezeq has completed the deployment of its NGN network with 84% of all its subscribers
using NGN services (those with packages which offer speed of 10 Mbps or higher).
Exhibit 4: Broadband: Internet Lines vs. Average Exhibit 5: Broadband: ARPU vs. Broadband Speed per
Revenue Per User Subscriber
1300 82 83 85 90 90 85 20
82 83
1275 76
80 80 76 18
1250 69
70 69 18.1
1225 1263 16
70
1200 60 14
60
1175 1169 50 12
1150 50
40 10
1125
1111 40
1100 30 9.6 8
1075 30
1066 20 6
1050 6.7
1035 10 20
1025 4
4.3
1000 0 10 2
FY09 FY10 FY11 FY12 FY13 2.7
Broadband Internet lines (000's) (LHS) Broadband Interent ARPU (in NIS) 0 0
FY09 FY10 FY11 FY12 FY13
Broadband Interent ARPU (in NIS)
Average broadband speed per subscibers (end of period,Mbps) (RHS)
- Transmission and Data Revenue: Bezeq provides a wide variety of data and high-speed transmission services
to business customers and other telecommunication operators. Bezeq’s data service offerings includes point to
point, point to multi point, and network topology for business to business and multi-branch business customers,
as well as connectivity, Internet access and remote access services. Bezeq provides these services on multiple
platforms, from its legacy infrastructures to its newer and more advanced infrastructures, such as IPVPN and
metro Ethernet.
- Other Services
 Miscellaneous Services to Communications Operators: The Company provides services for other
communications operators, such as cellular operators, international call operators, HOT, NEP operators, ISPs,
Domestic Carriers, and Palestinian communications providers. The services provided by the Company include
infrastructure services, infrastructure upgrades, connection to the Company's network, transmission services,
billing services, leasing of space, services in leased premises.
 Broadcasting Services: The Company operates and maintains radio transmitters, which are operated, inter
alia, by Israel Broadcasting Corporation, Israel Army Radio (GaleiZahal), and the broadcasts of a number of
regional radio stations. It also operates the Digital Terrestrial Television (DTT) transmitters for the Second
Authority. The Company is responsible only for operating and maintaining the transmitters, and not for the
content of the broadcasts.
 Contract Works: The Company carries out set-up and operation works of networks or sub-networks for various
customers (e.g. the Ministry of Defense, HOT, radio and television broadcasting companies, cellular operators,
international call operators, local authorities, municipalities, and government bodies). The Company has
agreements with HOT Telecom for providing installation, maintenance, and hosting of networks using the
Company's infrastructures from the exit point of the operation of the license-holders to the delivery point at the
entrance to the homes of the subscribers. (The connection and maintenance from these points to the
subscribers' homes is not the responsibility of the Company).
 IP Centrex: IP Centrex service is a private and virtual exchange service in a public network
 Data Center: A service enabling a backup and survivability solution for the customer
 144 Internet Site (B144): A search engine for finding the telephone numbers of businesses and private
persons, including a classified search
 Free Wi-Fi services: This service allows the Company’s customers to share a part of their wireless bandwidth,
and in turn, they are allowed to browse outside their homes.

2.4.2 Pelephone
Pelephone is the third largest cellular communication player in Israel with an estimated market share of 26.8% as of
December 2013.xii In addition to mobile services, it also sells and services terminal equipment. Pelephone, a 100%
subsidiary of Bezeq, became a part of Bezeq through its acquisition in 2004.
Until the end of 2011, only four companies operated in the cellular services segment of Israel’s cellular
communications market. However, with a view to make mobile services more affordable to its customers, the Ministry
of Communications introduced numerous regulatory measures through which cellular telephony market has become
more competitive. By taking regulatory moves like removal of barriers to the movement of customers between cellular
operators, and by giving licenses to additional operators during 2012, a number of cellular operators started their
operations in the country. The entry of these new operators has led to fierce competition, resulting in higher churn
rates among the existing operators and price wars between participants leading to erosion in price and profits across
the sector. During the year 2013, Alon Cellular (MNVO) signed a hosting agreement with Pelephone; shifting from
Partner’s network demonstrating Pelephone’s high level of advanced network infrastructure.
Exhibit 6: Pelephone: Subscriber vs. MOU Exhibit 7: Pelephone: ARPU and Churn Rate
2900 475 110 35%
462
2857 106
450 28.6% 30%
2850 2847 105
419
425 25%
2800 2800 22.4%
100
2766 400 22.9% 20%
2750 375
95 97
375
15%
2700 349
350 90
333 10%
89
2650 325
85 5%
2642
2600 300
FY09 FY10 FY11 FY12 FY13 80 0%
Subscribers (000's) (LHS) MOU (per sub per month) (RHS) FY11 FY12 FY13
ARPU (NIS) (LHS) Churn rate (%) (RHS)
Exhibit 6 displays that despite a decline in the number of subscribers in the last three years, Pelephone has managed
to generate more volume per subscribers as evidenced by consistent growth in Minutes of Usage (MOU).
Exhibit 6 & 7 displays Pelephone’s strategy to grow its revenue through volume growth (MOU) and at the same time
counter the high subscribers churn rate through reduced pricing.
Products: Pelephone offers its customers various types of cellular telephone, on-board telephones, and hands-free
devices, as well as support for its range of services. It also supplies its customers with modems, laptop computers,
and tablets for surfing the Internet through the Pelephone network.
Services: Pelephone provides its subscribers with comprehensive services of voice transmission, transmission of text
messages, data communications and advanced multimedia services. These services are offered using both the
technologies, UMTS/HSPA & CDMA. However, since 2009, recognizing advantages like download speed of up to 42
Mbps and upload speeds of up to 5.7 Mbps of UMTS/HSPA technology, Pelephone has solely focused on the
UMTS/HSPA technology as the primary network technology to efficiently cater to its customers’ needs.
2.4.3 Bezeq International

Bezeq International’s operations include ISP services, international telephony services; domestic internal telephony
services, based on a Voice over Broadband (VoB) infrastructure, NEP services, ICT (Infrastructure and Communication
Technology) and data services. As on December 31, 2013, Bezeq International had estimated market share of 40% &
63% in ISP & ILD respectively, in Israel.

- Internet Services: In the Internet services sector, Bezeq International provides Internet access services for
private and business customers, including terminal equipment and support, with an emphasis on broadband
Internet based on ADSL, transmission or cable infrastructures; hosting services – site storage and server services
in a designated installation, including value-added services (such as monitoring and control); information security
services, services securing Internet connections and LAN networks using the required terminal equipment or
software, including monitoring; data services with IP-based international data communication solutions for
business customers, including global deployment; and high speed wireless (WIFI) access, including in public
locations (hotspots).
- Voice (Telephony) Services: In the voice services sector, Bezeq International provides International Direct
Dialing (IDD) services to business and private customers; toll-free number services for business customers
overseas; international call routing and completion services (hubbing) – transfer of international calls between
foreign communication providers (worldwide), telephone card services enabling prepaid and postpaid dialing from
Israel; and the 1809 service for dialing from Israel to other countries. Bezeq International also provides domestic
telephony services by means of VoB access using Basic Imaging Profile.
- International Data Services: The supply of international data communication solutions for business customers
includes customized global deployment. The customer is able to choose from a range of the most advanced data
communication methods through the submarine cable deployed by Bezeq International and the optic cables
deployed from Israel to Europe for which Bezeq International has long-term usage rights and through its business
partnerships with leading global telecom providers such as British Telecom, which make available to their
customers their sophisticated global network services.
- ICT Solutions for Business Customers: Bezeq provides Information and Communication Technology (ICT)
solutions for business customers which allow for the upgrade and adjustment of services to meet its customers’
ever-changing requirements, which is referred by Bezeq International as ‘IT as a Service’ (such as IT
Infrastructure as a Service, cloud computing and data backup, virtual servers and cloud call centers). As part of
the customer’s overall ICT solution, Bezeq International provides broad communications services, including
international data and communication services, server and site hosting services, technical support and
maintenance services, network and system services, outsourcing and out-tasking services, security and risk
management solutions, managed IP services, advanced, unique cloud computing services and online backup
services.
- PBX Services: Bezeq International markets and maintains communication systems in the Israeli market,
exchanges, telephony networks and IP communications. As part of the service contracts, Bezeq International
supplies direct maintenance of range of exchange manufacturers. The services are given to gateways, exchanges
and Network End Points (NEP) designated for use with both internal and external lines.
2.4.4 Digital Broadcast Satellite (DBS)

DBS, also known by its trade name YES, provides encoded and digital multi-channel broadcast services as well as
other satellite services to subscribers in Israel, and the Judea and Samaria region. There are only two digital multi-
channel service providers with DBS the only digital multi-channel satellite provider in Israel and HOT, which provides
multi-channel television broadcasting through cable in Israel with combined penetration rates of 62% of households in
Israel.xiii As on March 31, 2014, Bezeq has a 49.8% stake in DBS with remaining 50.2% stake held by parent
company Eurocom group. YES is Israel’s sole satellite provider and first television provider to offer digital broadcasts
and interactive services. It has nationwide satellite availability with subscriber count of 623,000 subscribers as on
Q3FY2014 with estimated 40% market share.xiv On March 2014, Bezeq received a decision from the Antitrust
Commissioner, according to which, upon fulfillment of the certain terms, the restrictions imposed on the Eurocom
Group on its continued holdings in YES would be removed, and the Bezeq's merger with YES would be allowed.
An Independent Committee of Bezeq's Board of Directors as well as professional advisors are in a process of
discussions and evaluations of a possible transaction.
In the first quarter of 2014 YES launched its revolutionary television service ‘yesGO’. This service allows viewers to
watch dozens of TV channels, including movie channels, TV show channels, kids’ channels, sports channels, lifestyle
channels, and thousands of VOD titles, including thousands of free titles direct from YES’ channel broadcasts -
anytime, anywhere, on their tablets, cell phones, and all other supported devices.

- Broadcasts: DBS’s broadcasts include a wide variety of
channels: there are approximately 160 different video Exhibit 8: DBS: Subscribers vs. ARPU
605 236
channels (of which five are Pay per View (PPV) channels, 601
600 234
39 are High Definition (HD) channels), in addition to 234
595
radio channels, music channels and interactive services. 232
233 232
During 2013, 60% of the 220 new theatrical releases 590
230
that were aired in Israel in 2012, were broadcast in 585
586 230
Israel by DBS. DBS broadcasts new television series at a 580

228
minimal delay, in some cases, within hours from the 575 226 578 578
time the content is originally aired in the United States 570 226
571
or worldwide. The broadcasts includes a basic package 565
224
which each subscriber is required to purchase as well as 560
additional channels chosen by the subscriber, either as a 555

FY09 FY10 FY11 FY12 FY13
222
package or as single and PPV channels. Subscribers (000's) (LHS) ARPU (NIS) (RHS)
- Advanced Services: DBS markets PVR decoders which

interface with DBS’s electronic broadcasting schedule and enable receipt of special services, including ordering
recordings in advance, recording series and pausing live broadcasts. The PVR decoders also enable viewing of the
content which is transferred from time to time to the decoder’s memory which is updated from time to time by
DBS (push video). DBS provides HD broadcasts which can be received through special decoders. These broadcasts
allow superior quality viewing. DBS also markets HDPVR decoders. The majority of DBS subscribers use PVR
decoders. DBS believes that an increase in the number of subscribers using PVR decoders will contribute to an
increase in its revenue from these subscribers and to their retention as subscribers, but it requires a material
financial investment. DBS provides a service enabling the viewing of certain Internet content on TV screens,
through the use of some types of advanced decoders (streamers).
- Video on Demand (VOD) Services: DBS provides its subscribers with VOD services via Internet. This service
has limitations with regard to the types of decoders enabling service reception, and with regard to availability of
services owing to constraints connected with the Internet infrastructure and bandwidth installed in customer
homes. These limitations have declined in recent years in view of the increase in the available bandwidth in
subscribers' homes. In recent years, the number of DBS subscribers connected to VOD services and the use of
VOD services has increased significantly.
- Others: The ‘Others’ segment consists of the Internet Portal, Walla! Communication, and BezeqOnLine
1. Internet portal - Walla! Communication: Walla! Communication is a 100% subsidiary of Bezeq and is one
of the most popular websites in terms of traffic generation in Israel. Key services provided by the website
include news, email, online shopping, on demand music, mobile downloads, information officially taken from
Wikipedia.
2. Call Center – BezeqOnLine:xv BezeqOnLine is a 100% subsidiary of Bezeq, which specializes in setting up,
managing, and operating call centers that provides services such as service and information centers,
telemarketing sales centers, meeting coordination centers, conducting surveys and data enrichment, event,
and appointment scheduling, after hours answering services.
2.5 Company Premiums
- Strong Management Team: The Company’s management team includes highly qualified professionals who are
either Certified Public Accountants or hold an MBA degree and have significant experience in the field of
Management, Communication, and Operational & Financial Management. The Company’s management team
includes Mr. Shaul Elovitch, who is the founder of Eurocom Communications and Chairman of the Board of
Directors (BOD), Bezeq and its subsidiaries, enjoys a highly respectable position in Israel’s business community.
He holds a controlling power over the Company’s operations and business strategy, which is considered to be
favorable, as he holds significant experience in building leading communication businesses and other major
investments businesses. Further, Mr. Doron Turgeman, CEO, who has been with the Company since 2001. His
significant experience of 17 years in Management and 15 years in Communication has enabled him to prove his
capabilities across strategy creation and strategic planning, marketing and brand development, operational and
financial management, managing mergers and acquisitions, creation of partnerships, capital raising methods. He
has successfully executed 11 major transactions, which include two IPO’s for IGLD and BCOM, nine bond issues
in Israel and just recently successfully closed a private offering to qualified institutional buyers of $800MM, 7⅜%

Senior Secured Notes due 2021. The presence of these consummate personalities provides the Company with an
advantage to experience excellent business opportunities.
- Positive Debt Rating: On March 20, 2014, Midroog Ltd., an Israeli rating company affiliated with Moody’s
(“Midroog”), raised the local rating of the Series B Debentures of B Communications Ltd. ("the Company”) from
an A2 to A1 rating with a stable outlook. In its rating report, Midroog noted that the A1 stable rating is supported
both by the Company’s successful private offering of $800MM of Senior Secured Notes due 2021 that improved
its financial flexibility and removed covenants following the payment of senior debts, and by the strong financial
profile of Bezeq. Bezeq is expected to continue to produce steady cash flows to support the Company’s debt
obligations for the short and medium terms. Midroog also noted the positive decrease in the Company’s leverage
ratio during the past years and its high liquidity balance.
- Bezeq Holds Strong Market Positions in all Telecom Segments: The Company’s business is solely
dependent on the business of Bezeq, which is considered to be the leading provider of advanced
telecommunications operations and services in Israel. All of its service segments are well positioned with respect
to its competitors in the market as discussed below:
1. Domestic Fixed-line segment: Bezeq holds a 63% market share of the fixed line and broadband services
in Israel and provides advance network services such as Next Generation Network (NGN), which is an
advanced communication network in Israel covering over 99% of Israeli households.
2. Pelephone: Cellular Communication is the third leading provider of cellular services holding a 26.8% market
share in Israel, and in order to differentiate its services in the market, it has focused on providing high
quality network such as HSPA (High Access Packet Speed) cellular technology offering 3.75 G speed.
Penelope has also proved its capability of well managing its business during crisis, in terms of experiencing
lowest increase in churn, least loss of subscriber’s market share during 2011-2013 as compared to its
incumbent operators.
3. Bezeq International: It provides a number of key services, but under Internet Service Provider (ISP)
segment, Bezeq is regarded as one of the leading broadband service providers in Israel, holding nearly 40%
Internet market sharexvi, and continuously striving to maintain its position by presenting subscribers with
customized service plans and advanced IP services.
Therefore, we believe that Bezeq’s leading market shares in most of the segments and its proven ability to
survive crisis situations help sustain its position of dominant telecommunication service provider in Israel, which
ultimately is favorable for BCOM’s business.
2.6 Company Risksxvii

- Risk of Non-compliance with respect to Financial Agreement Norms and too much dependency on
Bezeq for Repayment of Debt: In 2010, BCOM acquired a 30.96% controlling interest in Bezeq. In order to
facilitate its funding requirements, it entered into two financial agreements totaling a principal amount of
NIS5.1B. As of April 22, 2013, a few additional covenants were added. As per the new covenants, the Company
has to maintain a minimum shareholder’s equity and minimum ratio of shareholders equity. BCOM’s wholly-
owned subsidiary, which directly holds the Bezeq interest, is required to maintain a minimum ratio of debt to
EBITDA and debt service coverage ratio. However, on failure to abide by either of these norms will allow the
lenders to ask for immediate repayment of debts. Moreover, the Company has provided security to the lenders
by pledging Bezeq’s shares (excluding 29.6MM shares acquired in 2011) and shares of the subsidiary that was
established to acquire Bezeq’s stake. In addition, the Company is highly dependent on Bezeq’s dividend to repay
its debt, and any change in Bezeq’s dividend distribution policy can significantly impact the Company’s ability to
pay-off its debt. However, it is important to note that Midroog Ltd has provided the Company with an Israel local
rating of ‘A1’ and has also upgraded its outlook from ‘Negative’ to ‘Stable’. The ‘Stable’ outlook and on March 6,
2014xviii rating upgrade from A2 to A1 strengthens our belief in the Company’s ability to meet its debt obligations
in the short and medium term.
- Holding Controlling Interest in Bezeq is Subject to the Control Permit Norms: BCOM has acquired a
30.96% controlling interest in Bezeq in 2010 and as on September 30, 2014 holds 30.84% stake in Bezeq.
Therefore, as per Israel’s Communications Law and Communications Order (The: ‘Control Permit’), the Company
has been granted an authority to control Bezeq. This makes it mandatory for BCOM and its subsidiaries to hold
not less than 30% controlling interest in Bezeq at any point of time. In case of failure to abide by the terms of
Control Permits or with other regulatory provisions associated to the control of Bezeq, such permits would be
cancelled and the company may lose the controlling interest in the Bezeq. Since Bezeq is the Company’s only

source of earning, the loss of controlling interest can hamper BCOM’s cash flows. Additionally, if the Company
losses its authority in Bezeq, it shall then be identified as an “Investment Company”, which the Company
practically is not. Further, the loss of control in Bezeq will make it obligatory for the Company to fulfill the
following conditions: to either change its business model so as to evade from being subjected to the Investment
Company Act., or to register as an Investment Company.
- Recent Development: Creation of Wholesale Market: The Ministry of Communication (MoC) is in process to
develop a Wholesale market for Fixed Communication Services which is currently dominated by two players,
Bezeq and Hot. As per the new regulation, the MoC has released a list of services which the infrastructure owners
of nationwide fixed access networks will have to offer as wholesale services to other license holders. This will
encourage new players to enter as they would incur lower capital expenditure as they would be allowed to use
the infrastructure of the existing players. Thus, creation of the Wholesale market can lead to increase in
competition and loss of subscriber base as well as revenue.
2.7 Corporate Strategy
Since BCOM has no business operations of its own it is dependent on the business activities of Bezeq to derive its
revenue, the report highlights strategies adopted by Bezeq.
- Building and Maintaining Competitive Position: Bezeq is considered to be one of the leading service providers
for its broad array of telecommunication services in Israel. In case of fixed–line telecommunication services,
Bezeq holds approximately 63% of market share in Israel. Therefore, in order to sustain its leadership position
and to deal with the competition Bezeq devised a strategy to reinforce the apparent value of products and services
by launching new communication services, value added applications, and product packages. This helped them to
broaden its subscriber base. The Company was engaged in making regular investments to modernize its
infrastructure, thereby offering advanced services and products to its subscribers. Further, the services offered
incorporates the services provided by its competitors so that subscribers get a joint package of products and
services, which will eventually help the Company in building strong customer loyalty.
- Focused on Increasing Next Generation Networks (NGN) Penetration in Israel: In Israel, NGN
communication network covers about 99% of the Israeli households. Therefore, Bezeq, the leading service
provider for NGN services, is focused on the penetration of its high-speed NGN Internet infrastructure and
increasing its subscription base for the service. Bezeq’s NGN technology is based on fiber optics, which enables
broadband high-speed services and advanced IP telephony services. Moreover, broadband services offered to
subscribers over NGN–FTTC (Fiber to the curb) network, which make transmission possible at a speed of 100
Megabits per second enabling subscribers to enjoy the most advanced communications and content services.
Average broadband speed offered to its customers was increased by 88.5% Y-o-Y to 18.1 Mbps at the end of 2013
at free of cost. Further in Q3FY2014, the Company increased the average broadband speed to 24.0 Mbps, an
increase of 38.7% Y-o-Y. In 2013, Bezeq also accelerated its strategic roll-out of fiber-optic network, which
currently covers more than 0.4MM homes from Kiryat Shmona to Eilat. The management plans to speed up
deployment with the aim of covering around 1MM households, representing 40% of Israel’s population, by end of
2014.
- Simplified Tariff Structure: Bezeq offers a simplified tariff structure to both fixed and mobile phone customers
and also provides them with alternative payment packages for a service package, tracks and campaigns. For
instance, special tariff packages are offered based on the needs of the customers (with the approval from the
Ministry of Communications and Knesset Finance Committee). But, in order to create a competitive edge and
improve its turnover, Bezeq devised a strategy to utilize use-based packages and service tracks, which will help
them to increase subscription base for its telephony service.
- Cost Control: Bezeq invests in fixed assets and in projects that shall not only help in improving efficiency of the
production process but also reduce operating costs. However, Bezeq’s ability to make adjustments in its expenses
in the short and medium term is limited since its costs structure is majorly rigid, as it includes depreciation and
wage expenses, as well as the operating costs such as infrastructure maintenance, lease fees, and building
upkeep fees.

2.8 BCOM’s Shareholding Pattern
Exhibit 9: Shareholding Pattern (As of September 30,
2014) xix
Internet Gold
(IGLD)
33%
Public
67%
Exhibit 10: Shareholding Pattern xx
Shareholders No. of Shares % of total

Internet Gold 19,938,396 67%
Public 9,950,649 33%
Total Shares Outstanding 29,889,045 100%
2.9 Listing and Contact Details

B Communications Ltd is listed on Nasdaq Global Select Market and Tase (Ticker: NASDAQ Global Select Market &
TASE: BCOM, Date of Listing on NASDAQ Global Select Market– 1st January, 2011)
Contacts: B Communications Ltd, 2 Dov Friedman Street, Ramat Gan 52503, Israel
Email ID: [email protected]
Phone:+972-3-9240000

3. Key variable analysisxxi
3.1 Variable 1 – Fixed-line Telephony: Total Access Lines Growth rate
Fixed line Telephony is classified as a sub-segment under the segment, Domestic Fixed line Communication. Fixed line
Telephony contributed 20.6% to the total revenue in 2013 and 44.0% of Domestic Fixed line communication segment
revenue in 2013. For the Q3FY2014, the total access lines for the Company declined by 0.8% Y-o-Y to 2.2MM access
lines. With increased use of cellular services and growing penetration of VoIP provider, volume for the segment
measured by Access lines has seen continuous decline for the last three years. With MoC planning to enforce the
Wholesale Market Regulation in Fixed Line which will result in higher competition and hence we expect a decline in
access line’s growth rate.
Exhibit 11: Total Access lines Growth Rate

2014E 2015E 2016E 2017E 2018E 2019E 2020E
Low estimate (16.0%) (26.0%) (26.0%) (21.0%) 2.0% 2.0% 2.0%
High estimate (15.0%) (25.5%) (22.0%) (20.0%) 3.0% 3.0% 3.0%
3.2 Variable 2 – Broadband Internet Lines Growth Rate

Broadband Internet is one of the key growth drivers for Bezeq, contributing 13.5% of the total revenue in 2013.
Bezeq, a leader in providing broadband service has consistently strived to improve quality of services to its customer
by increasing the average broadband speed per subscriber and ensure consistent growth. With the expected entry of
more players in the coming year due to the Wholesale Market Regulation, we expect Bezeq’s growth in this segment
to slowdown.
Exhibit 12: Broadband Internet Lines Growth Rate

2014E 2015E 2016E 2017E 2018E 2019E 2020E
Low estimate 6.0% 5.0% 5.0% 4.8% 4.7% 4.6% 4.5%
High estimate 6.2% 5.4% 5.1% 4.9% 4.8% 4.7% 4.6%
3.3 Variable 3 – Cellular Communication: Subscriber’s Growth Rate

Through Pelephone, Bezeq operates Israel’s third largest cellular operator in terms of market share. Cellular services
contributed 39.8% to the total revenue in 2013. Due to intense competitive pressure due to presence of many MNOs
and MVNOs, Arrowhead estimates marginal decline in Number of Subscribers in line with historical trend. However,
due to high quality of services and low tariff structure provided by Pelephone, we expect it to record decline in churn
rates in the coming years which will further lead to marginal growth in the subscriber volume. For Q3FY2014, the
subscribers count for the Company declined by 3.1% Y-o-Y to 2.6MM with churn rate of 7.3%.
Exhibit 13: Cellular communication: Subscribers Growth Rate

2014E 2015E 2016E 2017E 2018E 2019E 2020E
Low estimate (5.0%) (5.0%) (3.0%) (3.0%) (2.0%) 1.0% 1.0%
High estimate (4.0%) (4.0%) (2.0%) (2.0%) (1.0%) 1.0% 1.0%
3.4 Variable 4 – Cellular Communication: ARPU

Due to continuous intense competitive pressure, we expect steady to mild decline in ARPU in the coming years.
Exhibit 14: ARPU

2014E 2015E 2016E 2017E 2018E 2019E 2020E
Low estimate 78 77 76 78 81 83 84
High estimate 79 78 77 79 82 84 85

4. News
BCOM xxii
- Announced that Midroog Ltd. Has Raised the Local Rating for B Communications’ Series B Debentures
to A1 With a Stable Outlook: On March 20, 2014, BCOM announced that Midroog Ltd., an Israeli rating
company affiliated with Moody’s (“Midroog”), raised the local rating of the Series B Debentures of BCOM from an
A2 to A1 rating with a stable outlook. In its rating report, Midroog noted that the A1 stable rating is supported
both by the Company’s successful private offering of $800MM of Senior Secured Notes due 2021 that improved its
financial flexibility and removed covenants following the payment of senior debts, and by the strong financial
profile of Bezeq. Bezeq is expected to continue to produce steady cash flows to support the Company’s debt
obligations for the short and medium terms. Midroog also noted the positive decrease in the Company’s leverage
ratio during the past years and its high liquidity balance
- Announced Closing of $800MM Aggregate Principal Amount of Senior Secured Notes Due 2021: On
February 19, 2014, BCOM announced that it had successfully closed a private offering to qualified institutional
buyers in the United States worth $800MM, 7⅜% Senior Secured Notes due 2021. BCOM will use the net proceeds
from the offering to repay all amounts outstanding under the loans it incurred to acquire its controlling interest in
Bezeq and to deposit funds into a debt service account.
Bezeq Group xxiii
- Cooperation Agreement between Pelephone and Cellcom: On September 22, 2014, Bezeq announced that
its subsidiary, Pelephone Communications Ltd has entered into a cooperation agreement with Cellcom Israel Ltd.
for the maintenance of passive components at cellular sites, including the consolidation of passive components
and the reduction in costs by means of a common contractor. The contractor will be selected through an RFP
process and will execute separate agreements with Pelephone and Cellcom for a period of at least five years.
- Regulation of Wholesale Services - Secondary Hearing: On August 19, 2014, Bezeq announced receiving of
secondary hearing document for the provision of wholesale services and the setting of the rate for wholesale
services on Bezeq’s network. In accordance with this secondary hearing, the Minister of Communications is
considering regulating the maximum rates for the provision of services on the Company’s network.
At this stage, on the face of things, the Company estimates that the implementation of the above regulation will
have a negative impact on the Company’s financial results. At the same time, alongside this impact the Company
estimates that, considering the possibility of the removal of the structural separation and the cancellation of the
supervision of the company’s tariffs – cancellations that are anticipated following the regulation of the wholesale
market – there will likely also be positive impacts on the Company.
- Private Placement of Debentures (Series 6 and 7) for Qualified and Institutional Investors: On August
13, 2014, Bezeq announced a private placement of Series 6 Debentures and Series 7 Debentures of the Company
to qualified and Institutional investors. Through this placement, the Company expects to receive approximately
NIS 1.029 billion (gross) by issuance of the Debentures (Series 6) and approximately NIS 119 million (gross) by
issuance of the Debentures (Series 7).
- Approval of Temporary Activation - Fourth Generation Services: On August 4, 2014, Bezeq announced that
its subsidiary Pelephone has received an approval from Ministry of Communication to provide fourth generation
services with LTE technology, through temporary allocation of an 1800 frequency band with width of 5MHz.
- Hearing regarding the duty of cover and quality required from cellular licensees: On July 30, 2014, Bezeq
announced that its subsidiary, Pelephone has to address a hearing discussion regarding amendment to the
operators’ licenses by way of toughening the cover and quality requirements as regards to the public telecom
systems operated by them using 2G and 3G technology deployed in the territories of the State of Israel and Judea
and Samaria.
- Update of 2014 Bezeq Group Outlook: On May 20, 2014, Bezeq updated its forecast in connection with the
group’s results as follows: Net profit attributable to Bezeq shareholders is expected to be approximately NIS 2B,
EBITDA to be approximately NIS 4.5B and Free cash flow of approximately NIS 2.5B.
- Completion of transaction for sale of Yad2: On May 20, 2014, Bezeq announced that transaction for the sale
of Yad2 was consummated, in accordance with the terms set forth in the Sale Agreement. Upon consummation of
the transaction, the entire consideration for the transaction in the amount of approximately NIS 805MM was

remitted to Walla, and that Walla no longer holds the share capital of Yad2. Bezeq expects a pre-tax profit of
approximately NIS560MM from the transaction.
- Moti Elmaliach Appointed Chief Executive Officer of Bezeq International: On May 7, 2014, Bezeq
announced that its Board of Directors have approved the appointment of Moti Elmaliach as CEO of Bezeq
International. For the past eight years, Mr. Elmaliach, 55, served as the CEO of Eurocom Digital Communications,
which markets and leads the Panasonic brands and products in the Israeli market. He is deeply familiar with, and
has vast experience in, the telecommunications, and Internet & Information Technology solutions markets for
both the private and public business sectors. Mr. Elmaliach replaces Itzik Benbenisti, who served as CEO of Bezeq
International for the last seven years.
- Execution of agreement for the sale of Yad2: On May 6, 2014, Bezeq announced that its subsidiary Walla!
Communication Ltd. has executed a binding agreement with Axel Springer Digital Classifieds Holding GmbH, a
foreign company incorporated in Germany, engaged, among others, in the field of media, for the sale of the entire
share capital of Coral Tel Ltd., a private company wholly controlled indirectly, through Walla, that operates the
Yad2 website, for a cash consideration of NIS787.5MM (subject to price adjustments expected to total an
additional NIS18.8MM).
The Sale Agreement also includes an undertaking by Walla and Bezeq to refrain from engaging in Coral Tel's fields
of activity for a period of 24 months.
- Pelephone signs agreement for the establishment of an LTE network: On April 30, 2014, Bezeq announced
that for launching fourth generation network with LTE technology, Pelephone has executed an agreement with
L.M. Ericsson Israel Ltd. for upgrade of the network center to support LTE, for the purchase and installation of
radio equipment and for additional adjustments to the network to enable it to support LTE. The equipment to be
provided to Pelephone will also support the LTE Advanced technology (4.5 generation).
- Anti-Trust Authority Decision regarding Yes Merger: On March 26, 2014, Bezeq announced that the
Company has received a decision provided by the Antitrust Commissioner with respect to merger of YES into
Bezeq. Pursuant to Decision upon fulfillment of terms stated in therein, the restrictions imposed on the Eurocom
Group on its continued holdings in YES would be removed, and that YES would be allowed to merge with Bezeq.
- Regulation of Wholesale Services: On January 15, 2014, Bezeq announced that the MoC has released a list of
services which the owners of infrastructures (thus including the Company) shall be obliged to offer as wholesale
services to service providers. The list of services includes Bitstream Access on a nationwide, regional or local
connectivity level; Sub-loop unbundling (at this stage - only in the Company’s network and not in Hot Telecom’s
network); lease of dark fiber over the entire network; lease of Virtual dark fiber in the core network; access to the
physical infrastructure of cables, sub-cables, manholes, boxes and posts over the entire network; as well as
wholesale telephony service.
- Pelephone Network Sharing Agreement: On December 10, 2013, Bezeq’s subsidiary, Pelephone entered into
an agreement with Cellcom Israel ltd. and Golan Telecom Ltd. for the establishment and operation of a fourth-
generation cellular network (LTE) and an agreement with Cellcom for sharing the passive components of cellular
sites on the existing networks.
- Private placement by enlargement of an existing Debentures series: On November 14,2013, Bezeq
announced that it has entered into a transaction for the private placement of 434,782,609 Debentures (Series 6)
of the Company to institutional investors included under the First Schedule to the Securities Law, 5728-1968, for
an aggregate consideration of NIS 500MM; i.e. NIS 1.15 per each Debentures (Series 6) par value NIS 1, by
increasing the existing Debenture series (Series 6) issued by the Company.
- Draft Terms of Bezeq-Yes Merger: On November 3, 2013, Bezeq released the initial draft of the terms for
Bezeq’s merger with D.B.S Satellite Services, wherein it currently holds 49.8% from the Antitrust Authority. With
respect to increasing Bezeq’s shareholdings of YES, Bezeq’s BODs has formed a sub-committee that includes
members who are all external or independent directors to decide on the merger activity.

5. Management and Governancexxiv
The Company’s management team includes highly qualified professionals having significant experience in the field of
Management, Communications, and Operational and Financial Management. Additionally, the Company’s management
team possesses proven capabilities in strategy creation and strategic planning, marketing and brand development,
management of mergers and acquisitions, creations of partnerships and raising capital which is evident from its 11
major transactions, which includes two IPOs - IGLD and BCOM, and nine bond issues.
Exhibit 15: Management Team

Name Designation Age Background
 He holds a B.A. degree in Economics and Accounting from the Hebrew
University of Jerusalem and is a Certified Public Accountant (CPA) in Israel
 He has significant experience of about 17 years in management and 15 years
in communications
 He has been serving the position of CEO with IGLD since October 2011, and
previously, he had served the Company holding position of Deputy CEO since
October 2004, and CFO since May 2001
Mr. Doron  Currently, he is also serving as the CEO with BCOM and as the CFO with
CEO 46 Eurocom Communications
Turgeman
 From February 2010 – October 2011, he served BCOM as the CFO and Vice
President of Finance, and from January 2008 – February 2010,he served
BCOM’s BODs as a member
 Additionally, he had served as an executive officer for several of the
Company’s Media and Internet companies, which have been sold, including
CEO of MSN Israel which was a joint subsidiary of IGLD and Microsoft
Corporation.
 He holds a B.A degree in Economics and Accounting from the Haifa
University, an MBA degree from the college of Management Academic
Studies in Rishon LeZion and is a CPA in Israel.
Mr. Ehud  He had joined the Company in May 2011 as a controller and was promoted
CFO 36 to Principal Financial Officer in October 2011.
Yahalom
 In the past, he had served Deloitte Israel branch’s Enterprise risk services
department as a senior consultant, and from 2007-2011, he had served
Cellcom Israel Ltd.’s accounting department.

6. Technologies and Markets
6.1 Telecommunication xxv
Telecommunications involves the integration of voice, data, pictures, videos, and different communication
technologies with electronic devices to facilitate communication between people and deliver entertainment,
information, and other services. The process involves the use of computer, and mobile technology to transmit,
receive, and switch voice, data, and video communications over different transmission medium (including copper,
fiber optic cable and cellular communication). Telecommunication networks were originally designed for voice services
but with evolution of Internet Protocol (IP), the data and video services are also becoming an important part of
telecommunication. Quality and efficiency of telecommunication depend upon the medium (carrier) by which the
information is transferred. These transmission carriers or mediums are broadly classified as wire line and wireless
modes of communication transmission.
Exhibit16: Basic Components of Telecommunication
Transm itter
Receiver (User of
(Radio station, Com m unication
voice and
Mobile or Cell Medium (Wire line
broadband
tower, Telephone or Wireless)
internet services)
exchange etc)
6.2 Medium of Telecommunication:

6.2.1 Wire Line Telecommunicationxxvi
Wire line Communication or fixed line communication requires a fixed carrier as the transmission medium. The
medium of transportation of information could be either copper wiring or optical fiber wire. The devices (telephones,
computers, routers) are connected through a fixed cable and require individual technologies to transmit information.
Wire line telecommunication provides data and voice communication services, which includes local and long distance
voice service, broadband Internet access, corporate networking solutions, data center and cloud services, and security
and managed network services. Wire line communication has an advantage of having higher bandwidth 1 when
comparing it to wireless mode communication system.
6.2.1.1 Next Generation Network (NGN)xxvii xxviii xxix
NGN is the most advanced communication network, which uses a packet-based network to transports all information
and services (voice, data, and media such as video and pictures) by converting them into packets (digital) form. This
enables the carrier to carry all types of services including voice, data, video, and signaling through single
communication channel. NGNs are commonly built around the IP, and therefore the term ‘All IP’ is also sometimes
used to describe NGN. This technology provides several advantages over other network technologies. For service
provider, the NGN offers lower capital expenditure, low operating expenses, greater power saving, less space
requirement and low maintenance cost. For, the user it provides benefits of low cost and high speed of services. NGN
technology provides information transfer speed in the range of 20 to 100 megabits per second. The future of NGN
technology is the enhancement to fiber NGN, which uses fiber – Optic as transmission medium. Fiber NGN have
transmission rate in the range of 100 megabits per second to 1 gigabits per second.
6.2.1.2 Fiber – Optic Communicationxxx

Fiber-optic communication is a transmission medium, which transmits information from one place to another by
sending light pulses through an optical fiber cable. Fiber optic data transmission systems send information over fiber
optic cables by turning electronic signals into light. This medium of transmission is a popular alternative to the
conventional cable wires mainly due to high rate of transmission speed. Information transported using fiber optic
cables creates an electromagnetic carrier wave that carries information. This technology provides enhanced data
security, high bandwidth over a long distance communication and fastest way of transporting information.
1
In communication, the term ‘bandwidth’ refers to how much data can be transmitted in a certain amount of time. In essence, higher bandwidth
requires less time to transport bundle of information.

6.2.2 Wireless Telecommunicationxxxi
Wireless telecommunication involves the transmission of information over a distance without the use of wires, cables
or any other forms of electrical conductors. The transmitted distance can be anywhere between a few meters to
thousands of kilometers (for example, cellular communication). Mobile communication also known as cellular
communication is one of the best examples of wireless technology.
6.2.2.1 Cellular Communicationxxxii
A cellular communication system provides a wireless connection to the public telephone network for any user located
within the range of the system. This technology is the most popular wireless communication system which has been
the catalyst to the wireless revolution. Cellular mobile communication system uses a large number of low – power
wireless transmitters to create cells. A cell is the basic geographic unit of a cellular system. Each mobile uses a
separate temporary radio channel to talk to cell site (physical location of radio equipment that provides coverage
within a cell). The cell site uses one channel per mobile to communicate many mobiles at once. Communication
channel uses a pair of frequency to establish the connection. One frequency is used for the transmission of the
information from the cell site, known as the forward link. The other one is the reverse link, used for the cell site to
receive calls from the user.
Exhibit 17: Basic Mobile Telephone Service Networkxxxiii

Mobile Base Station (Cellular Tower) Mobile Base Station (Cellular Tower)
(A) (B)
Mobile Control
Equipment
Froward Link
Reverse Link
Froward Link
Reverse Link
Mobile Operator
Mobile User Network Mobile User

Interface
#1 Equipment #2
Public
Switched
Telephone
Network
(PSTN)
6.2.2.2 Voice over Internet Protocol (VoIP)xxxiv

VoIP is a communication technology used to for the delivery of voice communication and multimedia information over
IP network. This technology converts analog audio signal (voice) into digital form and transmit it over the Internet.
Voice calls using VoIP can be made using computers, special VoIP phones or traditional phones using an Internet
connection. The most attractive advantage of making voice calls using VoIP technology is the cost saving as it uses
Internet services to make small as well as long distance voice calls.
6.2.3 Broadband Internet Servicesxxxv
Many of the current and newly-developing Internet services require the transfer of large amounts of data that may not
be possible with conventional dial-up Internet service. Broadband Internet provides alternative to this problem as it
enables high speed data transmission to access information over World Wide Web (WWW). This technology gives
access to the highest quality of Internet services like streaming media (audio and video), VoIP, Internet gaming, and
other interactive services. Broadband Internet services are provided through fixed line and wireless technologies. The
most commonly used fixed line broadband Internet technologies are Digital Subscriber Line (DSL) modem, Cable
Modems, Fiber Optic and Broadband over Power Lines (BPL). Wireless broadband Internet uses Fixed Wireless Access

(WiFi, WiMAX), Mobile Broadband (3G, 4G, 5G) and Satellite Communication techniques to access high speed Internet
services.
6.2.4 Satellite Televisionxxxvi
Satellite TV system works by broadcasting video and audio signals from geostationary satellites to satellite dishes on
the Earth’s surface. The television satellites are all in geosynchronous orbit, meaning that they stay in one place in the
sky relative to the movement of the Earth. In other words, the satellite keeps pace with the earth rotation. This way,
user only has to direct the dish at the satellite once, and from then on it picks up the signal without adjustment.
These geostationary satellites orbit the earth in a region of space known as the Clarke Belt, which is approximately
22,300 miles above the equator. Satellite television systems transmits and receive radio signals using specialized
antennas called satellite dishes. Each of these satellites carries a number of transponders, which transmits a signal
back to the Earth. Evolution of satellite based television enabled option of multi-channel broadcast thus providing
option of multiple channels to the user. Primarily there are three types of satellite television usage: reception direct by
the end user (generally called Direct to home or DTH), reception by local television affiliates, or reception by
distributors of cable systems. The satellite television provides best quality of picture and video quality and provides a
variety of other services to the user.
6.3 Telecommunication Industry - Israel
6.3.1 Industry Overviewxxxvii
The telecommunications industry is comprised of
Exhibit 18: Sector wise contribution to total
companies that operate or provide access to facilities telecommunication revenue, 2011xxxviii
for voice, data, text, sound and video transmission
through wired, wireless or satellite networks. The
5%
services they provide include fixed network services
such as data retail, Internet retail, voice retail and 13% Cellular services
wholesale services and mobile servicesxxxix. The

telecommunications industry in Israel has undergone
significant transformation over the last two decades Local landline voice &
internet access
from being a market dominated by a single player to a
sector consisting of multiple companies operating in a
56%
highly competitive business environment. This 26% Multichanned TV
transition has been majorly driven by the numerous services
reforms that the country initiated at regular intervals in
order to liberalize and privatize the ICT sectors.
International Voice
Technological advancements and massive amounts of services
foreign investment in the sector have further driven the
telecommunications market. The entry of Mobile Virtual
Network Operators (MVNOs) has been a growing trend
in the Israeli market as these new players seek to take advantage of the demand for low cost services. The downward
pricing trend in the market has been the result of a substantial increase in competition as well as the introduction of
policies that have promoted a multi-operator environment. As of 2011, the telecommunications sector in Israel
recorded revenue of US$8.0B, representing about 4% of the GDP xl. The Exhibit 20 shows the contribution of each
sector to the total revenue of the Israeli telecommunication industry.
6.3.2 Growth Drivers

- Technological Advancements: Since the privatization process that started in Israel in the early 1990’s, one of
the biggest drivers of growth in the telecom industry has been the ability of the country to constantly innovate
and develop new technologies in the information processing and telecommunications field. A major part of the
local service provider’s networks and applications is produced and designed by Israeli companies, many of whom
are start-ups. Significant technological breakthroughs have been witnessed in areas like public switching,
transmission, access network technology, wireless local loop systems, data networking devices, network
management software, billing systems and value added services software. Technological expertise in areas such
as Internet applications, broadband, local area networks, digital wireless devices, network security and
management and telemedicine followed by intensive R&D activities and adequate support from Ministry of
Industry and Trade’s Chief Scientist have further expanded the size of the industry and drastically increased its
contribution to the country’s overall economic growth.

- Foreign Investments: The availability of massive foreign investment has been a key contributor to the growth of
the Israeli Telecom Industry. Apart from investments in the manufacturing and R&D facilities, foreign investments
have also flown into high-tech Israeli companies. The country’s attractiveness to foreign investors can be further
evidenced by the presence of more than 100 dedicated high-tech venture capital funds in the country.
Furthermore, institutional and private investors have consistently purchased shares of Israeli companies listed on
the New York Stock Exchange as well as in London and other European exchanges, thereby providing indirect
investment to Israeli telecommunication companies.
- Regulatory Environment:xli The Israeli communications market has seen an unprecedented number of reforms
over the last two decades. In 1994, the first step toward a more competitive telecommunications market was
taken when the government owned Bezeq was required to form subsidiaries in order to provide services in sectors
other than domestic, fixed wire line telephony.xlii This led to the introduction of Pelephone, offering cellular
services; and Bezeq International, providing international long distance services. Subsequently in September
2000, the Minister of Communications formulated regulations for the licensing of new operators entering the fixed
services market thereby ending Bezeq’s exclusive monopoly by law in the fixed services market. Some of the
recent reforms that have completely changed the dynamics of the telecom market in the country include the
interconnection rate cuts, which were aggressively reduced from NIS0.251 to NIS0.073 in 2011. This led to a
substantial decrease in pricing plans as new players competed amongst each other to gain significant market
shares. Another step that increased competition in the market was the simplification of the process of handset
imports, whereby the regulator removed the requirement that handsets certified for US or European markets be
specially approved. This move took away a competitive advantage from the operators as it limited their ability to
sell handsets at higher prices. The elimination of early termination fees (the fee payable for termination of a
contract) and handset subsidies further ended the long run subscription and retention strategy of Israeli mobile
operators wherein they had previously attracted subscribers by offering cheaper mobile phones and long term
contracts with fixed prices. Apart from regulatory reforms, Israel has also signed bilateral telecommunication
agreements with 27 countries and has been an active contributor to the development of international and regional
telecommunications cooperation. Thus, over the years regulatory policies have played an extremely important role
in the Israeli telecom market. Going forward also, any changes in regulatory policies will be a key determinant of
growth for the industry.
6.3.3 Fixed Telecommunication Servicesxliii
The fixed services market in Israel has evolved from being a market dominated only by Bezeq to a sector comprising
of multiple operators over the last two decades. Major players in the domestic fixed services market include Bezeq,
HOT, 012 Telecom, Cellcom Fixed Telecommunications Services, Partner Fixed Telecommunication Services, etc. As of
December 31, 2013, there were approximately 3.5MM fixed- line telephony lines in Israel. The number of fixed-lines
has been growing moderately in Israel since 2009, which compares favorably to most Western European countries,
where the number of fixed-line telephony lines has declined due to the increasing number of individuals who use only
cellular phones. The growth in the number of fixed-line telephony lines is driven by the relatively high population
growth rate in Israel, and particularly the growth rate of households, which grew at a CAGR of 1.9% in the period of
2007 to 2012.
The fixed line telephony market in Israel is characterized by:
(1) Pricing Pressure
(2) Commoditization
(3) Growing Enterprise Data Services
(4) Technology Convergence between Communication Systems
Recent Development
Creation of Wholesale Market: In order to provide high quality of services at a cheaper price, MoC is in process to
develop a Wholesale market for Fixed Communication Services which is currently dominated by two players, Bezeq
and Hot. The MoC is enforcing a new regulation by which the infrastructure owners of nationwide fixed access
networks will have to offer few of their services as wholesale services to other license holders. Some of these services
include Bitstream Access, Leasing of access elements (unbundling), leasing of dark fibers, duct access and
transmission services (‘the wholesale services’), and on the basis of non-discriminatory terms. The new entrants will
be allowed to use the infrastructure of the existing players to provide their services. This will encourage new players
to enter as they would incur lower capital expenditure leading to increase in competition.
However, the Wholesale Regulation is still under review and MoC is expected to make the final decision in around
second half of 2014. Under the Wholesale Market Regulation, MoC will prescribe maximum prices under the

regulations for the services. Under the current draft, the management is expecting the average wholesale pricing to
be approximately NIS 50-60 per access line/month. On a much positive note, post implementation of the Wholesale
Market Regulation, the company management estimates the possibility of the removal of the structural separation and
the removal of the supervision over the Company’s tariffs.
6.3.4 Cellular Telephonyxliv
The Israeli cellular telephony market is mature and highly competitive. As of December 31, 2013, there were
approximately 10 MM cellular telephony subscribers in Israel, representing a penetration rate of 124%. The Israeli
cellular telephony market is characterized by a dominant post-paid market. The Cellular Telephony market in Israel
was characterized by the introduction of competition in 1995. Three cellular telephony operators, Cellcom, Partner and
Pelephone, have historically led the Israeli cellular telephony market. In 2012, following regulatory changes, two
additional cellular telephony operators, Golan Telecom and HOT Mobile, began providing UMTS 3Gbased cellular
telephony services. In addition, measures taken by the Israeli government to encourage competition in the cellular
telephony market, 11 MVNO licenses were granted by the Israeli government. Currently, only four of the MVNO
licensees currently provide services: Rami Levy (which signed hosting agreements with Pelephone), Alon Cellular
(which signed hosting agreements with Pelephone), Azi Communications (which signed a hosting agreement with
Partner) and Home Cellular (which signed a hosting agreement with Cellcom). A fifth MVNO, Cellact, which has not yet
begun commercial operation, has signed a hosting agreement with Pelephone. The total number of MVNO subscribers
was estimated to be approximately 144,000, or approximately1.4% of all cellular telephony subscribers, as of
December 31, 2013.The market recorded revenue worth US$2.91B in 2012 with the number of subscribers at 9.9MM.
This rapid rise in penetration rates can be attributed to the introduction of the Calling Party Pays (CPP) method in
1994, nationwide coverage at low tariffs, superior network quality and effective marketing strategies employed by the
players. Regulatory policies like lowering of the regulated rate for termination of calls on mobile networks from
approximately NIS0.27 to NIS0.07 also led to increased competition and subsequent higher penetration in the
country. Following the abolition of early termination fees and handset subsidies in the April 2012, subscribers were
able to move freely between operators that offered the best prices. This has led to an unprecedented rise in the Israeli
mobile market churn, thereby forcing operators to focus more on subscriber acquisition through effective marketing
strategies and value added services. A substantial increase in competition has also ensured the continuity of the
downward pricing trend in the Cellular services sector.
6.3.5 Internet and Broadbandxlv
Broadband Internet in Israel has now become a household Exhibit 19: Number of Internet Users in Israel xlvi
product with penetration rate having grown from 4% in
2002 to approximately 82% in 2010. Major Internet service 7,000
providers include 012 Smile, Bezeq International, Barak-

Netvision, Golden Lines and over 45 small license holders. 6,000
These participants combined serve 3MM users in the

country covering more than 60% of the households and
Internet Users ('000)
5,000
above 80% of businesses. Factors that have led to this

rapid rise in broadband Internet usage include reduction in 4,000
tariffs as a result of stiff competition among existing
players, widespread usage of computers at work and home, 3,000 6,173
5,794
introduction of several sophisticated Hebrew-language 5,146 5,349
4,725
portals and a variety of Hebrew websites. The Israeli 2,000
government has also contributed to the growth of the
Internet in the nation by undertaking several e-government 1,000
initiatives with numerous activities like license renewal,
payments, taxation and viewing of court documents with
0
government agencies being done online. Furthermore, 2009 2010 2011 2012 2013
Israel’s reputation of being a world leader in developing
Internet technologies and applications has also influenced
local interest and usage of Internet services. A key trend that has been developing in the Broadband Internet market
is the growing demand of high speed Internet in the country. Recognizing this trend, major players like Bezeq and
HOT have already started investing in newer technologies and assets. While the former is completing the rollout of a
fiber-to-the-curb network and beginning trials of a fiber-to-the-home network, the latter has started investing in the
hybrid fiber-coaxial network to provide higher speeds. The Exhibit 21 depicts the growth in the number of Internet
users in Israel.

6.3.6 International Telecommunications Services xlvii
The monopoly of Bezeq International (a subsidiary of Bezeq) in the International telecommunications services market
ended in July 1997, when two privately owned facility based carriers namely Golden Lines and Barak were given
licenses to operate. In May 2004, additional licenses were given to Internet Gold, Xphone and Netvision. The
International Long Distance (ILD) market in Israel has been characterized by a decrease in call volume in recent
years. In 2013, the average annual volume of incoming and outgoing call minutes increased by 5% compared to a
decrease of 1.6% in 2012. Aggressive cuts in retail prices along with fair and transparent interconnection
arrangements were the primary drivers of growth in the sector. Major developments in the sector include the usage of
a modern digital network to deliver services, optical submarine cables, digital satellite links, modern operator facilities
and advanced data communication facilities. Excessive competition in the sector has given rise to a new trend of
international calling becoming a part of a bundle of services. For instance, a number of mobile operators in Israel offer
unlimited international calling packages to numerous destinations.
6.3.7 Multichannel TVxlviii
The multichannel subscriber television market in Israel is supervised by the Minister of Communications and regulated
by the Council of Cable and Satellite TV Broadcasting. Currently, this market consists of three major players namely
HOT Telecommunication Systems Ltd (known under the brand name ‘HOT’) offering cable TV services, DBS Satellite
Services operating under the brand name ’YES’ as the satellite TV operator and the Second Authority for TV and
Radio offering Digital Terrestrial TV services under the brand named ‘IDAN Plus’. Major developments in the sector
include a series of reforms passed by the Minister of Communications and the Ministry of Finance in May 2013 under
the Economic Arrangements bill. One of the most relevant reforms includes the introduction of a narrow broadcast
package by DBS and Hot giving the Minister the authority to lower prices, to intervene in the composition of stations
and the authority to require ‘YES’ and ‘HOT’ to sell these narrow broadcast packages to companies wanting to enter
the television market. These reforms are expected to influence the dynamics of the multichannel market in the
country in the future as they would pave the way for more competition in the sector which would further lessen the
pricing power of existing players in the sector. While the Israeli pay television market has been stable by number of
subscribers since 2009, and stood at approximately 1.5MM subscribers, revenues have expanded from NIS 3.7B in
2009to NIS 3.9B in 2012. This growth is primarily due to ARPU growth resulting from digitalization and the emergence
of a broader offering of channels and additional services.

6.3.8 Competitive Landscapexlix
The Communications industry in Israel has undergone
Exhibit 20: Participants in Each Sector From 1994 -2013 l
rapid changes over the last two decades.
Technological advancements and recent changes in
regulations governing the industry in the country have
been primarily responsible for the developments in
the sector. The MOC has consistently encouraged
competition in the sector, mainly by segregating
infrastructure & service providers, mandating mobile
number portability, supporting various innovative
technologies, and conceding new licenses at regular
intervals. Favorable regulatory policies for the entry of
new players have intensified competition in various
sub sectors of the industry, which, in turn, has caused
a substantial decrease in prices as existing and new
operators aggressively compete with one another to
capture valuable market share. Increased competition
has also affected the structure of the industry with a
number of companies in the sector adopting
cooperative marketing strategies with common
ownership for the supply of various comprehensive
communications service packages. One of the major
changes in the competitive landscape of the Israeli
communications market has been the change in the
number and the size of participants involved in the
sector. While in the past, competition was primarily
among the independent communications service
providers in each segment, over the years the market
has consolidated with competition now among large
communication groups operating in most segments of
the market. The Exhibit 22 depicts the change in the
number of participants involved in each sub sector in the industry from 1994 to 2013.

7. Valuation
The Fair Market Value of all of BCOM’s shares stands between NIS2.3B (US$611MM) and NIS2.8B (US$722MM) as of
November 18, 2014. The Fair Market Value of one of B Communications Ltd publicly traded regular shares stands
between US$20.46 and US$24.17 as of November 18, 2014. We have used the Dividend Discount Model method for
valuation.
7.1 Dividend Discount Model

Historically, Bezeq has been a high dividend paying company. BCOM, which derives all its revenue from Bezeq, also
intends to distribute the majority of dividends to its shareholders, which it received from Bezeq. We have valued the
Company using the Dividend Discount Model to arrive at the estimated fair value.
Exhibit21: Dividend
Discount Model
(High Bracket)
All figures are in NISMM unless otherwise mentioned
Time Period 0.25 1.25 2.25 3.25 4.25 5.25 6.25
2017
2011 2012 2013 2014E 2015E 2016E 2018E 2019E 2020E
Ratios E
EPS (7.2) 1.5 4.6 (3.3) 6.8 7.6 8.3 9.4 9.7 10.3
DPS (3.3) 6.8 7.6 8.3 9.4 9.7 10.3
Dividend Payout Ratio 100% 100% 100% 100% 100% 100% 100%
EPS growth rate (173%) (305%) 11% 10% 5% 5% 5%
O/S shares (MM) 30 30 30 30 30 30 30 30 30 30

Total dividend - - - (100) 204 226 248 281 290 308
Discount factor 0.981 0.908 0.841 0.779 0.721 0.668 0.618
Present value - (98) 186 190 193 203 194 190
Discount rate (cost of

8.00%
equity)
Terminal growth rate 1.00%
PV of Cash Flow 1,058

Terminal value 2,747
PV of Terminal Value 1,698
Equity value (NIS MM) 2,756
Equity value (US$ MM) 722
Shares (MM) 30
Fair Value (US$) 24.17
Current Share Priceli
17.49
(US$)

Exhibit 22: Dividend Discount
Model (Low Bracket)
All figures are in NISMM unless otherwise mentioned
Time Period 0.25 1.25 2.25 3.25 4.25 5.25 6.25
Ratios 2011 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E 2020E
EPS (7.2) 1.5 4.6 (3.3) 5.6 5.6 6.1 8.3 8.1 9.0
DPS (3.3) 5.6 5.6 6.1 8.3 8.1 9.0
Dividend Payout Ratio 100% 100% 100% 100% 100% 100% 100%
EPS growth rate (173%) (268%) (1%) 8% 5% 5% 5%
O/S shares (MM) 30 30 30 30 30 30 30 30 30 30

Total dividend - - - (100) 168 167 181 249 242 270
Discount factor 0.981 0.908 0.841 0.779 0.721 0.668 0.618
Present value - (98) 153 140 141 180 162 167
Discount rate (cost of

8.00%
equity)
Terminal growth rate 1.00%
PV of Cash Flow 844

Terminal value 2,408
PV of Terminal Value 1,489
Equity value (NIS MM) 2,333
Equity value (US$ MM) 611
Shares (MM) 30
Fair Value (US$) 20.46
Current Share Pricelii
17.49
(US$)

Approach for Dividend Discount Model Valuation
Time Horizon: The Arrowhead fair valuation for BCOM is based on a DDM method. The time period chosen for the
valuation is 75 months (Q4FY2014E- FY2020E).
Terminal Value: Terminal Value is estimated to depend on a terminal growth rate of 1.0%
Prudential nature of valuation: It should be noted that this Arrowhead Fair Value Bracket estimate is a relatively
prudential estimate, as it discounts the eventuality of any of new products launched or sold off in the market or any
significant change in the Company strategy.
Key variables: The upper and lower bounds in the estimation correspond to the extreme positions taken by the
following key variables:
Variable 1 – Fixed-line telephony: Total Access Lines Growth rate
Exhibit 23: Total Access lines Growth Rate

2014E 2015E 2016E 2017E 2018E 2019E 2020E
Low estimate (16.0%) (26.0%) (26.0%) (21.0%) 2.0% 2.0% 2.0%
High estimate (15.0%) (25.5%) (22.0%) (20.0%) 3.0% 3.0% 3.0%
Variable 2 – Broadband Internet Lines Growth Rate
Exhibit 24: Broadband Internet Lines Growth Rate

2014E 2015E 2016E 2017E 2018E 2019E 2020E
Low estimate 6.0% 5.0% 5.0% 4.8% 4.7% 4.6% 4.5%
High estimate 6.2% 5.4% 5.1% 4.9% 4.8% 4.7% 4.6%
Variable 3 – Cellular communication: Subscribers Growth Rate
Exhibit 25: Cellular communication: Subscribers Growth Rate

2014E 2015E 2016E 2017E 2018E 2019E 2020E
Low estimate (5.0%) (5.0%) (3.0%) (3.0%) (2.0%) 1.0% 1.0%
High estimate (4.0%) (4.0%) (2.0%) (2.0%) (1.0%) 1.0% 1.0%
Variable 4 – Cellular communication: ARPU
Exhibit 26: ARPU

2014E 2015E 2016E 2017E 2018E 2019E 2020E
Low estimate 78 77 76 78 81 83 84
High estimate 79 78 77 79 82 84 85

7.2 Net Asset Valuation (NAV) Method
The Fair Market Value of one of B Communications Ltd publicly traded regular shares stands at $24.14 as on
November 18, 2014 according NAV method.
Exhibit 27: Net Asset Valuation Method
All figures are in NIS MM except per share data
BCOM NAV Calculation NIS US$

Bezeq’s Share Price 6.21
Number of Bezeq Shares 2,739
Total Market Cap of Bezeq 17,008
No. of Bezeq shares held by BCOM 844
BCOM Value based on Bezeq Share price 5,240

BCOM Net Debt 2,458
BCOM NAV 2,782
General, Operating and Tax expenses 30
BCOM's value 2,752 721
BCOM’s Shares Outstanding 30

Net Value Per Share (BCOM) 92.09 24.14
BCOM's share price @ Nov 18, 2014 66.72 17.49
Upside over market price 38% 38%

Important information on Arrowhead methodology
The principles of the valuation methodology employed by Arrowhead BID are variable to a certain extent depending
on the subsectors in which the research is conducted, but all Arrowhead valuation research possesses an underlying
set of common principles and a generally common quantitative process.
With Arrowhead Commercial and Technical Due Diligence, Arrowhead extensively researches the fundamentals, assets
and liabilities of a Company, and builds solid estimates for revenue and expenditure over a coherently determined
forecast period.
Elements of past performance, such as price/earnings ratios, indicated as applicable, are present mainly for reference
purposes. Still, elements of real-world past performance enter the valuation through their impact on the commercial
and technical due diligence.
Elements of comparison, such as multiple analyses, may be to some limited extent integrated in the valuation on a
project-by-project or asset-by-asset basis. In the case of this BCOM report, there are no multiple analyses integrated
in the valuation.
Arrowhead BID Fair Market Value Bracket

The Arrowhead Fair Market Value is given as a bracket. This is based on a quantitative key variable analysis, such as
key price analysis for revenue and cost drivers, or analysis and discounts on revenue estimates for projects, especially
relevant to those projects estimated to provide revenue near the end of the chosen forecast period. Low and high
estimates for key variables are produced as a tool for valuation. The high-bracket DDM valuation is derived from the
high-bracket key variables while the low bracket DDM valuation is based on the low bracket key variables.
In principle, an investor who is comfortable with the high-brackets of our key variable analysis will align with the high-
bracket in the Arrowhead Fair Value Bracket, and likewise in terms of low estimates. The investor will also take into
account the Company intangibles – as presented in the initial pages of this document in the analysis on strengths and
weaknesses and on other essential Company information. These intangibles serve as supplementary decision factors
for adding or subtracting a premium in the investor’s own analysis.
The bracket should be understood as a tool provided by Arrowhead BID for the reader of this report and the reader
should not solely rely on this information to make his decision on any particular security. The reader must also
understand that on one hand, global capital markets contain inefficiencies, especially in terms of information, and that
on the other hand, corporations and their commercial and technical positions evolve rapidly: this present edition of
the Arrowhead valuation is for a short to medium-term alignment analysis (one to twelve months). The reader should
refer to important disclosures on page 31 of this report.

8. Appendix
8.1 BCOM’s Financial Summary
Exhibit 28: Financial
High Bracket Estimates
Summary
Year Ending December 2011A 2012A 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Revenue (NIS MM) 11,373 10,278 9,563 9,235 9,142 9,044 9,113 9,404 9,709 9,990
Operating Profit (NIS MM) 1,500 1,949 2,035 1,881 1,881 1,881 1,888 1,932 2,014 2,085
Net Income ( NIS MM) 128 793 939 1,291 824 836 858 911 990 1,063
EPS (7.23) 1.54 4.58 (3.34) 6.84 7.57 8.29 9.41 9.71 10.30
Growth rates (%)
Revenue 31.4% (9.6%) (7.0%) (3.4%) (1.0%) (1.1%) 0.8% 3.2% 3.2% 2.9%
Operating Profit 22.0% 29.9% 4.4% (7.6%) 0.0% 0.0% 0.3% 2.4% 4.2% 3.5%
Net Income (60.4%) 519.5% 18.4% 37.5% (36.2%) 1.4% 2.6% 6.3% 8.7% 7.3%
EPS NM NM 197.8% (172.8%) NM 10.7% 9.5% 13.6% 3.2% 6.1%
Margins (%)
Gross Margins 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Operating Profit Margin 13.2% 19.0% 21.3% 20.4% 20.6% 20.8% 20.7% 20.5% 20.7% 20.9%
Net Profit Margin 1.1% 7.7% 9.8% 14.0% 9.0% 9.2% 9.4% 9.7% 10.2% 10.6%
Ratios
ROA 0.5% 3.5% 4.5% 5.6% 3.6% 3.7% 3.9% 4.2% 4.7% 5.1%
ROE 2.6% 18.3% 24.0% 28.4% 17.5% 17.6% 18.0% 19.1% 20.7% 22.0%
Debt/Equity 2.8x 3.1x 3.4x 3.0x 2.8x 2.7x 2.6x 2.5x 2.4x 2.3x
Interest Coverage 1.5x 2.1x 2.4x 2.8x 2.4x 2.4x 2.5x 2.7x 2.9x 3.1x
Price /Earnings Ratio (PE) NM 40.1x 13.5x NM 9.0x 8.2x 7.5x 6.6x 6.4x 6.0x
Exhibit 29: Financial

Low Bracket Estimates
Summary
Year Ending December 2011A 2012A 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Revenue (NIS MM) 11,373 10,278 9,563 9,130 8,979 8,814 8,850 9,086 9,349 9,604
Operating Profit (NIS MM) 1,500 1,949 2,035 1,839 1,816 1,788 1,781 1,806 1,872 1,934
Net Income (NIS MM) 128 793 939 1,262 777 765 774 810 873 935
EPS (7.23) 1.54 4.58 (3.35) 5.62 5.59 6.06 8.33 8.10 9.03
Growth rates (%)
Revenue 31.4% (9.6%) (7.0%) (4.5%) (1.7%) (1.8%) 0.4% 2.7% 2.9% 2.7%
Operating Profit 22.0% 29.9% 4.4% (9.7%) (1.2%) (1.6%) (0.4%) 1.4% 3.6% 3.3%
Net Income (60.4%) 519.5% 18.4% 34.4% (38.4%) (1.5%) 1.1% 4.6% 7.8% 7.0%
EPS NM NM 197.8% (173.0%) NM (0.6%) 8.4% 37.6% (2.8%) 11.6%
Margins (%)
Gross Margins (%) 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Operating Profit Margin 13.2% 19.0% 21.3% 20.1% 20.2% 20.3% 20.1% 19.9% 20.0% 20.1%
Net Profit Margin 1.1% 7.7% 9.8% 13.8% 8.7% 8.7% 8.7% 8.9% 9.3% 9.7%
Ratios
ROA 0.5% 3.5% 4.5% 5.5% 3.4% 3.4% 3.4% 3.6% 3.9% 4.3%
ROE 2.6% 18.3% 24.0% 27.8% 16.2% 15.5% 15.2% 15.7% 16.6% 17.4%
Debt/Equity 2.8x 3.1x 3.4x 3.0x 2.8x 2.7x 2.5x 2.4x 2.3x 2.2x
Interest Coverage 1.5x 2.1x 2.4x 2.7x 2.3x 2.3x 2.3x 2.4x 2.6x 2.8x
Price /Earnings Ratio (PE) NM 40.1x 13.5x NM 11.0x 11.0x 10.2x 7.4x 7.6x 6.8x

9. Analyst Certifications Investors are advised to gather and consult multiple
sources of information while preparing their
I, Snehal Mahajan, certify that all of the views investment decisions. Recipients of this report are
expressed in this research report accurately reflect my strongly advised to read the Information on Arrowhead
personal views about the subject security and the Methodology section of this report to understand if and
subject Company, based on the collection and analysis how the Arrowhead Due Diligence and Arrowhead Fair
of public information and public Company disclosures. Value Bracket integrate alongside the rest of their
stream of information and within their decision making
Important disclosures process.
Arrowhead Business and Investment Decisions, LLC Past performance of securities described directly or
received fees in 2013 and 2014 from B indirectly in this report should not be taken as an
Communications Ltd for researching and drafting this indication or guarantee of future results. The price,
report and for a series of other services to BCOM value of, and income from any of the financial
including distribution of this report and financial securities described in this report may rise as well as
research services. Neither Arrowhead BID nor any of fall and may be affected by simple and complex
its principals or employees owns any long or short changes in economic, financial and political factors.
positions in BCOM.
Should a security described in this report be
Aside from certain reports published on a periodic denominated in a currency other than the investor’s
basis, the large majority of reports are published by home currency, a change in exchange rates may
Arrowhead BID at irregular intervals as appropriate in adversely affect the price of, value of, or income
the analyst’s judgment. derived from the security.
Any opinions expressed in this report are statements of This report is published solely for information
Arrowhead BID’s judgment to this date and are subject purposes, and is not to be considered in any case as
to change without notice. an offer to buy any security, in any state.
This report was prepared for general circulation and Other than disclosures relating to Arrowhead Business
does not provide investment recommendations specific and Investment Decisions, LLC, the information herein
to individual investors. As such, any of the financial or is based on sources Arrowhead BID believes to be
other money-management instruments linked to the reliable but is not guaranteed by Arrowhead BID and
Company and Company valuation described in this does not purport to be a complete statement or
report, hereafter referred to as “the securities”, may summary of the available data.
not be suitable for all investors.
Arrowhead Business and Investment Decisions, LLC is
Investors must make their own investment decisions not responsible for any loss, financial or other, directly
based upon their specific investment objectives and or indirectly linked to any price movement or absence
financial situation utilizing their own financial advisors of price movement of the securities described in this
as they deem necessary. report.

10. Notes and References
i Source: Bloomberg, November 18,2014

ii 52 weeks to November 18, 2014. Source: Bloomberg, November 18, 2014
iii 3 months to November 18, 2014. Source: Bloomberg, November 18, 2014
iv Source: Bezeq Investor Presentation FY 2013
v Source: Bezeq Press Release Dated January 15, 2014 – Wholesale Regulation
vi Arrowhead Business and Investment Decisions Fair Value Bracket – AFVBTM. See information on valuation on pages 25-29 of this report and important disclosures on page 31 of this
report.
vii Source: Bezeq Press Release Dated January 15, 2014 – Wholesale Regulation
viii
Source: BCOM, Annual Report 2012 and 2013
ix
Source: IGLD Investor Presentation November, 2014
x
Source: IGLD Investor Presentation, November 2014
xi
Source: Bezeq, Annual Report, 2013
xii
Source: Bezeq Investor Presentation FY 2013
xiii
Source: Bezeq, Annual Report, 2013
xiv
Source: Bezeq Investor Presentation, FY 2013
xv
Source: http://www.bezeqonline.com/about_us.html
xvi
Source: Bezeq Investor Presentation FY 2013
xvii Source: BCOM, Annual Report, 2013
xviii Source: BCOM Press Release Dated March 20, 2014 – Midroog raised rating to A1 with Stable Outlook
xix Source: Company Management
xx Source: Company Management
xxi Source: Arrowhead BID estimate
xxii
Source: BCOM web site – News section
xxiii Source: Bezeq web site – News section
xxiv Source: BCOM, Annual Report, 2013
xxv Source: http://www.ie.itcr.ac.cr/acotoc/Maestria_en_Computacion/Sistemas_de_Comunicacion_II/Material/Biblio5.pdf
xxvi Source: http://www.swisscom.ch/en/ghq/portrait/the-swisscom-network/all-about-fixed-line-communications/technology-in-fixed-line-communications.html
B Communications Ltd – Arrowhead BID 32 NASDAQ / TASE: BCOM

xxvii Source: http://en.wikipedia.org/wiki/Next-generation_network#Underlying_technology_components
xxviii Source: http://connect-world.com/~cwiml/index.php/component/k2/item/16692-next-generation-network-ngn-the-future-of-telecommunication
xxix Source: http://ir.bezeq.co.il/phoenix.zhtml?c=159870&p=irol-financialreports
xxx Source: http://en.wikipedia.org/wiki/Fiber-optic_communication
xxxi Source: http://www.engineersgarage.com/articles/wireless_communication
xxxii Source: http://wsl.stanford.edu/~andrea/Wireless/SampleChapters.pdf
xxxiii Source: http://edu.eap.gr/pli/pli23/documents/Parallila_Keimena/Cellular_Communications.pdf
xxxiv Source: http://www.fcc.gov/guides/voice-over-internet-protocol-voip
xxxv Source: http://www.broadband.gov/broadband_advantages.html
xxxvi Source: http://www.tech-faq.com/satellite-tv.html
xxxvii Source: http://www.moc.gov.il/sip_storage/FILES/5/605.pdf
xxxviii Source: BCOM, Annual Report 2012 & 2013
xxxix Source: http://en.wikipedia.org/wiki/Telecommunications_in_Israel
xl
Source: BCOM, Annual Report 2012
xli
Source: http://ftp5.bizportal.co.il/web/giflib/dindata/analyst/pdf/goldman_sachs_-_feb_2013.pdf
xlii Source: http://www.moc.gov.il/sip_storage/FILES/5/605.pdf
xliii
xliv
xlv
xlvi Source: http://www.euromonitor.com/israel/country-factfile
xlvii
xlviii
xlix
l
Source: http://www.moc.gov.il/sip_storage/FILES/5/605.pdf
li
Source: Bloomberg, November 18, 2014
lii
Source: Bloomberg, November 18, 2014
B Communications Ltd – Arrowhead BID 33 NASDAQ / TASE: BCOM


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Due Diligence and Valuation Report

Arrowhead Code: 54-01-05 Company: B Communications Ltd.

Market Data Bezeq to Drive Growth

B Communications Ltd. – Arrowhead BID 1 NASDAQ / TASE: BCOM

B Communications Ltd. – Arrowhead BID 2 NASDAQ / TASE: BCOM

B Communications Ltd. – Arrowhead BID 3 NASDAQ / TASE: BCOM

B Communications Ltd. – Arrowhead BID 4 NASDAQ / TASE: BCOM

1. 100% stake in Bezeq Fixed line

2.2 Company Milestone

 As part of a regulatory requirement in relation to the acquisition of a controlling stake in Bezeq,

B Communications Ltd. – Arrowhead BID 5 NASDAQ / TASE: BCOM

2.4 Products and Servicesxi

comprised of monthly amounts of minutes for a fixed 2150

penetration of mobile services & telephony services

B Communications Ltd. – Arrowhead BID 6 NASDAQ / TASE: BCOM

B Communications Ltd. – Arrowhead BID 7 NASDAQ / TASE: BCOM

2.4.3 Bezeq International

B Communications Ltd. – Arrowhead BID 8 NASDAQ / TASE: BCOM

2.4.4 Digital Broadcast Satellite (DBS)

B Communications Ltd. – Arrowhead BID 9 NASDAQ / TASE: BCOM

Israel by DBS. DBS broadcasts new television series at a 580

additional channels chosen by the subscriber, either as a 555

- Advanced Services: DBS markets PVR decoders which

B Communications Ltd. – Arrowhead BID 10 NASDAQ / TASE: BCOM

2.6 Company Risksxvii

B Communications Ltd. – Arrowhead BID 11 NASDAQ / TASE: BCOM

B Communications Ltd. – Arrowhead BID 12 NASDAQ / TASE: BCOM

Exhibit 10: Shareholding Pattern xx

Shareholders No. of Shares % of total

2.9 Listing and Contact Details

Email ID: [email protected]

B Communications Ltd. – Arrowhead BID 13 NASDAQ / TASE: BCOM

Exhibit 11: Total Access lines Growth Rate

3.2 Variable 2 – Broadband Internet Lines Growth Rate

Exhibit 12: Broadband Internet Lines Growth Rate

3.3 Variable 3 – Cellular Communication: Subscriber’s Growth Rate

Exhibit 13: Cellular communication: Subscribers Growth Rate

3.4 Variable 4 – Cellular Communication: ARPU

Exhibit 14: ARPU

B Communications Ltd. – Arrowhead BID 14 NASDAQ / TASE: BCOM

Bezeq Group xxiii

B Communications Ltd. – Arrowhead BID 15 NASDAQ / TASE: BCOM

B Communications Ltd. – Arrowhead BID 16 NASDAQ / TASE: BCOM

Exhibit 15: Management Team

B Communications Ltd. – Arrowhead BID 17 NASDAQ / TASE: BCOM

Exhibit16: Basic Components of Telecommunication

6.2 Medium of Telecommunication:

6.2.1.2 Fiber – Optic Communicationxxx

B Communications Ltd. – Arrowhead BID 18 NASDAQ / TASE: BCOM

Exhibit 17: Basic Mobile Telephone Service Networkxxxiii

Mobile User Network Mobile User

6.2.2.2 Voice over Internet Protocol (VoIP)xxxiv

B Communications Ltd. – Arrowhead BID 19 NASDAQ / TASE: BCOM

wholesale services and mobile servicesxxxix. The

6.3.2 Growth Drivers

B Communications Ltd. – Arrowhead BID 20 NASDAQ / TASE: BCOM

B Communications Ltd. – Arrowhead BID 21 NASDAQ / TASE: BCOM

providers include 012 Smile, Bezeq International, Barak-