Eurocom's 012 Smile to buy 30.6 pct of Bezeq

* Shareholders to sell 30.6 pct for 6.5 bln shekels

* Controlling stake to be sold to Eurocom's 012 Smile

* Conditioned upon receiving regulatory okay by April 25

* 012 Smile seeks to be leading telecom player in Israel

(Recasts, adds comments from analysts, Communications Ministry)

By Tova Cohen

TEL AVIV, Oct 25 (Reuters) - The controlling shareholders in Bezeq Israel Telecom (BEZQ.TA: Quote, Profile, Research) agreed to sell their 30.6 percent stake for 6.5 billion shekels ($1.76 billion) in a deal likely to shake up Israel's telecoms market and bring pressure on its mobile phone operators.

The Apax-Saban-Arkin group agreed to sell its stake in Bezeq, Israel's largest telecoms group, to 012 Smile Communications (SMLC.TA: Quote, Profile, Research), a provider of Internet service and domestic and overseas calling, Bezeq and 012 Smile said on Sunday.

012 Smile is controlled by businessman Shaul Elovitch's Eurocom Communications, which started in the telecoms business by importing Nokia cell phones.

Elovitch is fulfilling "a life's dream", Leader Capital Markets analyst Eran Jacobi said.

The deal is priced at 8 shekels a share, a 7 percent discount to Bezeq's closing price on Thursday. Bezeq was flat at 8.60 shekels at 1212 GMT on Sunday.

Shares of 012 Smile surged 24 percent to 48.36 shekels.

"This transaction is in line with our strategy to become, through selective investments, the leading integrated player in Israel's telecom marketplace," 012 Smile Chief Executive Stella Handler said in a statement.

"Given its unique competitive positioning and strong cash flow generation, Bezeq represents an attractive investment for 012 Smile."

The deal will be financed through a combination of cash, debt and stock, the details of which will be announced soon.

The sale is conditional upon receiving regulatory approval by April 25, 2010. 012 Smile has agreed to sell its current telecommunications assets to obtain antitrust approval, and those proceeds will also be used to finance the transaction.

Excellence Nessuah analyst Gilad Alper said Eurocom would not have a problem selling 012's activities, with likely buyers being mobile phone operator Partner Communications (PTNR.O: Quote, Profile, Research) or cable company HOT (HOT.TA: Quote, Profile, Research).

"The problem will be in finding a buyer for its 32 percent stake in (satellite TV broadcaster) YES," Alper told Reuters.

Bezeq owns 49 percent of YES, which would discourage others from buying a minority stake in the company. Bezeq itself is not allowed by regulators to increase its stake in YES.

SHAREHOLDERS CASH IN

The partners in Bezeq -- media mogul Haim Saban, businessman Mori Arkin and the Apax Partners private equity fund -- bought control of Bezeq four years ago from the government.

The sale would net them a more than 300 percent return on their investment, according to analysts.

Alper said it has been known for some time that the controlling shareholders wanted to monetise their investment.

"It's good it happened smoothly and quickly and to someone like Elovitch, who is known to be level-headed," he said.

The problem will be for Israel's top cellular operators -- the leader Cellcom (CEL.TA: Quote, Profile, Research) and No. 2 Partner.

That is because 012 will have to drop out of the tender to buy Mirs, Israel's fourth and smallest mobile phone operator, from Motorola (MOT.N: Quote, Profile, Research). That would leave HOT, which is one third owned by French businessman Patrik Drahi, as the most likely buyer of MIRS.

"Drahi will try to charge up the cellular market, which could go from being a three-way market to a four-way market. MIRS could go from being a marginal player to a serious competitor," Alper said.

While Alper is maintaining his "outperform" rating for Bezeq, the deal raises concerns for Partner, now rated "market perform" and Cellcom, now at "outperform", he said.

012 Smile said it will be entitled to receive all dividends payable by Bezeq to Apax-Saban-Arkin prior to closing. Alper estimated this could amount to about 300 million shekels.

Bezeq, which has more than 2.5 million landline customers and about 1 million broadband lines, also provides mobile services through Pelephone, the third largest cellular operator.

The Communications Ministry said it will examine all aspects of the deal "to protect Israeli consumers and the companies operating in the Israel market".

"We will make sure the group continues to invest in infrastructure and technology," the ministry added.

($1=3.69 shekels)

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