THE GLOBE AND MAIL’s top business story on Monday was one saying U.S. telecom behemoth Verizon was looking at jumping into the Canadian market by purchasing tiny Wind Mobile, or the even tinier, Mobilicity.
The guffaws you heard Monday morning came from the offices of all of the nation’s telecom companies – and just about all of Bay Street. “What a joke,” one senior telecom executive told Cartt.ca on condition of anonymity. “This is just bulls**t fed to (The Globe) by people trying to drum up interest in Wind and Mobilicity,” said another.
“This is highly unlikely,” wrote Scotia Capital analyst Jeff Fan in a note to clients Monday morning. Verizon actually “can not invest in wireless outside the continental U.S. due to the VZ/Vodafone shareholder agreement and it would be unlikely that VZ would invest in wireless outside of (Verizon Wireless).”
Even less likely than a decision to invest in Canada by a company like Verizon would be for it to invest in something as small and fraught with challenges as Wind. “We do not believe VZ sees Canada's 4th operator as attractive based on the track record, the lack of spectrum and inferior network. We also believe that VZ does not see the Canadian regulatory environment as stable based on the policies that the Canadian government has put in place to artificially support a 4th operator,” wrote Fan.
Indeed, we here at Cartt.ca have written extensively this year about how we believe the federal government has botched the wireless file, meaning it is very difficult for most to envision a foreign operator the likes of Verizon wanting to invest here unless it could outright purchase an incumbent, which our foreign investment regulations currently prohibit. The rules now say that a non-Canadian can only buy control of a Canadian telecom company if it owns less that 10% market share.
Plus, as some have noted, Wind has built the core of its network with technology from Chinese manufacturer Huawei, which would present a real problem, politically, for Verizon, given the U.S. government’s thinking about that vendor.
As well, despite the positives of consolidating the smaller Canadian wireless providers, the capital requirements to do it (which include the resources needed for the 2014 700 MHz spectrum auction) are huge. “Canadian new entrants are far from profitable today and may require $2 billion+ of funding for consolidation, spectrum purchases and LTE,” said Canaccord Genuity analyst Dvai Ghose, in an equally skeptical note to clients.
“We believe that Verizon would rather acquire a Canadian incumbent like Telus if foreign ownership rules are liberalized,” wrote Ghose. “Consequently if it buys a new entrant, Industry Canada could block a Verizon move for an incumbent like Telus even if foreign ownership rules are further liberalized.”
Fan sees the Globe story as our telecom executives see it, as “noise, like many other headlines over the past few weeks. We expect more headlines over the next three months and we see these as potential buying opportunity for TELUS (T-T), RCI and BCE,” he wrote.
Ghose, however, did note that everyone could be wrong. “We assume that large U.S. carriers like Verizon and AT&T are not interested in Canadian new entrants. However if we are wrong, our thesis could be wrong. Verizon and AT&T have brand recognition in Canada, similar business plans to the Canadian incumbents, much greater scale and vendor power and could presumably leverage off their existing U.S. billing and switching infrastructure, at least in the near term,” he wrote.
“Having said that we see no real signs of Verizon or AT&T interest in Canadian new entrants at this time.”
