TORONTO – With outgoing Wind Canada CEO Tony Lacavera having told Cartt.ca that he loves auction rules set by Industry Canada because it shows the federal government is committed to seeing a fourth national wireless player emerge strongly, Bay Street is now wondering if Lacavera’s former backer, Egyptian billionaire Naguib Sawiris, will risk diving deeper into the Canadian wireless market.
Scotia Capital analyst Jeff Fan wrote in a research note to clients last week that there are numerous reasons not to invest in the Canadian wireless market, yet “we understand (Sawiris) and his team are evaluating Canada’s prospects again,” wrote Fan. While Wind Canada’s major shareholder, VimpelCom, has moved to fully take control of the Canadian arm and then, it’s believed, to sell the nascent operation, Industry Canada has also since said it will closely review all license transfers, setting a fog of uncertainty over the business in Canada.
“For VimpelCom and Mobilicity backers, we think their best course is actually to sell to the incumbents, which we believe will likely pay the most. But with Industry Canada’s proposal to review licence transfers, it is essentially trying to eliminate that option and force them to either invest more or sell to a strategic investor… We think this scenario gives Mr. Sawiris an opportunity to re-evaluate and possibly re-enter,” wrote Fan, who also added it appears as though Mobilicity will not be a buyer and is “effectively” under the control of its bondholders.
Fan speculates that Sawiris could be a player in the 700 MHz spectrum auction in November and become a consolidator purchasing Wind Canada, Mobilicity and even Allstream. “In total, to acquire Wind, consolidate Mobilicity and Allstream, we estimate Mr. Sawiris would have to invest around $1 billion before the 700 MHz spectrum auction,” he writes.
That auction’s combinatorial clock auction favours national over regional bidders, explains Fan’s report. “because a bid for one package of national licenses could potentially be greater than the sum of many packages of regional bids. For the current regional bidders (Quebecor, MTS, SaskTel, and EastLink), we believe this may be a strong incentive for them to partner and buy a national package to ensure they are not outbid for the fourth national prime block in their regions. Regional partnership could make Wind’s ability to acquire the fourth national prime block more difficult.”
Even with a block of 700 MHz to go with the AWS spectrum owned by Wind and Mobilicity, Fan considers Sawiris, in this scenario, to be still too light on spectrum to compete effectively, so then if he wanted to be really aggressive, Sawiris could challenge the incumbent big three and go after two prime 700 MHz blocks. “For current wireless operators, a “Second WIND” attempting to bid for one or two prime national blocks would make the auction more heated than currently expected,” wrote Fan.
Now, until Industry Canada approves VimpelCom taking control of Wind Canada in the spring, none of this can happen and whether or not Sawiris would want to team up again with Lacavera is an open question. However, “unless there is another strategic investor interested, we believe Mr. Sawiris will participate in the 700 MHz auction first. If he is successful in acquiring the spectrum he needs at the right price, then we believe he will pursue Wind Canada, Mobilicity, and perhaps Allstream,” says Fan, who then called this speculation a “worst-case scenario” for the big three wireless incumbents, Rogers, Bell and Telus.
“Even if he is successful, with a relatively weak spectrum position relative to incumbents the chance of long-term success is still remote. But regardless of the long-term outcome, incumbent valuations and ARPU/margin outlook will be impacted if we have a ‘Second Wind.’ The incumbents may be encountering an individual ‘doing the same thing over and over again but expecting different results’,” writes Fan.
And yes, that last quote is one of the most popular descriptions of the word insanity…
