Speculation over the entry of Verizon Wireless into Canada’s telecom industry has picked up steam, as reports emerged that US telecom giant Verizon Communications is making a bid for WIND Mobile, and also holding discussions with Mobilicity.
According to reports, Verizon has valued WIND at $700 million.
In a research note released Wednesday, Desjardins Securities analyst Maher Yaghi said that Verizon’s entry into Canada would have a negative impact, and if true, would “mean a significant move that could disrupt the Canadian wireless market.”
Similarly, RBC analyst Drew McReynolds noted Verizon’s entry would be a “game changer,” having “negative implications for both the earnings and wireless valuation multiples” of Canada’s telecom incumbents.
Macqaurie Securities analyst Greg MacDonald estimated that the incumbents could suffer a loss of 1.5 million subscribers over the next five years were Verizon to enter Canada, which would amount to $4 billion in lost values.
The incumbents could also be set to lose Verizon’s 25 per cent contribution to the $1.5 billion available in roaming revenue in Canada, added MacDonald. At current multiples, this would result in a $2.5 billion loss.
“Overall, we believe a Verizon Canada scenario would result in value erosion of 5-10% for Canadian incumbent stocks,” MacDonald wrote.
Notably, in McReynolds’ estimation smaller wireless entities won’t be immune to the effects of a Verizon entry either. Regional providers such as MTS and Videotron will face earnings and valuation risks as well, he added.
Yaghi and his team added that an ongoing government review of spectrum, the results of which are expected Friday, would have a significant impact on Verizon’s ultimate decision. If the government holds incumbents Rogers, Bell, and TELUS to a strict spectrum threshold, “this would favour Verizon’s entry,” Yaghi said. Otherwise, the incumbents may look to outbid Verizon for WIND.
There are no details yet as to Verizon’s overall strategy if it were to enter the Canadian market. The company will face the same challenges that have faced other Canadian wireless providers in the past, noted McReynolds, as Verizon will need to build several more towers and establish more retail locations if they are to be successful north of the border.
Working in Verizon’s favour is the federal government’s ongoing effort to encourage a fourth national wireless carrier to come forward and compete with the incumbents. The government’s spectrum auction has been delayed until early 2014, and foreign ownership rules have been relaxed to allow foreign companies a stake in the telecom industry, as long as its market share doesn’t rise above 10 per cent.
News of the venture hit the Canadian carriers hard: at mid-morning, BCE shares had dropped 3% on the TSX, Rogers by 7% and TELUS by 6%.
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