Canada Frustrates Investors With ‘Calvinball’ Policy
Anyone who wants to know how six years of concerted policy making by the Canadian government fell into disarray this week should ask Naguib Sawiris.
The Egyptian billionaire decided to bankroll Canadian wireless startup Wind Mobile in 2008, only to be hit with a multi-year battle over Canada’s foreign ownership laws that delayed Wind’s debut. Prime Minister Stephen Harper’s government ultimately overruled its own regulator in the interests of gaining a new wireless player.
When Sawiris came back last year with a proposed acquisition of Manitoba Telecom Services Inc. (MBT)’s Allstream business services unit for C$520 million ($475 million), the same government rejected him on unspecified security grounds, prompting Sawiris to tell the Egyptian newspaper Al-Ahram he was “finished with Canada.” Sawiris declined a request for an interview.
A series of half-measures and reversals accompanied by tensions between policy objectives and national security concerns have undermined a high-profile political push by the government to foster new competition to Canada’s big three carriers. On the eve of a major spectrum auction this week, Wind’s current backer VimpelCom Ltd. (VIP), a Russian-controlled company also dogged by national security concerns, dealt another blow to the process by announcing it wouldn’t finance Wind’s bid in the coveted 700-megahertz band.
The Harper government’s approach has been “unstable, inconsistent and at times incomprehensible,” said Mark Goldberg, a Canadian wireless consultant who also runs Canada’s largest telecommunications conference each year. He called Canada’s policy a “Calvinball approach,” referring to a game in the “Calvin and Hobbes” comics that lets players make up rules as they go.
Taming BCE Inc. (BCE), Telus Corp. (T) and Rogers Communications (RCI/B), which together control 90 percent of the Canadian market, has been a preoccupation of the Harper government for years. It has gone so far as to run attack ads against the blue-chip incumbent companies and has made the cause of reducing wireless charges for consumers a plank in its political program.
National security issues aren’t the only problems getting in the way. The government’s policies on foreign competition in wireless are ambivalent and so far have failed to attract well-established foreign players into the mid-sized Canadian market of 27 million subscribers.
With encouragement from the Canadian government, Verizon Communications Inc. (VZ), the largest U.S. carrier with a market value almost double BCE, Telus and Rogers combined, said in June it was interested in entering Canada. Had it gone ahead, the auction rules would have allowed Verizon as a new entrant to buy up to two of four blocks of spectrum in each region, which would have forced the three Canadian incumbents to fight for the remaining two blocks. The government’s efforts to stir competition were again stymied after the New York-based carrier said in September it wouldn’t bid in the current auction, allowing the incumbents now to go after one block each at lower cost.
“The whole area has been confused by government intervention,” said David Cockfield, a fund manager with Northland Wealth Management in Toronto, who owns shares of Montreal-based BCE and Manitoba Telecom Services Inc. “It also makes it very difficult for an investor to place value in an industry when the government sees fit to step in the way it has.”
With Verizon out, Wind Mobile, the startup that began offering wireless service in Toronto in 2009 with backing from Sawiris, had been expected to emerge as the strongest challenger to the top three.
Then Wind got caught this week in national security machinations between its shareholders and the Canadian government. Amsterdam-based VimpelCom is controlled by Russian billionaire Mikhail Fridman’s Altimo and generates more than half of its revenue from Russia and other parts of the former Soviet Union. VimpelCom says it still wants to build a fourth national carrier in Canada. However, VimpelCom is reluctant to spend potentially hundreds of millions of dollars in the auction with its ownership of Wind still in doubt.
“Wind needs more wireless spectrum, which is the real estate of our business,” Wind Chief Executive Officer Tony Lacavera said this week in explaining his predicament. VimpelCom’s backing out “leaves us with a spectrum shortfall we must still address.”
This week’s events have prompted calls from Goldberg and others for the Canadian government to rethink a wireless policy dating back to the run-up to the last auction in 2008. That auction raised C$4.3 billion from the incumbents and reserved spectrum to launch operations for new carriers Mobilicity, Public Mobile, Wind Mobile and Videotron.
With the exception of Quebecor Inc. (QBR/B)’s Videotron business, which is focused in Quebec and has complimentary cable and content offerings, the smaller carriers have struggled. Wind, which began operating in late 2009, had about 650,000 subscribers at the end of last year, less than half of Lacavera’s three-year goal of 1.5 million.
Mobilicity is currently in a court-appointed sale process after the Canadian government blocked Telus’s friendly acquisition in June, saying it wouldn’t allow any of the Big Three to acquire spectrum allocated for the new entrants. Wind is now trying to acquire Mobilicity’s spectrum assets, while Quebecor has signed a non-disclosure agreement with Mobilicity to explore bidding for its airwaves, according to Scotia Capital Inc. analyst Jeff Fan.
Public Mobile was bought in June by U.S. and Canadian investors led by Thomvest Seed Capital Inc. before being sold to Vancouver-based Telus in October. That purchase was allowed by the government because it said the deal would result in only “a modest increase in spectrum concentration by the incumbents.”
Under pressure to liberalize the industry, the government compromised in 2012 by allowing carriers with less than 10 percent market share to be bought by foreign investors. It stopped short of allowing foreigners to acquire any wireless carrier regardless of size. Beyond that are more general provisions governing foreign takeovers in Canada, requiring all acquisitions worth more than C$354 million to be reviewed and possibly subjecting them to a national security test.
BCE, Telus and Toronto-based Rogers have been critical of the Canadian government’s unwillingness to establish what they call a “level playing field.” The Big Three say it’s unfair to have government preventing them from acquiring smaller cash-strapped rivals while encouraging larger foreign carriers to come into Canada to do just that, or to bid on spectrum on auction-friendly terms.
Looking to score political points this week, Canada’s main opposition party criticized the government’s approach.
“Mixed messages, confusion and mismanagement by the Conservative government has repeatedly delayed this important auction and created increased uncertainty for investors,” Anne Minh-Thu Quach, the New Democratic Party lawmaker who speaks on industry issues, said in a Jan. 14 statement.
Jake Enwright, a spokesman for Industry Canada, declined to comment on whether its policies are confused or improvised. The auction “will be positive for consumers because high-quality spectrum will soon be available across Canada, providing Canadians with dependable, high-speed wireless services on the latest technologies,” he said.
The limited competition is good for shareholders of the Big Three, whose stocks have rallied as much as 8 percent after Verizon ruled out a Canadian expansion.
“If you’re one of the big telcos, you probably don’t want to see that” fourth carrier, said Bruce Campbell, a fund manager with StoneCastle Investment Management Inc., in an interview in Toronto yesterday. “So it’s probably good for Rogers, BCE and Telus. There’s really not much of a competition for that spectrum.”
Harper’s government doesn’t just risk losing face over its wireless policy. It stands to lose money with a less competitive auction. Neeraj Monga, an analyst at Veritas Investment Research Corp. in Toronto, had previously estimated the auction would generate C$2.8 billion to C$3.5 billion. Revenue will now be much lower, “maybe half of that,” Monga estimates, while BCE, Telus and Rogers are poised to pay much less than they had anticipated.
“To auction off at bargain prices is not in their best political interests,” Northland’s Cockfield said of the government. “They seem to be in over their heads, nothing has worked out the way they anticipated.”
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