Cash Makes BCE, Rogers Likely Winners in Spectrum AuctionHugo Miller
BCE Inc. and Rogers Communications Inc. are building cash reserves and making strategic acquisitions as Canada’s biggest carriers prepare to spend as much as C$1.8 billion ($1.8 billion) on an auction of wireless spectrum critical to their growth.
Montreal-based BCE last week said excess cash will be put toward the auction and that bidding should be limited to those with firm plans to use the airwaves, signaling its determination to secure as much 700-megahertz spectrum as it can. Rogers, Canada’s largest wireless carrier, reports earnings tomorrow after spending about C$300 million last month to buy unused spectrum from Shaw Communications Inc.
Rogers, BCE and No. 3 carrier Telus Corp., which together account for 90 percent of Canadian wireless subscribers, will probably get a better deal than at the 2008 auction when new entrants such as Mobilicity bought spectrum to start service.
“Things are looking very good in wireless for the incumbents,” said Dvai Ghose, an analyst at Canaccord Genuity Corp in Toronto, who expects the three companies to spend about C$600 million each in bidding. “They have all the significant spectrum in the country. It doesn’t look like the new entrants can afford this incremental spectrum.”
The Canadian government hasn’t set a date for the auction. BCE has said it expects it to happen in the fourth quarter.
The three largest providers need more wireless spectrum to secure their future as more customers cut fixed-line phone and cable packages. The 700-mhz frequency is particularly sought after for its ability to transmit data through densely-packed buildings where demand on networks is heaviest.
“By way of the law of physics, if you don’t have spectrum then you don’t have a wireless business,” Ghose said. “The importance of spectrum cannot be overestimated.”
Wireless revenue at BCE has climbed 22 percent over the past three years fueled by smartphone spending on video and Web browsing. Fixed-line revenue dropped 4.2 percent. Its data revenue alone jumped 28 percent last quarter. Rogers’s wireless revenue climbed 3.1 percent last quarter from a year earlier as fixed-line revenue was unchanged.
Rogers had C$459 million in cash at the end of the third quarter and BCE had C$127 million in cash and near cash at the close of 2012. The incumbents may issue debt of as much as C$800 million each to finance the spectrum spending, says Andrew Calder, a credit analyst at Royal Bank of Canada.
BCE Chief Financial Officer Siim Vanaselja said last week issuing debt was a possibility, saying BCE’s capital structure gives it a “very high level of overall financial flexibility.”
BCE’s management has done a good job of returning money to shareholders in recent years, said Paul Harris, portfolio manager at Avenue Investment Management in Toronto, which manages about C$300 million including BCE shares. Still, he said that issuing debt would be the logical option for financing the spectrum spending given low borrowing costs.
Buying spectrum is inherently more risky than buying another company as “it’s very hard to know whether you’re overpaying or underpaying,” said Harris. The competing bidders will be fewer this time, which reduces the risk for investors.
“The ability for them to pay too much has gone down quite dramatically,” he said.
George Cope, BCE’s chief executive officer, told analysts last week he doesn’t want to see anyone bidding for airwaves without serious plans to use them.
“We just don’t want to have spectrum not going anywhere and not deployed, and we’ve just seen that happen already,” he said.
Shaw, a Calgary-based cable provider, spent about C$190 million on wireless spectrum in the last Canadian government auction in 2008 before canceling plans to build a mobile-phone business in 2011. Last month, in a sign of how valuable that spectrum had become, Rogers CEO Nadir Mohamed agreed to spend C$300 million for those airwaves to meet what he called an “explosion in terms of usage” of smartphones.
Toronto-based Rogers is expected to report a fourth-quarter profit of 72 cents a share, with sales little changed from a year earlier at C$3.19 billion, according to a Bloomberg survey of analysts. Vancouver-based Telus, which also reports tomorrow, will probably deliver a profit of 87 cents a share and say revenue grew 4.7 percent to C$2.82 billion, the survey showed.
BCE has climbed 13 percent in the past year before dividends, as Rogers climbed 22 percent and Telus gained 19 percent. BCE fell 0.4 percent to C$44.34 at the close in Toronto today, Rogers slipped 0.5 percent at C$45.47 while Telus was little changed at C$66.78.
The Canadian government reserved spectrum for new carriers in the last auction to spur competition. More than five new companies bought airwaves. This time, the stiffest bidding will be among the incumbents and deeper-pocketed Quebecor Inc., not the newest players -- Mobilicity, Wind Mobile and Public Mobile -- which either don’t have the money or the desire to bid heavily, said Ghose.
“Only the incumbents are well-positioned to buy new spectrum from a capital perspective,” he said.
The 2008 auction netted the government C$4.25 billion in revenue. Rogers spent C$999 million on airwaves, Telus C$880 million and BCE made an outlay of C$741 million. Wind’s parent company spent C$442 million, Quebecor shelled out C$554 million and Shaw C$190 million.
Shaw never entered the wireless market. Wind Mobile founder Anthony Lacavera last month transferred his stake in the carrier to its original backer Orascom Telecom Holding SAE. Naguib Sawiris, an Egyptian billionaire who was Orascom’s former CEO, has said he “totally” regrets his decision to invest in Canada. Quebecor’s Videotron wireless unit, Mobilicity, Wind Mobile and Public Mobile accounted for 6 percent of the market by subscriber at the end of last year, according to the SeaBoard Group.
The government’s attempts to stimulate competition have been less than successful even if it’s premature to label them a failure, said Canaccord’s Ghose. While the 700-mhz airwaves should be more expensive given their growing strategic importance, the lack of competition may mean BCE, Rogers and Telus pay less this time around with the auction netting closer to C$2 billion overall, he said.
“Ironically, per megahertz valuations may be lower simply because of supply and demand,” said Ghose.