Verizon Canada Foray Would Deal Rogers and Telus Bigger Blow

Rogers Communications Inc. and Telus Corp. would be hardest hit among Canada’s main wireless carriers from Verizon Communications Inc.’s potential foray north while BCE Inc. may be better insulated by its broadcast and land-line moat.

A report yesterday that Verizon has made a bid for Toronto-based Wind Mobile has sent shares of Rogers and Telus tumbling for a second day and prompted downgrades to both stocks. Verizon, whose market value of $145.9 billion is more than double that of BCE, Rogers and Telus combined, last week confirmed it’s mulling an entry into Canada. It declined to comment on whether it has made an offer for Wind that would value it at C$700 million ($668 million) or that it started talks with Mobilicity, another new entrant.

BCE, which has spent close to C$8 billion in acquisitions in the past four years to expand into broadcasting, is less dependent on wireless profits than Toronto-based Rogers and has a more diversified business than Vancouver-based Telus. Earnings before interest, taxes, depreciation and amortization from mobile-phone businesses accounts for more than 60 percent of total profit at Rogers and Telus, while only 30 percent for Montreal-based Bell, according to Tim Casey, an analyst at BMO Capital Markets in Toronto.

“Of the large cap wireless companies, BCE has the lowest exposure to wireless on a relative basis,” Casey said in a note today. Casey downgraded Telus and Rogers to the equivalent of a hold and upgraded BCE to a buy.

Deep Pockets

Verizon’s interest in Canada comes weeks after Telus’s bid to buy Mobilicity, which bought wireless spectrum in 2008, was blocked by the Canadian government. Industry Minister Christian Paradis is leading the government’s charge to spur fresh competition for BCE, Telus and Rogers, who together control about 90 percent of the Canadian wireless market.

“The entry of Verizon into the Canadian wireless market would be the best-case scenario for the Industry Minister and the worst case scenario for the incumbent players,” Casey said. Verizon has “deep pockets, and considerable scale and expertise in the business.”

Other analysts agree that Rogers, the first carrier to offer the BlackBerry and then Apple Inc.’s iPhone in Canada, has the most to lose.

‘At Risk’

“Given Rogers’ higher-than-average exposure to wireless, we see Rogers as most at risk,” for subscriber losses, said Greg MacDonald, an analyst at Macquarie Capital Markets in Toronto.

Using a combination of prospective subscriber losses and roaming revenue decline, MacDonald estimates the arrival of Verizon could be worth C$4.25 a share to Rogers’ valuation, C$2.41 to Telus and C$2.20 to BCE.

Telus yesterday tumbled 8 percent in Toronto, its biggest drop since April 2009, as Rogers fell 9.2 percent, the steepest decline since October 2008. BCE fell by 4.1 percent yesterday and climbed 0.9 percent to C$41.96 today. Rogers dropped 3.2 percent today to C$40.35, while Telus fell 2.9 percent to C$29.82.

“Wireless service is already intensely competitive in Canada with three large national carriers and a few dozen regional and smaller carriers,” Shawn Hall, a spokesman for Telus, said in an e-mail. “Telus has never shied away from competition, and that won’t change if a U.S. carrier opens shop in Canada.”

‘More Spectrum’

Wind Mobile, Mobilicity and Public Mobile, the third of the three Ontario-based new entrants, have all struggled to make inroads against the big three. Wind sought a deal with Vimpelcom to give the Amsterdam-based carrier control of Wind before Vimpelcom withdrew its request for approval from Canadian regulators. Mobilicity’s rescue by Telus was blocked. Public Mobile successfully secured a deal this month to be acquired by a U.S. private equity firm and an investment firm linked to the billionaire Thomson family.

Spectrum rules designed to support new Canadian competitors would be unfair if it means “giving major U.S. carriers access to more spectrum and at a lower price than Canadian companies,” BCE said in an e-mail. “Bell is always ready to compete” but “favoring big foreign companies was clearly not the intention, and the government needs to address the issue as soon as possible.”

‘Competitive Environment’

“The Verizon story is speculation at the moment,” Patricia Trott, a Rogers spokeswoman, said today in an e-mail. “We’re watching with interest, like others. We already operate in an extremely competitive environment and know we have what it takes to succeed.”

Drew McReynolds, an analyst at RBC Capital Markets, today cut his rating on Rogers and Telus to the equivalent of a hold while questioning whether Verizon will move forward with a bid.

Based on conversations he said he’s had with executives at Verizon, McReynolds said in a note that Verizon is awaiting the Canadian government’s clarification on spectrum transfer rules and an auction of wireless airwaves expected in early 2014.

“While we continue to question whether the prize of entering Canada is worth the effort,” said McReynolds, “Verizon’s entering Canada would be a game changer.”

Before it's here, it's on the Bloomberg Terminal.