Verizon Looms Over Canadian Telecom Stocks

BCE Inc. and Telus Corp. beat profit and subscriber forecasts while shares of the wireless carriers languish near lows for the year. Verizon Communications Inc.’s potential plans for Canada explain why.

BCE and Telus yesterday reported profit, sales and subscriber gains that topped analysts’ estimates -- joining Rogers Communications Inc., which last month added more smartphone customers than forecasts. BCE, Canada’s biggest telecommunications company, also increased its estimate for full-year sales growth to account for its C$3 billion purchase of Quebec broadcaster Astral Media Inc.

After doubling between December 2008 and June 17, when reports that New York-based Verizon was interested in entering Canada surfaced, BCE dropped 5.3 percent through yesterday. Shares of Vancouver-based Telus and Toronto-based Rogers have both declined 12 percent since then.

The slump has pushed Telus’s price-to-earnings ratio down to 15 yesterday from 17 in the first quarter, BCE’s to 14 from 15, and Rogers to 11 from 15 over the same time frame. Verizon’s ratio, a measure of a stock’s affordability, stood at 20.

“The Verizon issue is overblown,” said Paul Harris, a partner at Avenue Investment Management in Toronto, which manages about C$300 million ($290 million) in assets, including shares of BCE and Rogers. If you look at the Canadian carriers’ numbers, “they’re going to continue to be really great cash cows. They’ve got great dividends.”

Dipping Toe

Verizon, whose market value of $142 billion is more than double that of BCE, Telus and Rogers combined, said in June it’s weighing a bid to buy Wind Mobile, the largest of three new Ontario-based carriers. Verizon Chief Financial Officer Fran Shammo described the possible bid as “just us dipping our toe in the water.”

Shares of Verizon, which runs the largest U.S. wireless carrier as a joint venture with Vodafone Group Plc., have dropped 2.7 percent since the first June 17 report of its Canadian interest.

BCE fell 0.3 percent to C$41.77 at 4 p.m in Toronto, Telus gained 1 percent to C$30.92 and Rogers Communications climbed 0.2 percent to C$40.73. Verizon slipped 0.6 percent to $49.32 in New York.

Shammo reiterated last month to analysts on a conference call that this was an “exploratory exercise for us.” Robert Varettoni, a spokeswoman for Verizon, said yesterday this is one of many business opportunities that the company is looking at, declining to comment further.

Four Carriers

Wind, Public Mobile and Mobilicity have all struggled to gain market share from their larger rivals, even after the Canadian government reserved wireless spectrum for them in 2008. An auction of fresh spectrum, critical to carriers’ ability to offer sufficient airwaves for data-hungry smartphone users, is scheduled for January.

The government in June blocked Telus’s bid to buy Mobilicity. James Moore, Canada’s new Industry Minister, said he would stick with the government’s pledge to foster four competitors in each region of the country.

Under current rules, foreigners can buy a Canadian carrier with less than 10 percent share of the wireless market, paving the way for Verizon to bid on the new spectrum.

“It’s very uncertain that Verizon is going to come in and the threat is sort of nebulous,” said David Cockfield, managing director of Northland Wealth Management in Toronto. Northland’s C$200 million in assets includes shares of BCE and Telus. For people who want steady dividend income, BCE represents a “good value,” he said.

‘About Fairness’

The chances of Verizon entering Canada are below 50 percent, “given the potential costs to enter the market and the small upside,” John Culver, an analyst with ratings company Fitch, said in a note yesterday.

BCE, Telus and Rogers have released statements, put ads in newspapers and are lobbying the federal government to close what they consider to be unfair loopholes originally designed for small new players that it says Verizon could exploit.

“There’s no question, it’s about fairness -- it’s also about spectrum,” John Gossling, Telus chief financial officer, said in a telephone interview yesterday. “Spectrum is the lifeblood of our industry and we need this spectrum for the next tranche of our growth.”

Patricia Trott, a spokeswoman for Rogers, said, “We believe there should be a fair and level playing field,” echoing comments by CEO Nadir Mohamed to analysts last month.

Active Dealmaker

BCE CEO George Cope said yesterday that Verizon cannot be allowed to buy Canadian carriers at a discount nor should it have preferred access to new spectrum.

“It’s very clear that Verizon does not need government handouts,” he said.

Cope has also been the most active dealmaker in Canada’s media and telecommunications landscape. His agreement to buy Astral was the latest in a series of acquisitions that transformed the company and triggered a broad multiyear rally in the stock -- until the Verizon announcement.

BCE remains the best stock among the three, said Cockfield, who plans to buy more shares in BCE on the strength of yesterday’s results.

“They have better management than they had previously and they’re showing a lot more entrepreneurial action,” he said.

The stocks could fall further if Verizon enters Canada, said Colin Moore, an analyst with Credit Suisse AG in Toronto.

“An actual commitment by Verizon would likely lead to further pressure and cause a long-term overhang on the sector,” he said.

Rogers remains Canada’s largest wireless operator, though it’s no longer adding more of the lucrative multiyear contract customers each quarter. Telus added 100,000 last quarter, BCE signed on 96,390, and Rogers gained 98,000. All three numbers were better than analysts had projected.

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