Shorts on Telus, BCE Jump Before Spectrum Sale

Bets against Canada’s three biggest wireless carriers have surged ahead of a deadline for the country’s spectrum auction that may include interest from foreign carriers such as AT&T Inc. and Telenor ASA.

Short positions in BCE Inc. last week jumped to the highest since February, and in Telus Corp. the most since April, according to data compiled by Bloomberg and financial-services firm Markit. Bets against Rogers Communications Inc. increased two weeks ago by a third before declining. Short-sellers aim to profit by borrowing shares, expecting the price to fall, then rebuying them at a lower price and pocketing the difference.

“These stocks are not expensive, so that’s not why they’re shorting them,” said Paul Harris, a partner at Avenue Investment Management in Toronto, which manages about C$300 million ($290 million), including shares of Telus and BCE. “People feel uncomfortable that somebody may just come in.”

The Canadian government has spent years trying to foster greater competition in the country’s mobile-phone industry and is preparing to take its next step by limiting how much spectrum BCE, Telus and Rogers can bid on starting in a Jan. 14 auction. The auction may yield as much as C$8 billion, and the country’s biggest carriers will probably pay more than they did in a 2008 airwave sale, according to Bloomberg Industries.

Growth Opportunities

AT&T, Telenor and Vodafone Group Plc have all looked at bidding for spectrum in the auction, BNN reported Sept. 12, citing people close to the situation, sending the stocks of BCE, Telus and Rogers lower. Verizon Communications Inc. said Sept. 3 it wouldn’t enter Canada after saying it was exploring the idea earlier in the summer. Companies that want to bid must submit deposits by tomorrow, and the list of participants will be released Sept. 23.

The number of shares shorted on BCE climbed to 38.74 million on Sept. 11, or 5 percent of the shares outstanding. Telus shorts stood at 16.77 million, or 2.6 percent of the total. Bets against Rogers were at 30.5 million, or 7.6 percent of the total Rogers shares outstanding.

“We wouldn’t be surprised if AT&T is evaluating participating in the spectrum auction as the company looks for international growth opportunities in an environment of potentially slowing growth in the U.S.,” Barclays Capital Inc. analyst Amir Rozwadowski said in a research note Sept. 13.

There’s a reasonable chance a foreign carrier will put down the C$8 million refundable deposit for a license covering the entire country, even if they don’t aggressively bid for airwaves when the auction begins, said Greg MacDonald, an analyst at Macquarie Capital Markets in Toronto.

Surprise Applicant

“You could get a surprise foreign applicant showing up,” said MacDonald. “The stocks are reasonably attractive on valuation right now, but I would still be hesitant to be buying them,” he said of Canadian wireless providers.

AT&T and Vodafone Group are both plausible bidders, said Dvai Ghose, an analyst at Canaccord Genuity Corp. in Toronto.

Ben Padovan, a spokesman for Vodafone, Meera Bhatia, a spokeswoman for Telenor, and AT&T’s Brad Burns all declined to comment on whether the companies had any interest in airwaves in Canada. Executives from Rogers, BCE and Telus have all said they intend to bid.

Verizon’s interest in Canada triggered a national lobbying campaign by BCE, Rogers and Telus to change the auction rules. The incumbents are restricted to bidding for just one of four prime blocks in each region of the country while smaller players and foreign companies are able to bid for up to two.

Prize Spectrum

BCE, Rogers and Telus say they need the 700-megahertz airwaves for their ability to transmit signals in densely-packed cities. Industry Minister James Moore has rejected the calls from the carriers, saying the government wants to promote competition and lower prices.

It’s unlikely such carriers will make serious bids, after watching Verizon put its expansion ambitions on hold, said Ghose. “You have to persuade your CEO and your board why, now that Verizon has passed, you shouldn’t pass,” he said.

Avenue Investment’s Harris said he doesn’t think a foreign carrier will bid as it doesn’t make good business sense given carriers would have to compete with the incumbent’s bundled offerings of phone, Internet and digital television.

Wind Mobile

“If they looked at the numbers, they’d see it’s pretty hard to compete with Bell, Telus and Rogers,” said Harris. The three together control about 90 percent of the market, according to research firm the Seaboard Group in Toronto. For Newbury, England-based Vodafone, pushing deeper into Europe where they have a strong presence already or expanding into high growth Asian and African markets “is more logical than coming into a big country like Canada with a small population,” he said.

Accelero Capital Holdings, the Paris-based investment firm co-founded by Egyptian telecommunications billionaire Naguib Sawiris, won’t bid in the auction, the company said in an e-mail on Sept. 13. Sawiris was the original backer of Wind Mobile, the largest of the three Ontario-based new entrants, and had earlier this year expressed interest in buying Wind outright, a person with direct knowledge of the plan said in May. Accelero agreed to buy Manitoba Telecom Services Inc.’s Allstream business-services unit for C$520 million.

“Accelero is not currently participating in a bidding process to acquire Wind or Mobilicity and is totally focused on closing the Allstream deal,” the company said.

Rogers was little changed at C$43.26 at 11:45 a.m. in Toronto, BCE climbed 0.3 percent to C$43.47 and Telus advanced 0.2 percent to C$33.47.

Alexandra Maxwell, a spokeswoman for Toronto-based Wind, declined to comment.

Bid Dynamics

The spectrum being auctioned aligns with frequencies used in the U.S. by AT&T and Verizon, which would allow Canadian carriers to purchase equipment and offer products compatible with the systems of the U.S. companies.

Two of the four prime blocks are aligned with AT&T’s spectrum, while the other two are aligned with Verizon’s U.S. holdings. Rogers is probably targeting the blocks aligned with AT&T, while BCE and Telus likely have their sights on the Verizon spectrum, MacDonald said.

“If a foreign carrier is in, it changes all the bidding strategy dynamics,” he said by phone. “The incumbents have to bid more aggressively.”

Verizon had said June 17 it was interested in buying Wind to gain a foothold in Canada. Now that Verizon is no longer interested in expanding north, it’s unclear who might buy Wind or Mobilicity, another small Toronto-based carrier, said Tim Casey, an analyst at BMO Capital Markets.

Sheryl Steinberg, a spokeswoman for Mobilicity, declined to comment.

Spectrum Transfer

The government in June blocked Telus’s purchase of cash-strapped Mobilicity until a moratorium on the sale of airwaves auctioned in 2008 expires next year.

“I don’t know who’s going to roll up Mobilicity and Wind in time to bid for further spectrum or who’s going to take a flyer on bidding for spectrum, then roll up Mobilicity and Wind,” said Casey.

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