Telecoms can expect rough ride as industry braces for next wave of consolidation

It appears that another wave of consolidation is about to hit the telecom market, and it’s one that could put increased pressure on Industry Canada to lower or eliminate foreign ownership limits, an industry analyst predicts. A shakeout in the industry over the past year has seen several telecoms go into receivership, or be put up for sale. Others, particularly LD competitors, are still trying to find a way to reverse mounting losses. Much of the blame for the current difficulties can be laid on the faltering stock market, with one veteran watcher predicting dire results. "Telecommunications is no longer the hot thing to invest in and so the markets have moved on to other industries," explains Roberta Fox of Fox-Hoey Consulting Inc. "So any of the firms that are capital intensive, primarily the tier twos, will have a tough time. The ones that are needing capital will be challenged to survive." Fox-Hoey recently completed a white paper on the industry, which it will be releasing soon. Fox, president and senior partner of the company, expects major changes. "We definitely see the telecom industry restructuring," she predicts. "There will be consolidation and failures, particularly at the tier two level. Those guys are very dependent on the junk bond market."Jonathan Robinson of the National Bank agrees that the second tier will produce a commodity glut soon. He warns, however, that, "It’s very difficult to comment on the market with too broad a brush, even a single metropolitan market." "GT Group Telecom and Telus will probably become the industry consolidators," Fox suggests. She imagines AT&T Canada will be the next high-profile company available. "Depending on which numbers you read, they are losing any where from one million and 1.5 million a day and they’ll probably seek a merger or significantly retrench their operations. AT&T Corp may retreat from Canada." Her paper also hints that the government will alter the playing field. "The CRTC is getting a new mandate to be more of a watchdog role and less driving the telecom industry," she says. "We think that Industry Canada will go for more of a power grab and become the czars of telecom." Foreign ownership rules may be changed in near future One hindrance to raising capital on the money markets is the federal government’s foreign ownership restrictions. "It caused extra cost and it forced us to do some things from a corporate structuring point of view, which in turn led to extra cost," RSL Com Canada’s David Alsop told Network Letter last year. Fox concurs. "I really believe that the foreign investment rules will be really pushed during the next 12 to 18 months." Changes to the regulations would permit all telcos to raise more funding from outside Canada. Companies from Europe, Asia and the United States would line up at the door to get a piece of the Canadian pie. Until then, it will be up to Canadian firms to pick up the slack. Robinson believes that is still a likelihood. "Obviously Bell requires facilities on the west coast and Telus still requires facilities on the east coast," he notes. "But I think there are certain sellers out there with unreasonable price demands and the higher those demands, the more attractive the build versus buy equation becomes."

Telecoms can expect rough ride as industry braces for next wave of consolidation

News | February 26, 2001

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