Too high cost of capital result of current foreign ownership rules, committee hears

Canada’s two new entrant wireless players told members of a Parliamentary committee studying the foreign investment restrictions in the telecom sector that unless they recommend to the minister of Industry that the limits be eliminated, the long-term viability of competitive telecom providers is at risk. The House of Commons Standing Committee on Industry, Science and Technology began hearings on potentially changing current foreign ownership rules in telecom last week. Top bureaucrats from Industry Canada, along with representatives from Rogers Wireless Inc., Microcell Telecommunications Inc. and Ericsson Canada, presented their cases during the first two days of hearings. While the department illustrated the negative impact current investment restrictions have had on the Canadian economy, it didn’t make any specific recommendation to the committee. Rogers and Microcell, on the other hand, didn’t pull any punches and called on the committee to recommend an elimination of foreign ownership limits. Not surprisingly, both companies pulled out the cost of capital card. In his presentation, André Tremblay, Microcell’s chief executive, noted that current rules have created a two-tier regime of access to capital: one for the incumbents and one for the new entrants. To highlight the cost of capital issue, he compared the cost of capital figures of incumbent provider Bell Canada and competitive provider GT Group Telecom. He noted that Bell could borrow the money at 6.3% compared to GT’s quoted rate of about 20%. If both companies wanted to raise $1 billion, GT would have to bear $140 million more in financing costs annually. Speaking on behalf of Rogers Wireless, president of strategic relations Francis Fox highlighted the significant capital expenditures the company has made to expand and improve its network. Since 1999, Rogers has invested more than $2 billion in network upgrades and plans to spend approximately $425 million this year. Fox said the removal of foreign ownership limits would allow the company to raise equity at an affordable price and become less reliant on debt financing. To clarify the cost of capital issue in response to a question from Alliance MP James Rajotte, Tremblay explained that the problem is the result of a couple of factors. One, he said, is that the company can’t always go out and raise equity because the current limits prohibit the issuing of voting shares over the 20% limit to non-Canadians. Another is that new entrants are riskier ventures, which drives up the cost of borrowing money and large investment pools generally allocate a much smaller portion of the overall pool to new entrant operators. "The fact that we don’t have enough equity is by itself an impediment for us to raise debt at an affordable price. So it increases the risks. It increases the leverage on the company and in fact it’s creating a situation where the total structure of capital will be more costly," Tremblay told committee members. "What we can’t afford is a cost of capital which is two, three or four times more than the rest of the crowd, because it’s requiring capital every year. You need to grow the network. You need to invest in product development. You need to invest in customer growth." Tremblay said capital will not always come from financial investors, noting that strategic investors are another investment vehicle for the company. "The other thing is when we speak about external funds, if you look for long-term funds in an industry like wireless, you will very often hit strategic investors, not strictly financial investors, but strategic investors that will go for the long term," Tremblay reiterated. Fox told the committee that all competitive providers are at a disadvantage against the incumbents not only because they enjoy a quasi-monopoly in the local access market, but also due to financial circumstances. "We’re all at a disadvantage towards the telcos. (They) get better rates in the marketplace, somewhere between 300 and 400 basis points better than we do," he said. "What we’d like to see is a sustainable competitive model, but to have such a model you have to have access to a pool of funds at the best possible price," Fox added. "We think that lifting the foreign ownership restrictions means we’ll have larger access to funds and would probably decrease, by at least 100 basis points, the cost of debt funding for us. It would also be easier to issue equity in that type of context." Ericsson Canada chair Lionel Hurtubise summed up the need to change the current rules in his presentation to the committee. Canadian carriers need to continue to invest to keep their networks and service at the leading edge, he stated, adding that contrary to popular belief the more open the rules are the more home-grown development there will be.

Too high cost of capital result of current foreign ownership rules, committee hears

News | February 4, 2003

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