Verizon would lack towers, backhaul, ‘quad play,’ Rogers says

Verizon Communications Inc.'s entry into the Canadian wireless market would be disadvantaged by a lack of towers, backhaul and a “quad play” offering, said Anthony Staffieri, executive vice-president and chief financial officer at Rogers Communications Inc. “When we run our models, we really find it hard to believe that a fourth facilities-based carrier, that there’s room to have a fourth having adequate returns, especially for a carrier that doesn’t have backhaul services in Canada,” Staffieri said Wednesday during a webcast of the TD Securities Telecom & Media Forum conference in Toronto. “e just look at the economics and we don’t see it, notwithstanding Industry ’s position that they’d like to see a fourth player in the marketplace. We just don’t think the economics today bear that out,” he said. Staffieri was responding to a question about a report in The Globe and Mail Wednesday that said U.S. wireless and TV service provider Verizon made an initial offer to buy Wind Mobile for about $700 million. The Globe and Mail, citing two anonymous people familiar with the situation, reported that Verizon also approached new entrant Mobilicity, operated by Dave Wireless Inc., about a possible purchase. Reuters also reported on the Verizon offer Wednesday, citing one person familiar with the issue, who said the U.S. company made a “tentative” offer last week to purchase Wind for $600 million to $800 million. Bob Varettoni, a spokesman for Verizon Communications, declined to comment on the reports. Staffieri said Rogers, like other Canadian telecommunications incumbents, would have the advantage of offering “quad play,” or bundled Internet, TV, wireless and home phone services. “We’ll continue to leverage our cable footprint where we have it and offer the quad play advantage. In our markets, we’re more and more the Internet experience consumers are looking for, to be seamless as you go from wireless to wireline and vice versa, whether you’re watching the football game on your TV and want to move it to a smartphone or vice versa. Being able to do that we think is going to be a good competitive advantage for us,” he said. Accelero Capital Holdings, a private equity firm owned by former Orascom Telecom Holding S.A.E. CEO Naguib Sawiris, has also partnered with Wind chief executive Anthony Lacavera on an offer for Wind, which The Wire Report reported in May was in the range of $500 to $700 million. Troy Crandall, a media and telecom analyst with MacDougall, MacDougall & MacTier, estimated in a previous interview that Wind Mobile's debt is between $500 million and $800 million. Orascom, owned by Amsterdam-based VimpelCom Ltd., has a majority, non-controlling equity stake in Wind. Industry Minister Christian Paradis is emphasizing his policy of ensuring four competing wireless players in each region of Canada as companies head into an auction of valuable 700 MHz wireless spectrum in September. Any consolidation among new entrants must happen before the auction period, due to auction rules that state registered bidders cannot consolidate or engage in merger talks. “With Industry Canada’s application deadline for the 700 MHz auction looming on Sept. 17 (postponed from June 11), purchases of Wind and Mobilicity are likely to materialize over coming weeks, as we await confirmation that Verizon will serve as the government’s White Knight or possibly Trojan Horse in its effort to stimulate sustainable competition from a fourth wireless carrier across Canada,” National Bank Financial analyst Adam Shine wrote in a research note to clients Wednesday. If Verizon purchased Wind and Mobilicity, Shine wrote, it would take on more than 850,000 wireless subscribers with low average revenue per user in the mid-$20s. “t would remain to be seen how Wind and Mobilicity’s cost-conscious subscribers will be served by Verizon who isn’t likely to be operating a deep discount uneconomical operation,” Shine said. Verizon could leverage its device purchasing power for greater scale and lower handset pricing, “let alone lower priced plans and deals on U.S. roaming,” he said. The possibility of Verizon moving into Canada may create pressure for the incumbents to cut costs, particularly through layoffs and potentially delays to rural rollouts of fourth-generation wireless services, Shine wrote. RBC Capital Markets analyst Drew McReynolds said in a research note Wednesday that the challenges for Verizon would “include securing wireless backhaul, building significantly more towers and increasing retail points of presence.” McReynolds—who in a note earlier this month estimated Verizon would have to spend about $2 billion in incremental capital on spectrum licences and infrastructure—said Wednesday he would expect the incumbents to respond with emphasis on service bundling and leveraging media assets, such as mobile TV services, to differentiate their wireless services. Staffieri said at the conference Wednesday that two major “ingredients” for Verizon would be spectrum and towers, and “probably I’d add the third is backhaul.” Dvai Ghose, an analyst with Canaccord Genuity, said in a note to clients Wednesday that Verizon, if it's serious, would have a good chance of success in Canada due to its brand recognition, potential for corporate customers, ability to provide U.S. roaming at no additional cost, leverage with device vendors, and its extensive base of call centres and billing systems in the United States. Following Industry Canada's decision last month to block Telus' $380-million purchase of new entrant Mobilicity, due to its spectrum licences designated for new players, Mobilicity debtholders will vote on a recapitalization plan on July 3. Verizon Wireless, a partnership between Verizon Communications and Vodafone Group Plc, has about 98.9 million subscribers, compared to Rogers' 9.4 million, Telus' 7.7 million, and Bell's 7.7 million. It was not clear Wednesday whether Verizon will enter Canada's 700 MHz spectrum auction. The company would need to acquire as many blocks of spectrum as possible if it plans to deploy a fourth-generation LTE network comparable to the one it has in the U.S. Verizon would aim to acquire one—or, if it is willing to try to outbid incumbents, even two—blocks of “prime” 700 MHz spectrum in key licence areas, most likely in the “upper C” band that it uses in the United States. Ghose wrote Wednesday that “there are only 4 prime 700 MHz spectrum blocks up for auction and Verizon could acquire two.” That would be negative for Rogers, which, unlike Bell and Telus, does not have a national spectrum-sharing agreement, he wrote. Verizon's participation in the auction could also harm Videotron, a Quebecor Media Inc. subsidiary, Ghose said. “We assume that Verizon would want to acquire 700 MHz in Quebec if it comes to Canada. Given that there are only 4 prime blocks in each region and Quebecor Media Inc. is much smaller than Verizon, BCE, RCI or TELUS, there is a real risk that Videotron would not be able to buy 700 MHz spectrum in Quebec,” Ghose said. Verizon may also want to acquire unused AWS spectrum from companies like Shaw Communications Inc. in Western Canada or Videotron Ltd. in the Toronto area, one telecom industry source said Wednesday on a background basis. Rogers has option agreements to purchase each of those spectrum licences from Shaw and Videotron, though the deals require Industry Canada approval and will be subject to the department’s new rules for spectrum transfers. Those rules, expected to be released this week, will restrict “undue” spectrum concentrations under one owner. Shawn Hall, a spokesman for incumbent wireless provider Telus Corp., said in an emailed statement the company does not shy away from competition, and “that won’t change if a US carrier opens shop in Canada.” He said the company will continue focusing on customer loyalty, infrastructure investment, and customer service. “We will continue to pursue that strategy, and are confident it will put us in a good position to take on any competition,” Hall said. On news of Verizon's offer for Wind, owned by Globalive Wireless Management Corp., the incumbents’ stock prices fell between 10 and 6 per cent from a day earlier. Bloomberg reported Wednesday that Telus Corp.'s stock price fell 11 per cent to $29.78; BCE Inc.'s 6.4 percent to $40.58, and Rogers 10 per cent to $41.25, before rising again by a few percentage points in the afternoon. —With reporting by Simon Doyle at sdoyle@thewirereport.ca and Nicholas Kyonka at nkyonka@thewirereport.ca and reporting and editing by Anja Karadeglija at akarad@thewirereport.ca

Verizon would lack towers, backhaul, ‘quad play,’ Rogers says

News | June 26, 2013

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