Analysts split on Verizon-Vodafone talks’ impact on Canadian market

Verizon Communications Inc. has resumed talks with Vodafone Group Plc to acquire a full stake in the companies’ joint wireless company in a move that industry analysts said could either assist or deter Verizon’s potential Canadian expansion. In a statement Thursday morning, U.K.-based Vodafone confirmed that the two companies have renewed negotiations for Verizon to acquire Vodafone’s 45-per cent stake in Verizon Wireless Inc., after the Wall Street Journal reported that the companies were discussing a deal that could be worth from $100 billion US to $130 billion. “Vodafone notes the recent press speculation and confirms that it is in discussions with Verizon Communications Inc. regarding the possible disposal of Vodafone's US group whose principal asset is its 45% interest in Verizon Wireless,” Vodafone said in a statement posted on its website. “There is no certainty that an agreement will be reached.” WSJ reported that Verizon—which has mulled a potential entry into Canada’s wireless market this summer—was in discussions with banks over “tens of billions of dollars in loans” needed to complete a deal with Vodafone, a sign that the talks were serious after sputtering in recent months. Scotia Capital analyst Jeff Fan said in a research note Thursday that any deal over Verizon Wireless would reduce the likelihood of Verizon entering Canada after a summer of intense speculation about the company’s Canadian intentions. Fan said he believes such a deal would cause Verizon to shift its spending priorities towards paying off its debt, which the company said was $49.8 billion US as of June 30. “This could mean less capital available for the Canadian opportunity,” Fan said, adding that he believes there is less than a 50-per cent chance Verizon will enter the Canadian market. “If it does enter, we believe it will be spectrum driven and the deployment will be cautious and limited.” Canaccord Genuity analyst Dvai Ghose said in a separate note Wednesday evening that if the negotiations were serious, the probability of Verizon entering the Canadian market “could decline significantly.” “e wonder if Verizon management would want to detract their focus on consummating a transaction with Vodafone by investing in Canada, especially as the opportunity in Canada is small for a behemoth like Verizon,” he said, adding that he too believes the company’s balance sheet would become a greater priority following any deal with Vodafone. “Some have argued consistently that Verizon’s purported interest in Canada may have just been a bargaining chip against Vodafone.” The Globe and Mail reported in June that Verizon had bid $700 million to acquire Canadian new entrant carrier Wind Mobile (which is controlled by Globalive Wireless Management Corp. while Amsterdam-based VimpelCom Ltd. has a non-controlling a 65 per cent equity share), and BNN reported in July that the company was also in talks to acquire Mobilicity (owned by Dave Wireless Inc.). Any deal to acquire one of Canada’s new entrant carriers seemed to have stalled earlier this month when Verizon told the new entrants that it would postpone any Canadian acquisitions until after Industry Canada’s auction of 700 MHz wireless spectrum, which is scheduled to start in January. RBC Capital Markets analyst Drew McReynolds estimated earlier this year that Verizon, if it entered Canada, would have to spend about $2 billion on spectrum licences and infrastructure to enter Canada. Macquarie Capital estimated in July that the purchase price for new entrants Wind, Mobilicity and Public Mobile Inc. would be about $1 billion combined, with an assumption that the minimum price for Wind would be $700 million. Verizon said in a July earnings statement that it spent $7.6 billion US on capital expenditures in the first half of 2013, and added $9.5 billion to its free cash flow in the period. It said at the time that Verizon Wireless had 100 million retail subscribers in the U.S. and recorded $20 billion US in second-quarter revenues, including $16.4 billion in retail service revenues. Canada’s mobile providers recorded a combined $19.1 billion in wireless revenues in 2011, according to CRTC data released last September. Macquarie Capitals analyst Kevin Smithen said in a research note Thursday that a deal with Vodafone could make it easier for Verizon to enter the Canadian market because it would give the company full control over the wireless subsidiary’s free cash flow and board of directors. A deal would also clear Verizon Wireless to expand into Canada by allowing Verizon to remove restrictions limiting the joint venture to the U.S. market. “This is one of the hurdles some investors have been pointing to in ascribing lower probabilities of a VZ Canada deal,” he said. Smithen added that Greg MacDonald, Macquarie’s Canadian telecom analyst, “maintains that there is a +75% probability that Verizon will enter Canada.” Industry analysts speculated earlier this month that Verizon will take part in Industry Canada’s 700 MHz spectrum auction next year, and will base its decision about entering the market on the cost of acquiring Canadian spectrum that lines up with its U.S. operations. The deadline for applications and initial deposits to take part in that auction is Sept. 17, after which companies that submit applications are prohibited from engaging in merger or acquisition talks with each other until after the auction. BMO Capital Markets analyst Tim Casey said in a note Thursday that he believes Verizon will apply to take part in the Canadian auction, regardless of whether it reaches a deal to acquire the rest of Verizon Wireless. “Given the sheer size of its wireless unit … Verizon would appear to have the financial scale to pursue both opportunities,” he wrote. “We expect Verizon will submit an initial deposit (which is refundable) to participate in the upcoming 700 MHz spectrum auction.” Incumbent Canadian carriers BCE Inc., Rogers Communications Inc. and Telus Corp. have launched public relations campaigns this summer that aim to change Industry Canada rules limiting them to a single block of “prime” spectrum in the upcoming 700 MHz spectrum auction while allowing other players, including Verizon, to acquire two out of four prime blocks in each region of the country. Bell said in a release Thursday that reports of Verizon’s interest in acquiring Vodafone’s stake in Verizon Wireless support the companies’ calls to change the auction rules to ensure the U.S. company does not benefit from favourable auction conditions. “ company like Verizon with the scale to consider an acquisition of approximately US$130 billion dollars does not need any handouts from Ottawa to compete in the Canadian wireless market,” Bell said. Prime Minister Stephen Harper told reporters in Toronto Thursday that the government’s wireless policies do not favour any company in particular, and are designed to increase competition in the wireless market. He said the incumbent carriers were trying to “protect their bottom line” and that it was up to the government to clear up any “misinformation” Canadian consumers are being told about the auction rules. “The reality of the situation here is there’s no special rule or special loopholes for foreign companies,” Harper said in response to a reporter’s question. “There are rules that assist all new entrants, whether they be Canadian or foreign, to enter the marketplace and provide competition that will be in the interests of Canadian consumers.” Verizon spokesman Bob Varettoni said in an emailed statement Thursday that the company is not commenting on media reports that it has renewed negotiations with Vodafone, or “on further speculation regarding Canada.” —With reporting by Nicholas Kyonka at nkyonka@thewirereport.caand editing by Anja Karadeglija at akarad@thewirereport.ca

Analysts split on Verizon-Vodafone talks’ impact on Canadian market

News | August 29, 2013

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Analysts split on Verizon-Vodafone talks’ impact on Canadian market

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