Four-carrier policy questioned following Verizon’s decision to skip Canada

The government’s objective for four major mobile providers may now rest on Egyptian investor Naguib Sawiris or other private equity firms after Verizon Communications Inc. said it will not enter the Canadian market. The Industry Department has said it wants to encourage more competition in the wireless sector to compete against incumbents BCE Inc., Rogers Communications Inc. and Telus Corp. Verizon, the leading U.S. wireless carrier, was thought to be a fourth major player in Canada after the Globe and Mail reported in June that the company was in talks to acquire new entrant player Wind Mobile to launch services north of the border. Verizon says that entry is now off the table, creating uncertainty around Industry Canada's four-carrier policy in the lead up to a Sept. 17 deadline for applications to take part in next year’s 700 MHz spectrum auction. Companies now have just a week and a half to announce new mergers or acquisitions before that deadline, after which bidders are prohibited from engaging in merger discussions. “It is quite unlikely another global telco such as AT&T will bid in the auction since it has no time to do the necessary due diligence,” Macquarie Capital analyst Greg MacDonald said in a research note Tuesday after after Verizon CEO Lowell McAdam said that the company was not coming to Canada. “This is very good news for incumbent telecoms.” New entrants Wind Mobile, Mobilicity (operated by Dave Wireless Inc.) and Public Mobile Inc., which now compete in urban centres in Ontario, Alberta, and British Columbia, have struggled to grow their customer bases since they entered the market following a 2008 spectrum auction. Each has said they are up for sale and have engaged in consolidation talks. MacDonald said Tuesday that a private equity firm “is now the most likely consolidator of new entrants,” adding that some firms have already invested in them or expressed an interest in doing so. Accelero Capital Holdings may hold the most long-term interest in the industry, MacDougall, MacDougall & MacTier analyst Troy Crandall said. Headed by former Wind Mobile backer Naguib Sawiris, Accelero reached a deal in May to acquire Manitoba Telecom Services Inc.’s Allstream division, which has a national fibre network that analysts said could be used to carry mobile traffic across the country. The Wire Report reported in April that Accelero was also teaming up with Wind’s chairman and CEO, Anthony Lacavera, to make a bid to acquire Wind (which is controlled by Lacavera’s Globalive Wireless Management Corp. while Amsterdam-based VimpelCom Ltd. has a non-controlling 65 per cent equity share). “You can’t rule out the fact that there’s still Sawiris out there,” Crandall said in a telephone interview. “Verizon’s gone, but what if Sawiris and Lavavera make a deal now and Sawiris owns the wireline assets of Allstream? There’s potential here.” Crandall said Wind has had funding issues in the past, and that Sawiris and Lacavera would be “somewhat limited” in the capital they can raise to buy Wind, other new entrants, and to take part in the auction. With Verizon out of the picture, he said, costs should come down since there will be fewer bidders for the new entrants and for 700 MHz spectrum licences. “I wouldn’t rule anything out if there’s still potential ,” he said. MacDonald estimated that the incumbents could save up to $1 billion each in the 700 MHz spectrum auction, scheduled to start in January, as they each acquire a single block of “prime” spectrum covering each region of the country. Thomvest Seed Capital Inc. is another equity firm that has expressed an interest in claiming a larger slice of Canada’s wireless market. Thomvest, owned by Peter Thomson of Canada’s Thomson family, said in June that it had teamed with New York-based Cartesian Capital Group LLC to acquire full control of Public Mobile and aimed to become “Canada’s fourth wireless player.” Bruce Kirby, Public Mobile’s vice-president of strategy and business development, said at the time that the company would engage in further consolidation talks with Wind and Mobilicity. The company has not spoken publicly on the issue since that time. Newton Glassman, head of Toronto-based equity firm Catalyst Capital Group Inc., told the Globe and Mail in May that he was also considering a plan to operate a wireless carrier that would compete with the incumbents. He said at the time that he supported the government’s four-carrier policy and had placed a bid to acquire Wind. Birch Hill Equity Partners Management Inc. also considered a potential bid for Wind last month, which would have included funding from Rogers, the Globe reported. Industry analysts said at the time that they were skeptical that the federal government would approve any deal for a new entrant that was financed by an incumbent. Pierre Schuurmans, a partner at Birch Hill, declined to comment on Tuesday when asked whether the firm was still interested in getting into the wireless industry. “We have a firm policy here that we don’t comment on any speculative investment opportunities, whether or not we’re looking at them,” he said. John Lawford, executive director of the Public Interest Advocacy Centre (PIAC), which had defended the government's wireless policies favouring more competition, said Verizon's decision not to expand is disappointing. “There's more to cracking open wireless competition in Canada than auction rules and very clear government support,” Lawford said in a phone interview. “I think we have start looking really hard at these guys ... competition-wise. They have been very aggressive in getting their point across, let's say, in a somewhat coordinated fashion,” he said, referring to the incumbents' public campaign for changes to the government's wireless policy. “It looks like they're too big to manage.” Lawford acknowledged that Prime Minister Stephen Harper has put his personal stamp on encouraging more competition in the wireless sector, and that the government probably wants to see that policy objective through before the next election in the fall of 2015. The question now, he said, is how the government may accomplish that. Wind Mobile could still be built up into a stronger fourth competitor if it purchases enough spectrum, Lawford said, but “building a company up from scratch like that is a lot of work.” He said a failure to increase competition will put additional pressure on the CRTC to regulate the wireless market through its wireless code, as well as possible roaming or even wireless pricing regulations. Several analysts said in research notes Tuesday that the government may impose new rules on the industry to help foster the growth of a strong fourth carrier in light of Verizon’s decision not to enter the market. Canaccord Genuity analyst Dvai Ghose said the government may have to alter the auction rules “due to lack of bidders.” Macquarie’s MacDonald said the government “will not roll over” on its four-carrier policy, and may consider regulating roaming agreements between wireless providers. Sébastien Gariépy, a spokesman for Minister Moore, said in an emailed statement Wednesday that the government will not change its auction rules. “We are moving forward with the spectrum auction as planned,” he said. “The result of the auction will be positive for Canadian consumers, regardless of outcome, because the rules were designed with their interests up front.” Josh Blair, Telus’ chief corporate officer, said in a phone interview Tuesday that Telus was “totally neutral” on Verizon’s decision not to enter the market. “Our issue was never with Verizon coming into Canada,” he said of the company’s summer-long campaign. “Our core issue is fair access to spectrum.” McAdam said in an interview with Bloomberg on Monday that Verizon’s decision not to enter the Canadian market was unrelated to its decision to acquire full control of its Verizon Wireless subsidiary from its partner Vodafone Group Plc for approximately $130 billion US. “I just have to say that the press made a lot more of our interest in Canada than there was on the fourth floor of Basking Ridge,” McAdam added in a follow-up conference call with analysts on Tuesday, referring to Verizon's head office in New Jersey. “So, we never really seriously looked at this. I mean, we looked at it, but we never seriously considered the move. And it’s off the table at this point.” Michael Geist, the Canada research chair in Internet and e-commerce law at the University of Ottawa, told Yahoo! News Tuesday that Verizon's decision was a “major blow” to the government's plans to encourage the entry of a fourth large competitor, and that the goal “won't happen in this auction or will require consolidation of a series of existing players. The government has set as its goal ‘more choice, lower prices, better service.' Meeting that goal will be an enormous challenge.” He said there were indications that Verizon was serious about expanding to Canada. He pointed to a letter from McAdam to Prime Minister Harper, published in the Toronto Star on Aug. 23, that defended Verizon against allegations from consumer advocate Ralph Nader. Nader, in an earlier letter to the Prime Minister's Office, also published in the Toronto Star, had urged the prime minister not to encourage Verizon's Canadian market entry because he said the company dodges taxes. Geist added that the Financial Post reported on Aug. 2, citing anonymous sources, that Verizon's board was meeting the following week with an agenda that included a possible approval of the purchase of Wind Mobile. “At a minimum, it suggests that they were more closely following what was taking place in Canada, far more than the quote today about 'Never seriously considering Canada,'” Geist said, referring to Verizon. He said the incumbents appeared to believe Verizon was serious about a Canadian expansion, given that the three companies spent millions of dollars and “expended enormous political capital” in a campaign against the government's wireless policy and auction rules favouring foreign entrants. —With reporting by Nicholas Kyonka at nkyonka@thewirereport.ca and files from and editing by Simon Doyle at sdoyle@thewirereport.ca

Four-carrier policy questioned following Verizon’s decision to skip Canada

News | September 3, 2013

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