Auction 2014 — What to expect

The long-anticipated 700 MHz spectrum auction begins Tuesday, Jan 14. Among the rules set out by Industry Canada, each of the three incumbents, Rogers Communications Inc., Telus Corp. and BCE Inc., are each only allowed to acquire one of the four prime blocks of spectrum in each of 14 designated regions across the country, which leaves at least one block open to another bidder. There are three other blocks of spectrum available nationally that are considered less functional and, while they could be of use in certain circumstances, are expected be less sought after and, as a consequence, go for less money than the prime blocks. The following are edited excerpts from interviews The Wire Report conducted with telecommunications industry analysts in the days leading up to this auction. Here’s what they said about the following aspects of the auction: The most important part of the auction: Dvai Ghose, Canaccord Genuity “I think the most important thing is: Will anyone, and if so who, buy the fourth prime block in B.C., Alberta and, of course, Ontario? Because as far as Quebec’s concerned, one assumes that each incumbent is only allowed to buy one , Quebecor will get the fourth. One assumes the same is the case in Manitoba and Saskatchewan with their relative regional companies , and for that matter in much of Atlantic Canada .” Troy Crandall, MacDougall, MacDougall & MacTier “The funny thing is, the most important thing to happen in this auction probably happened over the course of the summer, and that was surrounding the potential entry of Verizon or another foreign entrant. That was really what would’ve been the most exciting, I guess one could say — not necessarily for the telecoms or the big three, the best outcome — but that would’ve been one of the most exciting elements going into the auction, for sure. … So we know there’s not going to be a well-funded, new foreign entrant coming in which could put pressure on the big three to increase the spending on the 700 wireless spectrum allocations. So to me, the most interesting part is already behind us.” Tim Casey, BMO Capital Markets “I think the most significant happening was last September when the eligible bidders came out and there was no big strategic or well-financed entity on it. And then since that initial list, the list has become even shorter as some of the marginal players have dropped off. There’s nobody on that list that’s — for lack of a better word — disruptive, in and of themselves.” How much money will be spent: Kevin Krishnaratne, National Bank Financial “We’re looking for incumbents to spend around $700 million . …. I know when we came up with our assumptions this assumed that you’d have a foreign carrier in there, potentially, doing some bidding up. So I think the lack of a foreign bidder, and then on top of that the fact that you’ve got dropped out of the bidding process, it’s probably less pressure than was previously anticipated. So, if anything … maybe the amount that’s going to be spent is going to be a little bit less. “It was always expected to be less than the $4.25 , but now it’s likely going to be even lower than that because there’s just less players. Less players to begin with, less spectrum to begin with, and since then you’ve had players dropping out and then you’ve had just a lack of interest from foreign entities.” Ghose “We’ve gone out about $500 million per carrier . … Maybe it’s too high because there’s more than one prime block per carrier and each incumbent is only allowed to buy one. “Last time around in 2008, I published $1.5 billion as my estimate and I had investors laughing at me, saying there’s no way it’s going to be more than $1 billion. As you know, it was $4.3 . This time around, we’re thinking that the whole auction is going to be $2 billion or less. “I think the guy who’s in a difficult position versus his peers — although I think are in a better position than the new entrants — is Rogers because they don’t have a spectrum-sharing partner. The good news with Bell and Telus is they share spectrum. … I think, in general, Rogers will spend more. … I think Rogers will spend a lot less than $1 billion . “I don’t think this is going to be an aggressive auction. … There was a lot more spectrum last time around; there was 100 MHz. This time, there’s only 50 MHz or so. But at the same time, it’s much better spectrum, right? … So what we’ve published is a price per MHz of about $1.50, which is in line with the last auction. So some might say, ‘That’s ludicrous. You’re telling me a Rolls-Royce is just as expensive as a Toyota?” And I’m saying, yeah; people bid up too much for the Toyota last time around.” Crandall “Analysts are a terrible group to ask because we were off by about three times . … I didn’t predict as much as it was. I don’t have the exact number, but I can tell you it wasn’t as much as the $4 billion that they raised. … Generally, I think the market or the Street’s looking for around $2.4 billion to be raised. Roughly, anywhere from $700 million to $800 million will be spent by each of the big three, and then you’ve got probably about $160 million for Videotron. “Probably Rogers at the high end of the three , Telus at the low end of the three and Bell probably in-between. Rogers doesn’t have a sharing agreement . Bell and Telus share.” What Wind Mobile will do: Ghose “ may be the only independent in the auction. Public Mobile is obviously now Telus Public Mobile , and Mobilicity is under CCAA and hasn’t even applied for the auction. So Wind could buy on a default basis because each incumbent can only buy one, and they may get it for the reserve price. The reserve price is still a couple hundred million bucks for all those licences, which may not seem like very much, but does VimpelCom really want to put more money into this asset, because we don’t see any other sources of financing that are obvious?” Crandall “The interesting thing for me to watch will be: What will Wind do? We know they want to buy new spectrum. … The question is: Are they going to concentrate where they already have a presence, which would be Ontario westward? Or are they going to continue to try to make themselves a national wireless company, which means: Are they going to be aggressive in Quebec, where they don’t have any spectrum right now? Are they going to go up against Videotron and be willing to put a lot of money there just to get some spectrum? And at the same time in the East … they do currently have some spectrum there; it’s just they haven’t done anything with it. … I would expect Eastlink would probably be aggressive in acquiring spectrum there too, but at the same time they may be even more aggressive because they would like to keep Wind out. “Given that capital is more limited, it probably would be a more efficient use of capital to both deepen and increase both the depth of their spectrum and the breadth of their spectrum in the areas where they already have a presence and brand recognition . “Wind’s kind of the wild card and it’s the one everyone’s really watching to see what they’ll do and how much capital they’ve got behind them.” Casey “The unknown is what happens to Wind. … They’ll bid we don’t know who is going to be the ultimate owner of Wind. Who is going to finance the consolidation of Wind/Mobilicity? That is the question. … It’s not a destabilizing entity like a Verizon.” The value of A block spectrum following T-Mobile USA’s $2.37-billion US purchase of A block spectrum from Verizon: Ghose “The A block was considered a rather shitty block until when T-Mobile it was going to buy that A block from Verizon. ... I think the nuances between the blocks are becoming less important. … The fact that T-Mobile seems to have some dough and is putting it behind I think makes it quite interesting. One of the issues with the A block was interference, but that seems to be sorted out.” Krishnaratne “There’s the A block which, looking at , obviously has some positive momentum behind it in terms of valuation. … There’s definitely going to be some more upside there but it’s still far lower than the value of the B and the C blocks.” Crandall “ is a little bit like the G block was in the AWS , the one that Public Mobile took up. At the time, the G block was basically backwater spectrum. … The characteristics were well suited for doing backhaul and things like that, and that’s what everybody thought it was going to be used for. And then Public Mobile kind of surprised everybody. … They were able to get that frequency on the cheap. … With technology improving and the ability to do different things with the frequencies now … I think you’re able to do more things with frequencies that previously were considered undesirable.” The implications of the auction on the Canadian wireless sector: Ghose “I think, if anything, it will solidify the fact that Canada is largely a three-player market with a few regionals who are relatively successful, like MTS and SaskTel, Quebecor is still a work in progress, the new entrants are finding it very tough, and unlike in 2008, where a number of new entrants bought spectrum, I’d be very surprised if you saw much new-entrant acquisition, with the exception of Quebecor and Eastlink, of course.” Crandall “I don’t know if it’s necessarily this auction , but obviously this auction is essential for it to happen. The fact that two of the new entrants, Public Mobile and Mobilicity, that those two are essentially in a way gone now, that, combined with the spectrum auction which will allow the remaining player to basically increase its depth and breadth of the network; the combination of those two factors will be, not a game changer, but change the landscape because I think this will enable Wind to actually develop a better network, which will in theory bring more subscribers, which also in theory will bring more capital, and it kind of becomes a bit of a nice cycle for them. And even the fact that there’s fewer competitors now may have in fact helped a bit on the capital side.” Casey “Our expectation is we come out of this auction with the industry structure more or less unchanged. Our expectation, as we highlighted, is we think will be a relatively benign event, given the nature of the bidders. Having said that, there’s always surprises in these auctions. In the past, the prices paid have always been higher that expected.” Krishnaratne “I don’t think anything changes as result of this auction, say when results are revealed in February. But what I do think is potentially still up for debate is whether a Verizon or an AT&T is interested , or another international carrier. Nothing stops a foreign carrier from coming in after the auction.” The auction’s unknown factors: Krishnaratne “I think the one province and companies to look at are maybe in Quebec. … Videotron actually can buy two of the prime blocks because it is not an incumbent carrier. … Does that province get competitive? We’re looking for $300 million for Quebecor to be spending there. … Maybe there’s some pressure there. … I think that’s the interesting province. “I’m curious to see, and I don’t know what Bitove’s strategy is with Feenix . I don’t know if he’s just going to buy spectrum through Feenix then flip it; I’m sure the government’s not going to allow things like that to happen. There’s obviously going to be another five-year moratorium, maybe longer.” Crandall “I guess Feenix Wireless will be kind of one to watch. We don’t really know what the deal is there. We don’t know what the game plan is or what John Bitove is thinking or what he’s got up his sleeve. That’ll be an interesting one … but I don’t expect it to be any kind of game changer or anything. “Novus , they’re the Vancouver-centric cable company, that might be something interesting to watch. … It’ll be interesting at least for those in the province of British Columbia, and more particularly in Vancouver. … They have landlines, cable and Internet, but they don’t have wireless. They’re basically like what Videotron was, just on a much, much smaller scale. … Are they going to proliferate throughout B.C., maybe move a bit into Alberta, maybe start stepping a bit on Telus’ toes, and, even to a certain extent, Wind’s?” — With reporting by Derek Abma at dabma@thewirereport.ca and editing by Anja Karadeglija at akarad@thewirereport.ca and Nicholas Kyonka at nkyonka@thewirereport.ca

Auction 2014 — What to expect

News | January 9, 2014

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