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Death of BCE-Astral deal a 'wake-up call' to phone companies that consumers rule Add to ...

These are stories Report on Business is following Friday, Oct. 19, 2012.

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The morning after
A shock decision by Canada’s broadcast-telecom regulator to kill a huge merger serves as a warning to the country's phone companies that this is the age of the consumer.

The ruling late yesterday is a sign of the newly activist Canadian Radio-television and Telecommunications Commission, analysts say.

“This should be a wake-up call to all carriers,” said Dvai Ghose of CanaccordGenuity. “In our view, the regulatory environment has changed under the current Conservative government and consumer sentiment has become far more significant than in the past.”

To recap, the regulator, under its new chief Jean-Pierre Blais, rejected the $3.4-billion takeover of Astral Media Inc. by BCE Inc. on grounds that the latter would have too much power.

Astral shares plunged on the Toronto Stock Exchange today, while shares of BCE slipped.

BCE, one of Canada’s three big telecoms, is appealing to the federal cabinet, though a government spokesman said it could not intervene.

But as Mr. Ghose warned, “regulators are getting a lot more active in Canada, carriers should take note.”

He lauded Telus Corp., one of the other major carriers, for recently scrapping certain fees and, along with Shaw Communications Inc., offering “generous bandwidth caps.”

But he is concerned over the “relatively aggressive stance on hot issues such as bandwidth caps and hidden wireless fees” at BCE’s Bell Canada.

Analyst Adam Shine of National Bank Financial was scathing in his report today, saying the surprise ruling lacked “both effort and imagination.”

“The CRTC’s decision has been made, but we wonder if any real effort was put into finding a workable solution that would have entailed conditions and divestitures to actually cope with the concerns expressed by intervenors leading up to and during mid-September hearings,” Mr. Shine said in the research note.

“The commission noted that ‘safeguards to properly supervise this level of market power would be extensive and unduly burdensome.’ We’re confident that Bell would have been receptive to hearing what these should be, rather than having to propose its own list of remedies which has not historically been the burden of applicants in prior applications.”

The question now is whither BCE, and analysts are mixed. And whither Astral, and analysts cite confusion in the wake of the ruling.

BCE and Astral could try to rework the deal, Mr. Shine said, but “it may be that too much time, money and effort has already been put forward in recent months and that Bell may have come to the conclusion that its burden of proof is too high for a regulator that chose to rewrite the rules for this particular situation.”

Analysts are mixed on the outlook for BCE, though obviously it is less impacted by the ruling than is Astral.

Bank of Nova Scotia analyst Jeff Fan said the death of the deal compromises BCE’s dividend “growth strategy.” The deal would have funded a 5-per-cent increase in the dividend next year, he said, noting that “BCE was so confident about the Astral transaction and the support for the dividend that it pulled forward its dividend increase announcement to August.”

Analyst Drew McReynolds of RBC Dominion Securities, on the other hand, doesn’t see the ruling as a “strategic or financial game changer” for BCE. And he sees no threat to the dividend strategy.

“We believe Bell Media has sufficient scale as a media company to remain competitive without Astral, particularly given ownership of TSN and the 28-per-cent interest recently acquired in [Maple Leaf Sports and Entertainment],” he said.

CanaccordGenuity’s Mr. Ghose said this could actually be good for BCE, suggesting a “slight” hit to earnings per share but adding that, for several reasons, “we never understood the strategic rationale behind the deal.”

Astral is another matter altogether. There’s no obvious buyer now, and the CRTC has left an air of confusion.

“Assuming Bell moves on, we don’t see any other party stepping forward to bid on Astral in totality,” said National Bank’s Mr. Shine as he, and others, speculated the next step may be to sell it off in pieces.

“Other potential strategic buyers for Astral could include Rogers and Cogeco/Cogeco Cable (albeit the likelihood is uncertain),” said Mr. McReynolds of RBC.

“In the absence of another offer by a strategic player, we believe breaking up Astral and selling the pieces is a viable option for the company. In our view, Astral has one of the best asset mixes of any Canadian media company, and we see significant buying interest from both strategic and financial players for television, radio and outdoor assets.”

EU leaders fail to impress
European Union leaders have established a timeline for a new banking regulator but, as is oft the case, failed to impress investors at their latest summit.

They do now plan to have the new regulatory system in place soon, but, amid squabbling, failed to reach on a deal on bank recapitalization.

There’s also still no word on the crucial issue of when Spain may seek a full bailout.

“EU summits are such entertaining affairs,” said market analyst Chris Beauchamp of IG in London.

“ Whatever they’re discussing, we are almost always guaranteed a warm, encouraging communiqué that contains very little new information,” he said in a research note.

“Last night’s was a case in point – we have an agreement to put the groundwork for banking reform in place by the end of this year, but further work is still required before the body is up and running. As ever, the devil will be in the detail. It would have been too much to hope to get any news on Spain, either, so that question still remains the great unknown.”

As always, Brussels is Summit Central, and the roadmap for the banking reforms will now come in December.

"The tangible take-away from the summit is … another summit," said Derek Holt and Dov Zigler of Bank of Nova Scotia.

"The statement calls for 'a specific and time-bound roadmap to be presented at its December 2012 meeting, so that it can move ahead on all essential building blocks on which a genuine EMU should be based," they said.

"That means that a roadmap for a banking union is due in December, which is different from a banking union simply being due in December. The statement itself seems to negate the possibility that the [European Central Bank], using its existing mandate, can be declared the bank supervisor via bureaucratic and not legislative channels. It calls for legislative proposals which could then require subsequent national ratification. The statement does not confer the sense that the ECB is close to being declared bank regulator of Europe."

Inflation tame
Inflation in Canada remains tame, which is still great news for the Bank of Canada. But for motorists, not so much.

Canada’s annual inflation held steady at 1.2 per cent in September, Statistics Canada said, while on a monthly basis consumer prices rose 0.2 per cent from August.

The so-called core rate, which strips out volatile prices and helps guide the central bank, slipped to 1.3 per cent and was unchanged from August.

So, where central bank Governor Mark Carney is concerned, there’s nothing to see here, folks.

Of course, the rest of us are still seeing prices at the gas pump climb.

Gas prices were up 4.7 per cent on an annual basis, and electricity costs 6 per cent.

Car prices were down, as were food costs.

Against this benign inflation backdrop and with the economy growing at rates that are slightly shy of its potential, there is little pressure for the Bank of Canada to adjust the amount of policy stimulus in the near term," said assistant chief economist Dawn Desjardins of Royal Bank of Canada.

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