A decision by Verizon Communications Inc. to delay expansion into Canada is adding new fuel to a campaign by large domestic carriers against Ottawa’s wireless policy.
The New York-based company is holding off on any commitment to the Canadian market until a federal auction of spectrum licences in January, The Globe and Mail reported Thursday. That means it is unlikely to pursue any deals in the near term with Wind Mobile and Mobilicity, two struggling smaller carriers with whom it had been in acquisition talks, sources say.
In theory, another acquirer could come along and scoop up the two companies. But the federal government has effectively banned the Big Three wireless companies – BCE Inc., Telus Corp. and Rogers Communications Inc. – from bidding for them, at least until 2014. That rule is one of three “loopholes” the major carriers are trying to get the government to change.
Verizon’s move “illustrates … the absurdity of loophole three, where a company just possibly waits for a while because there is nobody else to compete to buy a business,” BCE chief executive officer George Cope told The Globe, adding that his company would be eager to participate in a sale of Wind or Mobilicity, which own valuable spectrum, real estate and have nearly 900,000 subscribers between them.
The news Verizon may be cooling on Canada – earlier it made a $700-million preliminary offer for Wind – sent Canadian telecom stocks higher. Rogers jumped 5 per cent, Telus went up 4.8 per cent and BCE rose 1.7 per cent.
With Verizon potentially out of the running for Wind and Mobilicity over the near term, the future of Wind and Mobilicity remains in doubt. Wind’s foreign financial backers are eager to dispose of the business, while Mobilicity is bleeding cash as it struggles to find a buyer. Both also face a Sept. 17 deadline to apply for an upcoming spectrum auction – a move that would freeze any potential acquisition talks with other registered bidders.
Although Verizon’s move could signal the U.S. carrier is souring on Canada, it could also be a manoeuvre to conserve cash for the auction while driving down the price of Wind and Mobilicity. By delaying potential deals, Verizon is also guaranteeing that it would only face minimum build-out requirements for any 700 MHz spectrum that it does acquire.
Mr. Cope, however, said Verizon’s ability to tie up new-entrant assets indefinitely flies in the face of competition: “The idea that you could just maybe park the assets for a while and leave them because nobody else in Canada could buy them is a rather jerry-rigged structure.”
Greg MacDonald of Macquarie Capital Markets Canada Ltd. said he believes that Verizon is using a “negotiating tactic.”
“The benefit of this as a negotiating strategy is that Wind and in particular Mobilicity are currently being funded on negative free cash by motivated sellers, so time is on Verizon’s side. This is understated by the fact that as of the September 17 auction application deadline, negotiations are no longer allowed until after the auction is complete, which introduces real possibility that the new entrants will continue to bleed cash (and lose value) during this period,” Mr. MacDonald wrote.
When asked if he is concerned Verizon could seek new regulatory concessions, Mr. Cope said: “I am worried about everything at the moment.”
BCE also wants Ottawa to change rules that allow new entrant carriers, including large foreign telcos, to purchase more spectrum than domestic incumbents in the 700 MHz auction, while giving those newcomers the right to piggyback on existing network infrastructure – albeit at commercially-negotiated rates.
Still, the company has been telling analysts that it plans to bid aggressively for 700 MHz spectrum to ensure that Verizon gets squeezed out, one Bay Street source said.
“We just want to be equal to someone else who has not contributed anything to our country. Verizon came and left. When the going got tough in 2000, Verizon and AT&T and Sprint left Canada,” said Mr. Cope. BCE owns a 15-per-cent stake in The Globe and Mail.
When pressed on that point, he later added: “Those companies have been in our marketplace before and we had a capital markets meltdown in 2000; you all remember the tech bubble. And it was the Canadian companies that continued to invest in Canada, and the U.S. companies continued to invest, but in their domestic carriers.”