The Canadian wireless market has seen a run-up in stock prices this year as tremendous growth and recent consolidation activity have driven increased interest in the sector.
“1998 was not a bad year, but it was a little wishy-washy,” said George Karidis, director of research and consulting with the Yankee Group in Toronto. “Now we’re seeing huge growth numbers along with consolidation, [third-generation services] and wireless data coming around the corner. All are coming together to say there is an opportunity in wireless.”
Gregory Lundberg, associate director with Bear, Stearns & Co. Inc., expects Canada’s carriers to support 6.7 million subscribers by the end of the year, compared with 1998’s figure of 5.3 million. Penetration already has exceeded 20.6 percent. Aggressive pricing, prepaid service and better network coverage clearly are driving the growth this year, according to analysts.
The entire Canadian telecommunications market has experienced a swirl of merger-and-acquisition activity, setting the groundwork for wireless consolidation, said analysts.
One deal that analysts expect will have a significant impact on the wireless industry is the merger of two Canadian incumbent local exchange carriers, BC Tel and Telus, whose businesses will create a large western company that plans to provide national telecommunications services. BC Tel and Telus both have regional wireless systems and were part of Mobility Canada, a partnership of the regional independent LECs’ wireless systems that together provided a national wireless footprint. Their merger breaks up Mobility Canada and sets the stage for regional companies to merge and acquire spectrum to obtain a nationwide footprint. Bell Canada, another regional operator that privately purchased all of its wireless subsidiary, BCE Mobile, also announced plans to pursue a nationwide strategy.
Industry Canada, the government body that regulates telecommunications in the country, earlier this month lifted the spectrum cap from 40 megahertz to 55 megahertz and announced plans to license new personal communications services spectrum, which it will auction next fall. It’s unclear whether new entrants will be allowed to bid for the 40 megahertz of new PCS spectrum. Industry Canada is soliciting comments from the industry.
Industry Canada’s decisions bode well for the regional operators, which now have more freedom to acquire spectrum from existing operators and at auction to pursue their own national wireless strategies.
The spectrum-cap increase left a poor impression on investors, however. Canadian wireless stocks fell after the government made its announcement. Investors were hoping either Bell Canada or Telus would make a play for nationwide PCS operator Clearnet Communications Inc. But the new spectrum cap, reasoned investors, was still too low for a merger. Executives at Bell Canada and Telus also have indicated they wouldn’t pursue a merger with Clearnet in the near term.
“Industry Canada’s announcements make it even more unlikely that Clearnet is a takeover target,” said Lundberg. “The new cap does not even permit a clear, outright acquisition since an incumbent would have to dispose of 10 megahertz of in-region spectrum.”
But the wireless market is ripe for foreign investment. Although the Canadian government today limits foreign ownership to 33.33 percent, analysts are confident the country will lift this rule soon.
AT&T Corp. recently took a stake in Canadian landline operator MetroNet and structured the deal in a way that gives AT&T a 31-percent stake today, but also calls for a four-year call option on the remaining MetroNet shares.
“This creative structure is a bet that the Canadian government relaxes its foreign-ownership restrictions, and we would not be surprised to see this strategy carried out by other entities interested in Canadian telecommunications companies,” said Lundberg.
The Canadian government “has been pretty lenient in terms of ownership structures and control,” said Karidis. “There is precedent to suggest foreign ownership rules are a non-issue in Canada.”
Analysts expect an increased ownership stake from AT&T and BT in nationwide operator Rogers Cantel, which sold a 33-percent stake to the two companies earlier this year. Nextel Communications Inc. already holds a 10-percent stake in Clearnet, which operates both a Code Division Multiple Access network and an integrated Digital Enhanced Network system.
Karidis doesn’t rule out an MCI WorldCom Inc. play for Clearnet, which operates a nationwide CDMA system. MCI WorldCom plans to merge with Sprint Corp., which operates a nationwide CDMA system in the United States.
“Anyone operating in North America has to see Canada as an element of the North American strategy,” said Karidis.
