Rogers Wireless likely winner if Microcell fails to restructure and survive

Rogers Wireless Inc. will likely emerge as the big winner in the competitive Canadian wireless communications market if struggling operator Microcell Telecommunications Inc. fails to restructure, re-capitalize and ultimately survive, according to one telecommunications analyst. The Montreal-based wireless carrier is nearly at the end of the line, and the analyst says that Rogers is better positioned than either Bell Mobility or Telus Mobility to capitalize on Microcell’s failure. Dvai Ghose, a telecom analyst with CIBC World Markets, explains that there are a couple of reasons why Rogers is in a better position to profit from a Microcell failure than its two rivals. One is that Rogers operates a wireless network using the same GSM technology as Microcell. This leads into the next reason, which is that Rogers has an advantage over Bell and Telus in terms of being able to acquire Microcell’s subscribers at a lower cost. "We think they have something like a $100 to $150 per subscriber cost advantage of migrating the (customer) base because of the GSM common technology," Ghose tells Report on Wireless. Despite having to spend money to unlock the handset, he says the cost of acquisition for Rogers will be in the $300 to $400 range as opposed to the $500 to $600 range for Bell or Telus because it won’t have to subsidize a new handset for the incoming subscriber. Bell and Telus use CDMA technology thus rendering the handset subsidy irrelevant. While many telecommunications analysts have speculated for some time about Rogers courting Microcell for an acquisition, the Toronto-based operator has repeatedly said it is not interested in a transaction. Indeed, Rogers would not want to be saddled with Microcell’s $2-billion debt load, nor does it need Microcell for infrastructure as its network reach is far superior than that of Microcell. Microcell’s network covers about 60 per cent of the Canadian population, while Rogers is in the 90 per cent range. The same holds true for both Bell and Telus as they wouldn’t want the increased debt responsibility. It is more likely that all three carriers are banking on Microcell to close its doors to aggressively target its 1.2 million subscribers. Rogers has downplayed the unlocking of the handset scenario, saying that it’s too difficult and that it’s easier to just give out new handsets. Telus Mobility had to undertake such a process when it acquired Clearnet Communications Inc. a little more than two years ago (RoW, Sept. 5/00). Much of the upgrading was believed to have taken place remotely and over the air. In a September 2002 research brief, Ghose noted that in the event of a Microcell failure, each of the three remaining players would add more than $1 billion in value. Because Rogers could add Microcell’s former subscribers more cheaply than Bell or Telus, "we believe Rogers could actually add further incremental value – this is just from the loss of a competitor," he explains. Ghose admits that it’s not certain that Microcell will fail, but the likelihood of the company winning sufficient financing just to sustain operations is slim. The options for securing additional funding are finite, he says, and since foreign ownership restrictions are still in place the variables are even more limited. "So when all is said and done, I think it’s tough to (re-capitalize) and I’m not saying (Microcell) won’t, but I’m saying it’s a really challenging situation," he tells RoW. Microcell’s situation is unlike that of AT&T Canada Corp. and other companies in the telecommunications industry, which are generating enough operating cash flow to cover operating costs, Ghose says. "My problem with Microcell is that they’re not generating enough cash to cover (operating costs). Even with no debt, there’s a big gap and it’s not clear who’s going to bridge that funding gap." Ghose’s research brief details Microcell’s precarious financial position and it shows that the picture isn’t pretty. Ghose believes that the company will have about $25 million in cash at the end of this year with which to fund operations for the next year. The research brief estimates that Microcell will have a cash need of at least $50 to $75 million to fund next year’s ongoing operations if it is able to get rid of its entire debt load. Simple math shows that the struggling wireless operator will need approximately $25 to $50 million just to continue operations in 2003. Last week, Microcell announced that it has reduced its workforce by 6% or 149 employees as a cost-cutting measure. It also noted that it renegotiated the terms of a major contract with a vendor to avoid falling into default of terms and conditions of the contract (RoW Update, Dec. 16/02). Earlier this year, Microcell revealed that it may default on certain convenants, which could affect the company’s ability to operate as a going concern. In a move to evaluate all possible options, the wireless operator hired Rothschilds to explore alternatives (RoW, Aug. 19/02).

Rogers Wireless likely winner if Microcell fails to restructure and survive

News | December 20, 2002

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