Microcell unlikely to survive to the end of 2005, according to research brief

Microcell Telecommunications Inc. is unlikely to survive until the end of 2005, indicates a recently released RBC Capital Markets research brief, obtained by Report on Wireless. RBC restarted coverage of Microcell after the wireless operator emerged from Companies’ Creditors Arrangement Act protection last month. The brief’s author, Richard Talbot, notes that liquidity is the primary concern going forward. "While the company exited CCAA with $117.3MM in cash and $25MM in undrawn credit facilities, liquidity remains a primary concern for us. Through a combination of (1) modest EBITDA growth, (2) high capex, (3) a $30MM restructuring fee and (4) ongoing mandatory debt repayments, we anticipate the company will exhaust all available sources of liquidity by mid-2005. While the company may prolong the liquidity crisis through capex reductions, such an action could affect network quality and further impact postpaid subscriber retention," Talbot writes in the research brief. RBC also states that Microcell faces an uphill battle as it once again begins competing for market share against its three larger national rivals. The financial investment house notes that Microcell’s "Freeday" campaign (RoW, April 29/03) is evidence that it is going to fight the other national providers head on for a greater share of the mass market. "The likely outcome from such a strategy is (1) high sales & marketing costs, (2) potentially aggressive pricing behaviour, (3) fierce competition from competitors, and (4) persistently high churn. We note that Bell Mobility has also announced a Free Friday promotion in recent weeks, thereby limiting Microcell’s marketing initiative," Talbot writes in his brief. Many have long considered Microcell to be a takeover target or a merger opportunity for either one of the national wireless carriers or one of the struggling new entrant wireline operators looking to offer a bundled wireless/wireline offering. (Microcell and Sprint Canada have since announced a co-marketing agreement under which the two companies will work together to offer a bundled wireless/wireless service package. The next issue of Report on Wireless will provide a detailed look at this agreement and analysts’ reaction.) Talbot believes that "there is a diminished necessity for an outright acquisition" because the three rivals have been successful in targeting Microcell’s post-paid subscribers. On the subscriber front, Talbot doesn’t believe Microcell will be able to hit its target of 540,000 to 570,000 gross additions and 100,000 net additions for the entire 2003 fiscal year. "his may not be achievable given the heavy setback in Q1/03 (-39.9k) and the limited time for promotions during Q2/03," Talbot writes. "We forecast full year 2003E gross adds at 486k (12% market share) and net adds of +39.1k (vs.-44.7k in 2002) with the bulk of the net adds being pre-paid (25.9k prepaid vs. 13.2k postpaid). "As the company’s marketing efforts get underway, we expect modestly stronger performance in 2004E offset by tougher competition for post-paid subs from the larger carriers. We forecast modest market share growth to 12.2% of gross adds in 2004 (528k gross adds) and improved subscriber churn (2.9%) for total net adds of 100.4k." Talbot reserves his harshest comments for the end of the research brief. "Given the significant liquidity/going concern risk, with the passage of our price target is expected to erode to $nil over the proceeding year," he concludes. This is certainly not the type of news Microcell’s president and chief executive André Tremblay wants to hear from the financial analyst community. In a wide-ranging interview with RoW on June 10, he was bullish on Microcell’s direction. While he noted some analysts are more critical of Microcell than others, he hoped that they all would begin to see the light and realize that the strategy the company has undertaken is equally credible to that being employed by its three larger national rivals. "We understand the prudence of the financial analysts right now," Tremblay told RoW, adding that during the restructuring process Microcell was unable to talk or comment on scenarios making the rounds within the financial community. But he noted that Microcell was successful in the daunting task of convincing 51 banks and hundreds of bondholders involved in the restructuring process that the plan was viable and that they should exchange their debt for equity in the company. "We proved to those people that the business case we were working on was solidly grounded, had extremely high chances of success and that they should bet on us. Those people have the benefit of a lot of information, deep knowledge, (about the company’s plan) and they voted 100% for it … so we’ve been able to convince those people, in a very tough environment, and we believe time is going to prove us right," Tremblay explained.

Microcell unlikely to survive to the end of 2005, according to research brief

News | June 23, 2003

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