Solid fundamentals for telephony market, lines between telcos and cablecos blur

The telecom world looks favourable from an economic standpoint despite challenges facing the sector, a recent conference was told. Two leading financial analysts laid out their projections at the Canadian Telecommunications Forum in Toronto earlier this month. Both Dvai Ghose of CIBC World Markets and Richard Talbot of RBC Capital Markets spoke highly of the move by telcos to reduce their capex spending in recent years. For the ILECs, EBITDA margins are increasing and free cash flows are growing. The facilities-based regulatory environment benefits the incumbents, Ghose told delegates, while the foreign investment limits reduce competitive risks. But the ILECs face challenges from price caps, wireline substitution by wireless, Voice over IP (VoIP), an anemic enterprise and wholesale demand, and LD pricing pressure. The CLECs haven’t been unscathed either, as they also face problems with the enterprise and wholesale market, and differentiating themselves from the ILECs is difficult. But regulatory conditions, which have tended to favour the incumbents, are changing. All the publicly traded competitors have had to restructure, resulting in little or no debt, Ghose added. Talbot predicted that telco results will lag the overall economic recovery in the near term but in the medium term the sector will have modest top-line growth as growth areas mature. He expects the major ILECs will improve their dividends in the months and years to come. A change in the foreign ownership rules is also likely.Both analysts believe cable will be a major player in the market shortly. “For the cablecos, entry into voice has to be their future,” Ghose said. Their traditional services are being squeezed, he noted. Internet growth is slowing due to high penetration, and Canadian content regulations make digital cable service a hard sell. At the same time, telephone companies are stepping up the fight by introducing video services over VDSL. Talbot agreed with his colleague. “The pace of VoIP deployment is dependent on telcos getting into video,” the RBC Capital Markets analyst stated. Talbot noted that five of the top seven North American companies in high-speed Internet penetration are Canadian. Shaw Cablesystems, Rogers Cable Inc., and Bell Canada hold down the top three spots, with Telus Corp. at number five and Vidéotron ltée in seventh place. So far, EastLink Cable Systems is the only cableco to enter the local residential telephone market. Talbot expects more cablecos to enter the voice market by 2005. Ghose said customer churn in cable is slowing due to price increases implemented by satellite TV firms. In addition, cablecos are starting to exploit video-on-demand. Just like their telecom rivals, cable companies are cutting their capex. Among major ILECs, CIBC World Markets prefers Telus to BCE Inc. stock. The western telco is growing more quickly than its eastern counterpart. EBITDA for Telus is expected to grow by 13% in 2003 and 7% next year versus the 5% pro forma at BCE. Telus’ pre-dividend free cash flow is expected to produce a 12% yield this year and 14% next while BCE is projected to post an 8% yield both years. For smaller incumbents, Ghose touts MTS Communications Inc. over Aliant Telecom Inc. The Manitoba ILEC is a pure-play telco, producing higher margins than the Atlantic telco, while Aliant has IT and satellite assets. MTS is virtually all alone in its marketplace while Aliant faces a feisty competitor in EastLink. Bell Canada has holdings in both smaller companies but its 53% stake in Aliant means BCE controls the Atlantic Canada telco. While Bell holds 21% of MTS, it does not control the company.

Solid fundamentals for telephony market, lines between telcos and cablecos blur

News | November 24, 2003

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