Wireless industry analysts divided over ramifications of spectrum cap elimination

There can be little doubt that changes are afoot in Canada’s highly competitive wireless telecommunications landscape following Industry Canada’s decision to immediately remove the spectrum aggregation limit (DGTP-10-004; RoW Update, Aug. 27/04). Not only does the department’s Aug. 27 decision remove a key obstacle in TELUS Corp.’s hostile takeover bid for Microcell Telecommunications Inc., but it throws the door wide open for industry consolidation. While greater industry consolidation might be a long shot, the number of parties interested in purchasing Microcell has grown from one to two, and could possibly grow to three. Rogers Wireless Inc. noted in a September 3 news release issued late in the day that it is considering various corporate initiatives and these could include entering a bid for the country’s smallest wireless carrier. "These include but are not limited to reviewing current wireless industry developments and consolidation activities and the related possibility of offering to purchase alone or with others, shares or assets of Microcell Telecommunications Inc., and additional operational integration opportunities amongst the RCI operating companies," reads the news release. In past, Rogers Wireless hasn’t hidden its desire for a three-player market. In a July 2003 interview, company president and CEO Nadir Mohamed told Report on Wireless: "I have been on the record several occasions in the past as saying that three is better than four. All the metrics in the business show that three is better than four. And each of the three main players would say the same. The market conditions are such that a three-player market is better than four." Three analysts contacted by Report on Wireless prior to Rogers’ announcement agree that the department’s ruling will allow new parties to get in on the bidding. Brian Sharwood, principal at the SeaBoard Group, says removing the cap changes the market dynamics. "It opens the door to Rogers. Bell (Canada), for a whole set of other reasons I don’t think would be interested. But, certainly Rogers would be interested," he tells RoW. Johanne Lemay, co-president of Lemay-Yates Associates, is more reserved in her assessment of whether the cap removal opens the door for Rogers. "I don’t think removing the spectrum cap means that now it’s better for Rogers than it was before. Rogers faces the same issues as TELUS. They could have made a bid as well and with the same conditions. There’s still the issue of a competition review, and Rogers has to grapple with the need to buy back their shares and that’s a significant amount. Obviously they can look at raising the cash themselves or they need another investor," she says. Lemay adds that the timing of the department’s ruling may not have been the best for Rogers and that the company could see itself becoming the country’s smallest operator if Microcell is acquired by TELUS. The door is definitely open to other bidders, says Ian Angus, president of Angus TeleManagement Group. "It causes Bell and Rogers to reconsider whether they might buy or might get into the bidding." Angus maintains that TELUS was making a pre-emptive move in trying to acquire Microcell. "The only real logical argument was that TELUS saw this as a way to get spectrum cheap before they got themselves into an auction situation…Apart from the more tactical thing of getting Microcell out of the market because TELUS finds them particularly annoying, their real goal was to get the spectrum," he says, adding prices can be unpredictable in an auction. "I think TELUS believed they had an opportunity at a time when Rogers was dealing with the whole AT&T share thing and Bell was evidently not interested that they had an opportunity to capture some spectrum relatively cheaply," Angus tells RoW. "Now the question remains, does the spectrum remain relatively cheap? TELUS launched an unsolicited all-cash $1.1-billion bid for Microcell on May 13. In its original offer, TELUS requested that Industry Canada grant it a temporary waiver from the spectrum cap limit of 55 MHz. The price per share offer was priced at $29 for each Class A Share, $29 for each Class B Share, $9.67 for each Warrant 2005 and $8.89 for each Warrant 2008. The offer has since been extended twice and is set to expire on September 20. Lemay and Angus don’t agree on whether Microcell could now fetch a higher purchase price from a suitor. Lemay says it depends on the potential buyer, while Angus is unequivocal in his assessment, saying that Microcell is "instantly more valuable" following the removal of the spectrum cap. "I think, as of this announcement, Microcell is worth quite a lot more than it was. If you looked at it as a company, it wasn’t worth much just in terms of its balance sheet, but spectrum is a rare commodity," he tells RoW. For Lemay, it’s hard to determine whether the purchase price for Microcell will increase. "If you look at the prices that were paid for spectrum in 2001 and what TELUS had originally paid for Clearnet, the bid for Microcell looks like a steal. But if you do a cash flow analysis, you might get a different result. It’s all in the eye of the beholder and you can’t necessarily make assumptions…I think there are different ways to look at it and certainly what spectrum was worth to Rogers and Bell in Toronto in 2001, you can’t necessarily transpose that answer to what a company is worth right now," she explains. "I don’t think that TELUS made its bid thinking that they would buy it without getting the frequencies…They would have taken into account to make the bid that eventually they would have had the spectrum because there’s much less value if you don’t have the spectrum," she adds. Asked whether Microcell shareholders can hold out longer, Angus says: "If Microcell shareholders previously thought this offer wasn’t good enough, then it definitely isn’t good enough now. Does this mean they should hold out? I don’t know…But the real question is, is there another bidder out there?"

Wireless industry analysts divided over ramifications of spectrum cap elimination

News | September 9, 2004

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