Incumbents financially prepped for 700, 2500 MHz spectrum auction, say analysts

Ottawa—Canada’s telecom incumbents are financially ready for the upcoming 700 and 2500 MHz spectrum auctions but new entrants will have trouble raising the necessary capital if the government doesn’t take appropriate regulatory measures, industry analysts tell The Wire Report. Last week Industry Minister Tony Clement told reporters he was in the process of meeting with industry players to determine their ability to raise funds for the auction. He said the auctions will be held once potential bidders have raised the necessary capital and the government’s policy on the foreign ownership limits has been clarified. But analysts say the outcome of the auctions is largely dependent on the government’s objectives—whether it is seeking to maximize revenues from the auction or increase competition by favouring new entrants. “If they want to maximize the revenue they get from the auction then let the incumbents bid up the cost of the auction. It’s a drop in the ocean for them,” Dvai Ghose, a telecom analyst with Canaccord Genuity, said in an interview. “They’re gushing billions of dollars of cash flow every year. That’s not a problem at all.” Ghose added that Shaw Communications Inc. and Quebecor Media Inc. are in a good position to raise capital because of the profitability of their media operations. Greg MacDonald, an analyst with National Bank Financial, said the economic climate is particularly ripe for incumbents due to their refinancing activities over the last year and a half. “Unlike anytime in my 15-year career, this is probably the most attractive time to access the debt-capital market,” he said. “The incumbents have no problems. They have very strong balance sheets and access to debt capital.” But MacDonald said new entrants will find it much more difficult to access that capital. “New entrants have not been anywhere near the funds going into the more risky debt segments,” he said. “That may change, it may not. It depends a lot on the economic outlook.” MacDonald said it would be easier for new entrants to attract capital if Canada’s economic situation improves. Ghose said one measure the government may want to take to help new entrants is to set aside spectrum—as it did in the 2008 advanced wireless services (AWS) auction—through which the government raised $4.25 billion. But Ghose said set asides wouldn’t be the most convenient option for the 700 MHz spectrum auction. “The problem with set asides this time around is that there’s much less spectrum. There’s only 40 to 50 MHz in the 700 MHz to be licensed, whereas there was 105 MHz in the AWS auction band, including the G-band spectrum,” he said. “Maybe they will dice it up too much and reserve some.” Another option would be using spectrum caps to prevent incumbents from buying up large portions of the spectrum. But analysts and industry players agree the government must first clarify its position on foreign ownership before moving forward with the auctions. Clement launched a consultation on loosening the rules in June. Stewart Lyons, chief operating officer of new wireless entrant Mobilicity, said in an interview in Ottawa Thursday that the company wants to participate in the upcoming auction. Mobilicity launched in Toronto earlier this year after acquiring spectrum in the 2008 auction, and will be extending its network to Ottawa, Vancouver and Edmonton in November. Its launch is the result of American-backed equity, investment from Dutch financial institution ING Group and Canadian fundraising efforts. “We think there should still be rules favouring our continued ability to get more spectrum because we’re going to run out of spectrum. We only have 10 MHz,” Lyons said. He added that Mobilicity recently met with Clement to reiterate its support for eliminating the foreign ownership rules for telcos with market shares of 10 per cent or less. “When you have a limited ability to raise money due to foreign ownership limits, certain international players may not want to invest—because they only want to take a certain piece if they can have a certain level of control. Other private equity firms globally may not want to invest if they can’t get the requisite amount of votes to match their investment,” he said. New entrant Public Mobile has also said it supports loosening the restrictions for new entrants. Edward Antecol, Globalive Communications Corp.’s vice-president of regulatory affairs and carrier services, declined to comment on how the company’s performance in the auction might be affected by the loosening of foreign ownership restrictions. But Antecol said Clement needs to clarify the rules in advance of the auction and that tabling the legislation might be a “strong government signal” that would allow telcos to drum up capital for the auction. Ghose said Globalive’s ability to draw in capital is uncertain now that Orascom Telecom Holding, which owns a 65 per cent equity share in the company will merge with Russian company VimpelCom Ltd. Clement told reporters Friday he has instructed Industry Canada to get the “process rolling” on the 700 MHz auction, but industry sources who spoke to The Wire Report are divided on when the government may reveal its policy on foreign ownership. Some sources say the foreign ownership announcement could be made as part of Clement’s interim report on the federal government’s digital economy strategy, to be released on Nov. 22, while others say it may be bundled into the 2011 budget bill. Liberal MP and party industry critic Marc Garneau said in an interview the foreign ownership issue should be resolved before the auction, which is expected to take place before 2013. “Certainly, solving the foreign ownership issue is a first step and that needs to be done. I don’t think Clement’s consultations on foreign ownership have gone very well in terms of finding a consensus,” he said. “There may still be some work to do.” But Garneau added that the auction is a “ticking clock” when it comes to introducing more competition in the telecommunications sector, and that the Liberal party supports loosening the rules for telcos without changing the Broadcasting Act. "We would certainly be willing to have greater foreign ownership in the pure telcos ... so that we can have greater competition," he said. Bell Canada, Telus Communications Co. and Rogers Communications Inc. did not comment Thursday. kfournier@thewirereport.ca

Incumbents financially prepped for 700, 2500 MHz spectrum auction, say analysts

News | October 21, 2010

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