Analysts skeptical of a Verizon expansion North

Verizon Communications Inc. held “exploratory talks” with investors in Wind Mobile about operating in Canada, The Globe and Mail reported, though analysts said they are skeptical of a Verizon expansion North. “Verizon has held exploratory talks with investors in Wind Mobile—one of two struggling new entrants in the wireless market—in recent weeks, but those discussions are still at an early stage,” the Globe reported Monday, citing anonymous sources. Jeff Fan, a telecom analyst with ScotiaBank, said in a note to clients Monday that Verizon Wireless, a partnership between Verizon Communications and Vodafone Group Plc, is bound by its shareholder agreement and cannot invest in wireless outside the United States. He said he does not believe Verizon Communications sees Wind Mobile, which is in the process of transferring ownership to Amsterdam-based VimpelCom Ltd., as attractive, because of the new entrants' track record, “the lack of spectrum and inferior network.” Fan said the story about Verizon is “noise,” like other telecom consolidation headlines in the past few weeks, and that the firm expects similar articles to come out over the next three months. He added that negative headlines about the incumbents present buying opportunities for stock in Canada's incumbents, Telus Corp., Rogers Communications Inc., and BCE Inc. RBC telecom analyst Drew McReyonolds said in a note to clients Monday that the “key question is whether the capital and time commitment is worth the prize,” given that Verizon would have to spend about $2 billion in incremental capital, including infrastructure and spectrum auction costs, to enter the market. Verizon would need to secure more spectrum licences over the long-term, build towers, establish and expand retail stores, and lease backhaul network support from third parties, McReyonolds wrote. The American company would also be disadvantaged competitively against the incumbents because it would not have a “quad-play offering,” he said, which is the ability to offer Internet, TV, home phone, and wireless bundles. Dvai Ghose, a telecom analyst with Canaccord Genuity, said his firm is also skeptical because Verizon and Vodafone have “larger issues” to contend with in the United States. “hese discussions are at an early stage,” Ghose wrote in a research note Monday. Verizon Communications owns the Verizon Wireless business with a 55 per cent stake, and Vodafone has 45 per cent. Verizon Wireless has 98.9 million retail connections, according to its website, and more than 1,900 retail locations in the United States. The U.S. wireless market is becoming more competitive as Japanese teleco Softbank Corp. and Dish Network Corp. have made offers for U.S. mobile provider Sprint Nextel Corp. Sprint is also seeking full ownership of American wireless company Clearwire Corp. Ghose wrote that Canadian new entrants Wind, Public Mobile Inc., and Dave Wireless Inc. (operating as Mobilicity) are “far from profitable” and may require more than $2 billion in capital costs for consolidation, spectrum purchases and the build out of a fourth-generation LTE network, if Verizon was to step in to purchase them. He added that Wind's use of Chinese manufacturer Huawei Technologies Co. Ltd. as a primary network vendor “may have political issues for Verizon” related to network security. Verizon, previously a major investor in Telus that sold its stake in the company in 2004, “sat on the Board and saw the challenges of former Canadian new entrants from this position. According to our U.S. telco analyst Greg Miller, Verizon has consistently been on record since they divested Canadian assets long ago that their interest level in the country remains very low,” Ghose wrote. Ghose said time is running out for Verizon or other potential “white knights” to step in and purchase the Canadian new entrants, as initial deposits for the 700 MHz auction are due Sept. 17. Registered bidders in the auction are not permitted to merge or engage in merger talks. Industry Minister Christian Paradis said this month the Industry Department will not permit the incumbents to purchase the spectrum that was set aside for new players. “We assume that Industry Canada does not want further delays and so this gives the new entrants very little time to secure financial backing,” Ghose wrote. Although Canaccord sees “no real signs” of large, foreign players like Verizon or AT&T Inc. entering Canada, it could be wrong, he added. Verizon and AT&T have brand recognition in Canada, business plans that are similar to those of the Canadian incumbents, as well as scale and purchasing power with device vendors, he said. Fan and Ghose both wrote that, if Verizon was to invest in Canada, it would be more likely to try purchasing one of the incumbents, Telus, Rogers or BCE, if the government was to completely remove the foreign ownership limits on large operators. The government removed the foreign ownership restrictions last year for small players in the Canadian telecom market. Reached Monday, Verizon Wireless, Verizon Communications, and Wind Mobile declined to comment for this story. —With reporting by Simon Doyle at sdoyle@thewirereport.ca and editing by Anja Karadeglija at akarad@thewirereport.ca

Analysts skeptical of a Verizon expansion North

News | June 17, 2013

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