Delays to Verizon acquisitions reflect new strategy for Canadian market: analysts

Verizon Communications Inc.’s decision to delay a potential acquisition of new entrant carriers Wind Mobile and Mobilicity suggests the U.S. provider is changing course on how best to enter the Canadian market, or cooling to the idea altogether, industry analysts said. The Globe and Mail reported Wednesday, citing anonymous sources, that Verizon has put off a potential acquisition of the two new entrant carriers until after an Industry Canada auction of coveted wireless airwaves scheduled for January. Verizon, the leading U.S. carrier with 100.1 million retail mobile subscribers, has been mulling an entry into Canada’s wireless market, and bid $700 million to acquire Wind, the Globe and Mail reported in June. It also engaged in merger talks with Mobilicity, BNN reported in July. Canaccord Genuity analyst Dvai Ghose said in a research note that a Verizon “tactical switch” to delay its potential acquisition of the Canadian carriers until after the auction is a “prudent move” that will give the company more flexibility while easing its uncertainties about entering the Canadian market. “We wondered why Verizon would acquire WIND and Mobilicity before the auction when such a strategy could hold Verizon hostage to the auction,” he said. The 700 MHz spectrum Industry Canada will auction next year is considered especially important due to its ability to carry signals over long distances and through walls and other objects. Scotia Capital said in March that the auction will generate proceeds of about $2.6 billion for the federal government. Ghose said Verizon would have been unsatisfied if it had spent the money to acquire the new entrant carriers—which have an estimated 860,000 wireless subscribers combined—but was unable to acquire 700 MHz spectrum. “Consequently, if it committed to acquiring WIND and Mobilicity before the auction, Verizon may have no choice but to bid aggressively for spectrum at even unreasonable valuations,” he said. A delay, he said, will also allow the company ensure Industry Canada does not change auction rules that favour new entrant carriers, including Verizon, as incumbent carriers BCE Inc., Rogers Communications Inc. and Telus Corp. continue their public campaigns to change those rules, which they say would allow Verizon to acquire twice as much spectrum as each of them. Scotia Capital analyst Jeff Fan said in a note Thursday that he also believes Verizon would be better off securing 700 MHz spectrum before attempting to acquire Wind (which is controlled by Globalive Wireless Management Corp. while Amsterdam-based VimpelCom Ltd. has a non-controlling a 65 per cent equity share) and Mobilicity (owned by Dave Wireless Inc.). He said the company’s decision to delay those acquisitions “reflects thinking that Canada is an opportunistic, exploratory exercise and not strategic,” and shows that it is “far from fully committed” to entering the Canadian market. “We maintain our view that the probability of a VZ entry is <50% due to low ROI and regulatory uncertainty,” said Fan, who predicted earlier this week that the company is unlikely to come to Canada. Other industry analysts said the delay could suggest Verizon is less enthusiastic about entering the Canadian market than previously thought. BMO Capital Markets analyst Tim Casey said in a note that the company’s interest in Canada may be “cooling,” while Ghose speculated that the company could be “getting cold feet” due to negative advertising caused by the incumbents’ campaign. “Verizon may consider this negative advertising to be an unnecessary headache in a small market with only a 35 million population and, realistically only 6-7 million potential subscribers for Verizon,” Ghose said. Macquarie Capitals analyst Greg MacDonald said he believes there is still a 75 per cent chance that Verizon will enter the Canadian market and is delaying its potential acquisition of the new entrants as a “negotiating tactic.” He noted that Industry Canada rules barring spectrum auction participants from discussing mergers and acquisitions after a Sept. 17 deadline for initial deposits will help ensure other players don’t scoop up the new entrants during the auction period. Delays, he added, could also “motivate” the financially challenged carriers to reduce their asking price once the auction ends. “ime is on Verizon’s side,” MacDonald said in a research note to clients. “This is understated by the fact that as of the September 17 auction application deadline, negotiations are no longer allowed until after the auction is complete, which introduces real possibility that the new entrants will continue to bleed cash (and lose value) during this period.” MacDonald said in a telephone interview that there is also a chance that the new entrants will skip the spectrum auction entirely—or fail to raise funding to lay down the initial deposit—and could continue takeover negotiations with other players throughout the auction process. “Mobilicity doesn’t have funding outside of the bondholders that, for all intents and purposes, now own the company. They may not play in the auction and that’s a fact,” MacDonald said. “You can say the same thing about Wind.” If the new entrants skip the auction, there is no guarantee that they will be able to find potential suitors among the other auction players. Bell, Rogers and Telus are prohibited from buying the new entrants until an Industry Canada five-year moratorium expires on the incumbents acquiring the new entrant carriers' spectrum licences. The government has also said it will review any application by the incumbents to acquire the entrants or their spectrum after the moratoriums expire, in February for Mobilicity, and in March for Wind. MacDonald said he believes the government will prevent the incumbents from acquiring the new entrants, leaving them with few other potential buyers. Private equity firms Birch Hill Equity Partners Management Inc., and Accelero Capital Holdings are considered potential bidders for the new entrant carriers, as is Thomvest Seed Capital Inc., which acquired new entrant Public Mobile Inc. in June. The Canadian Press reported Thursday that Globalive owner Anthony Lacavera said he would also consider buying Mobilicity if Verizon does not acquire the two new entrants. Troy Crandall, a media and telecom analyst with MacDougall, MacDougall & MacTier, said Verizon could also try to enter the Canadian market without pursuing a Wind or Mobilicity acquisition if it acquires sufficient spectrum in the upcoming auction. “Maybe it’s just more attractive for them to come in and just buy spectrum rather than buying an existing network,” he said in an interview. Crandall noted that Verizon would inherit a number of redundant employees if it acquired the two new entrants, and could face a public backlash if it had to start laying off those workers. Scotia Capital’s Fan said there is a “remote possibility” that Verizon’s delays could be a “ploy” to try to get the federal government to provide more concessions to the company to entice it to enter the market, a plan that he said was unlikely to succeed. The federal government has already been the subject of public criticism from the incumbents and industry groups and unions that support them. They have criticised auction rules that appear to favour Verizon and other new entrants over Canada’s incumbents. Sébastien Gariépy, a spokesman for Minister Moore, said in an emailed statement Wednesday that the government will not change its auction rules. “ur Government’s policy remains unchanged,” Gariépy said. “We support greater choice at lower prices for Canadian consumers. We are moving forward with the spectrum auction as planned.” Moore, who called the incumbents’ campaign “misleading” and “dishonest” on Wednesday, was the target of a critical editorial Thursday in the Toronto Star. “Moore, as representative of a government with immense power over a crucial and highly regulated industry, should spell out just how he believes the telcos have been ‘dishonest’ in their campaign,” the Star editorial said. Verizon declined to comment for this story. —With reporting by Nicholas Kyonka at nkyonka@thewirereport.ca and editing by Anja Karadeglija at akarad@thewirereport.ca

Delays to Verizon acquisitions reflect new strategy for Canadian market: analysts

News | 08/15/2013 7:15 pm EDT

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