‘Moving parts’ making spectrum auction predictions difficult: analyst

Analysts are divided on how two upcoming spectrum auctions will change Canada’s wireless industry as the deadline for registration looms at the end of January. The upcoming AWS-3 and 2500 MHz auctions are taking place against a backdrop of uncertainty as carriers await a decision from the CRTC on wholesale wireless access and fees, a decision that could change the fundamental economics of providing consumer wireless services. Drew McReynolds, a telecom analyst with RBC Dominion Securities, said predictions about the auctions are more difficult in the current climate. “The problem is, there’s so many moving parts,” he said in a phone interview. The AWS-3 auction includes a set-aside of 30 MHz of the 50 MHz available in each region in the country for “operating new entrants,” and Quebecor Inc.’s Videotron and Wind Mobile seem primed to pick up valuable airspace for their future operations as some of the few companies, including Bragg Communications Inc.-owned Eastlink, that meet the government’s definition. Mobilicity, in bankruptcy protection since September 2013, is also an operating new entrant. This week, it made made a new filing to the Ontario Superior Court of Justice asking that its creditor protection, which was to expire Jan. 30, be extended until May 8. The filing said: "If the Mobilicity Group participates in the AWS-3 auction, the Mobilicity Group will require time to complete the auction process and then evaluate its options based upon the outcome of that process." An affidavit from William Aziz, Mobilicity's chief restructuring officer, said the company would need to post a refundable deposit of about $62 million by month's end in order to participate in the AWS-3 auction, and it has not yet completed any arrangement to secure that kind of funding. Jan. 30 is the deadline for both the AWS-3 and 2500 MHz auctions. The AWS-3 auction is scheduled to start March 3, and the 2500 MHz sale is to begin April 14. McReynolds said it's his understanding was that not all Mobilicity shareholders are "on the same page" when it comes to the best course. "It seems like a little bit of a dysfunctional situation," he said. "That doesn't really line up to taking capital and to participate in an auction. And they're in a process now where it's probably a little messy.” McReynolds said that if Mobilicity did participate, they would be competing against a rival in Wind that has much more unified backing when it comes to capital and direction. " the fifth facilities-based wireless player in Canada," he said. "If No. 4 is struggling, No. 5 is that much further behind in terms of sustainability." Mobilicity's subscribers have been aggressively targeted by Wind in a new campaign that gives customers who switch from Mobilicity to Wind six months of free service. In September, a group of investors led by Anthony Lacavera and investment firm West Face Capital reached a deal to acquire Amsterdam-based VimpelCom Ltd's majority stake in Wind Mobile. McReynolds said the set-aside has important implications for the possible creation of a new fourth national carrier to rival Rogers Communications Inc., Telus Corp. and BCE Inc., depending on “the extent to which the government's push to put cheap spectrum into new-entrant hands does incentivize more capital or consolidation to come to the forefront.” Many scenarios for a consolidated fourth carrier involve some combination of Wind Mobile, Mobilicity and Videotron, as well as unused spectrum Videotron and Shaw Communications Inc. purchased in the 2008 AWS auction. “If you're genuinely serious about being fourth player, then absolutely you need spectrum,” said McReynolds. “You need to get the spectrum at every opportunity.” Any potential fourth national carrier would need solid financial backing to build up its services, McReynolds said, and having spectrum makes any of the smaller companies far more valuable. “If you're trying to recapitalize, you're trying to attract capital from various players over time, it can't hurt that you're sitting on fairly attractive swathes of spectrum,” he said. “It's a tangible asset that underpins any new-entrant wireless recapitalization." McReynolds said Quebecor is taking a wait-and-see approach to expanding nationally, and that they want to be clear about what the government is going to do to support a fourth player before making any investments. Tim Casey, managing director at BMO Capital Markets, said in a Dec. 18 research note that such an expansion was unlikely. “We are negatively predisposed to a fourth player strategy outside of Quebec unless regulatory conditions are very favourable and a meaningful equity partner joins the strategy,” he said. Casey suggested that the AWS-3 auction would see little competition for the set-aside 30 MHz blocks, where new entrants will probably pay the minimum reserve bids. For Quebecor, that amounts to $30 million for spectrum in Quebec and eastern Ontario, and for Wind Mobile and Mobilicity that amounts to $56 million for spectrum in southern Ontario, Alberta and British Columbia. If Canada’s incumbent carriers base their bids on the ongoing AWS-3 auction in the United States, in which bids have reached nearly $45 billion US, they could end up bidding $1.8 billion for the remaining 20 MHz across the country that is not set aside for new entrants, Casey said. Yet he cautioned that his valuations would likely not reach that level in Canada “for a variety of reasons.” “Given industry structure and the meaningful set-aside spectrum, we doubt Canadian valuations will reach U.S. levels,” he wrote. Casey said the 2500 MHz auction, which is considered less valuable for wireless services than AWS-3, could raise $535 million, with Telus being the largest bidder at $400 million because of its comparative lack of 2500 MHZ spectrum versus Bell and Rogers, and government limits on spectrum concentration for the band. Telus chief financial officer John Gossling said Friday at a CIBC investor conference in Whistler, B.C. that the 2500 MHz auction will help Telus catch up to Bell and Rogers. “It has caps in place, which means that Bell and Rogers are not able to bid in certain regions. So that leaves Telus and perhaps some regional players and some new entrants who come in,” he said. “So that feels like that should be a very good outcome for Telus, and help us close the gap. We do have less spectrum than Bell and Rogers, and we do need to get more, so this will be an important year for that.” The government’s control over spectrum remains an important part of the future of the wireless market, Casey said, noting that the government refuses to approve the transfer of AWS spectrum purchased in the 2008 auction to the incumbent players. “It remains highly unclear if or when the Industry Minister would ever approve the sale of new entrants’ AWS spectrum to one of the big three,” he wrote. “On three separate occasions, the Minister openly denied Telus’ proposed acquisition of Mobilicity.” Rogers’ agreements to buy unused AWS spectrum from Videotron and Shaw are unlikely to be approved under the current government, Casey said. “One counter-argument in favour of approving the deals could be that these transactions relate to unused spectrum only and, therefore, would not diminish competition,” he wrote. “Alternatively, Rogers could wait for a change in government in late 2015.” Scotia Capital analyst Jeff Fan said in a research note, published Jan. 5, that while spectrum is critical to building a national fourth wireless carrier, any competitor to the incumbents would need to take advantage of domestic roaming and therefore needs the CRTC to decide to regulate roaming rates at an affordable level. “Beyond spectrum, we believe is the biggest factor that drives network coverage and quality, which affects market share and ARPU, which in-turn impacts the return profile of the fourth operator, which ultimately determines whether and other financial partners inject new capital,” he wrote. Fan said a fourth national carrier has the potential to be a “disruptor” in the Canadian market, he said. “We believe a consolidated fourth operator will have a solid spectrum position in Ontario, Alberta, and British Columbia, if Wind’s spectrum holding is combined with Quebecor (QBR)’s non-Quebec licences, and Shaw and Mobilicity’s licences,” he said. —With reporting by Peter Henderson at phenderson@thewirereport.ca and Anja Karadeglija at akarad@thewirereport.ca and editing by Derek Abma at dabma@thewirereport.ca

‘Moving parts’ making spectrum auction predictions difficult: analyst

News | January 23, 2015

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