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Technology Ottawa’s spectrum decision a ‘positive’ for internet provider TeraGo, but uncertainty remains: analysts

TeraGo Inc. is claiming a regulatory victory after Ottawa ruled that the small telecom provider won’t have to return any licences it owns for a swath of wireless airwaves set to be used for 5G technology.

Investors in the small Thornhill, Ont.-based company had worried that the federal government would claw back some of TeraGo’s spectrum – the invisible frequencies used to deliver communications services considered its main strategic asset – as part of a move to repurpose some airwaves currently designated for internet to allow companies to use them to build next-generation wireless networks.

But the company was relieved last week when the federal Department of Innovation, Science and Economic Development (ISED) said it would not claw back licences in the 38-GHz frequency range as part of a series of decisions on spectrum policy. TeraGo holds a number of licences for such airwaves covering smaller cities across the country, and analysts said the decision could bode well for TeraGo’s future value.

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Other companies, which own 3,500-MHz spectrum, considered a key frequency band globally for building next-generation wireless networks, were less fortunate. ISED said it will take back some 3,500-MHz licences from existing licence holders, including Canada’s largest rural internet provider, Xplornet Communications Inc., and Inukshuk, a joint venture between Rogers Communications Inc. and BCE Inc. Ottawa needs to reclaim the airwaves so it has enough to sell next year in a public auction.

Boosters of 5G wireless technology say it will deliver much faster internet speeds and support a vast expansion in the number of connected devices. To make that possible, telecom operators will need a mix of different types of spectrum, with low-frequency airwaves offering broad coverage and higher-frequency spectrum supporting a huge increase in data capacity.

TeraGo sells connectivity and data-centre services to the business market and uses a network of 600 rooftop antennas to deliver internet service to its customers. It offers “fixed-wireless” broadband service, which uses radio waves to send signals between a communications tower and a customer’s nearby home or business.

The company began acquiring ultra-high-frequency spectrum at public auction in 1999 and has since purchased additional airwaves through private sales. About 80 per cent of TeraGo’s licences are in the 24-GHz range and 20 per cent are in the 38-GHz range, the latter of which the government plans to sell at auction in 2021.

In its ruling on the 38-GHz spectrum, ISED noted that there is more bandwidth available in the frequency range relative to the amount held by current owners. The government also said it will permit licence holders to use the 38-GHz spectrum for mobile wireless services after the auction.

It all means TeraGo can keep its 38-GHz licences and will be able to use them for 5G cellular services – or, potentially, sell the spectrum to another player that wants them for 5G, such as one of Canada’s large wireless carriers.

Tony Ciciretto, chief executive officer of TeraGo, is pleased with the decision and thinks it could bode well for the company’s 24-GHz spectrum licences, which cover larger urban centres and could also be up for auction in the coming years.

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TeraGo CEO Tony Ciciretto is pleased with the decision and thinks it could bode well for the company’s 24-GHz spectrum licences.

Carlos Osorio/Globe and Mail

“I’d want to be very careful about this, but certainly arguments can be made that these several reasons [from the decision] could set a precedent for how ISED treats the 24-GHz band,” he said in an interview on Monday.

Mr. Ciciretto said TeraGo is continuing with plans to trial its own fixed-wireless 5G service and even hopes to serve some residential customers in high-rise buildings next year. But when asked about the potential for a sale of its spectrum, he indicated he would not rule it out. “Certainly the board would always be open to understanding what the best value for shareholders would be,” he said.

TeraGo said Tuesday it plans to raise up to $8.9-million from an upcoming share sale to fund the 5G trials. Investors reacted with enthusiasm to the regulatory news, but word of the stock sale, which meant the company would expand its share count by more than 5 per cent, erased roughly half of that gain. Shares of TeraGo, which has a market capitalization of $181-million, closed at $11.45 Wednesday, down almost 11 per cent.

Financial analysts who follow the company said in research reports last week that, while many details remain unknown, ISED’s recent determinations suggest the government could chart a similar course on 24-GHz spectrum. (There is not yet a consultation under way on this band but it was recently up for auction in the United States.)

“Overall, we believe this decision was a positive for TeraGo,” wrote Canaccord Genuity’s Aravinda Galappatthige and Matthew Lee in a report last week, adding that if ISED does not impose a clawback on 24-GHz spectrum, they would increase their price target on TeraGo.

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“[The risk of a clawback] had been a big fear for TeraGo investors. That said, although this sets a positive precedent, there remains a great deal of uncertainty regarding TeraGo’s 24-GHz holdings,” said TD Securities analysts Bentley Cross and Vince Valentini.

The pair maintained a hold rating on the stock, noting that its shares are trading in line with TD’s current estimate of the company’s breakup value, which includes a value of about $95-million for the spectrum holdings. They added, “We continue to believe that TGO’s spectrum should garner attention from incumbent [cable and telephone companies].”

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