The stock market seems a little confused in the wake of Wednesday's news out of Ottawa, that the federal government intends to loosen restrictions on foreign investment in Canada's telecommunications industry. On Wednesday, telecom stocks fell 0.4 per cent and they are down another 0.4 per cent on Thursday - but the group is up for the week after strong gains on Monday, suggesting that there's no panic. Not yet, anyway.
Maher Yaghi, an analyst at Desjardins Securities, outlines some of the thinking here. Overall, he believes the government's decision is a negative for the industry, or at least the incumbent players - such as BCE Inc. , Telus Corp. and Rogers Communications Inc. - because new companies are likely to set up shop here, dividing the pie into smaller slices.
"Loosening foreign investment restrictions would give new entrants a greater pool of potential investors, thus lowering their cost of capital," he said in a note. "Easing the barriers of entry to an industry with a high cost of capital could increase competition and hence lower profitability in the longer term."
But there is also an upside here, as Mr. Yaghi also noted. Faced with rising competition, the incumbents might have even greater incentive to merge with one another - a potential move that has been discussed before, when Ottawa first opened up cozy telecom industry to more competition.
"The timeline and exact nature of the intended changes remain unclear," Mr. Yaghi said. "We are not making any changes to our forecasts until we know if these changes will be implemented immediately or phased in over time."
Still, he suggested that consolidation could take different forms. Bell could merge with Telus. Rogers could merge with Quebecor and Shaw. Or some of the smaller players, such as Manitoba Telecom, could be snapped up.
David Berman