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Wireless stocks face deep cuts to valuations, if Verizon arrives

Analyst believe that Telus may be in the best position of the three major telecom companies if Verizon comes to Canada.

Gloria Nieto/The Globe and Mail

Verizon Communications Inc.'s potential entry into Canada's wireless market poses a "major risk" to the share prices of this country's three major telecom carriers, analysts say.

The threat of the U.S. giant buying into Canada has already knocked more than $5-billion off the combined market capitalization of BCE Inc., Rogers Communications Inc. and Telus Corp. since late June when The Globe and Mail first reported that the U.S. telecom giant had tabled an initial $700-million offer for Wind Mobile Canada.

Analysts say the share-price damage could worsen if Verizon closes the deal for Wind, and that Rogers, Canada's largest wireless provider, would be the hardest hit of the three Canadian carriers.

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"In our view, a Verizon entry into Canada would be a game-changer for the Canadian wireless industry with respect to wireless valuations, earnings and ultimately dividend-growth models," said RBC Dominion Securities analyst Drew McReynolds in a recent note.

He calculates that BCE, Rogers, and Telus shares are pricing in about a 50-per-cent chance that Verizon is coming to Canada.

"Although the pullback in BCE, Rogers, and Telus offers a potential buying opportunity for more risk-tolerant investors should Verizon not enter Canada, we see another leg down for the wireless stocks should Verizon enter," he said.

Verizon – with a market cap of $143-billion (U.S), more than double that of Rogers, Bell and Telus combined – is expected to confirm its Canadian intentions within weeks, ahead of a Sept. 17 deadline for down payments for an auction of wireless spectrum.

If it does enter the Canadian market, investors are likely to take an axe to the generous valuations that Canadian telecom stocks have traditionally enjoyed and pay less for every dollar of earnings that those companies generate.

"A new major competitor to Canada such as Verizon would obviously be a major risk and would cause us to be more cautious on the sector," Credit Suisse analyst Colin Moore wrote in a report Wednesday.

In a study titled, "Three's a Crowd; Four's a Feud," Mr. Moore analyzed the impact of new entrants on the wireless markets of the Netherlands, Chile, Israel and France, and concluded that a fourth player can cause "significant financial disruption to incumbents."

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To take one example, Iliad launched a fourth network in France in 2009, gaining a 10-per-cent market share. Since then the combined market cap of France's telecom companies has fallen by almost €35 billion ($48-billion).

Based on a "moderate competitive" scenario that assumes Verizon will enter Canada, achieve only limited subscriber growth through 2020, and face a one-time decline in average revenue per user of 5 per cent, Mr. Moore says valuations for Rogers and Telus would fall 20 per cent, while BCE's would take a 10-per-cent haircut.

"It would bring our valuations to stock prices at or slightly below current market prices, suggesting the market is already pricing in such a moderate competitive scenario," Mr. Moore said.

The larger impact could be on the revenues and earnings of the three big players, analysts say.

Rogers would see the biggest impact because Verizon is expected to target the Greater Toronto Area, where Rogers has the largest wireless market share.

In addition, both Telus and BCE are better positioned than Rogers to buy prime spectrum blocks up for auction in Canada because they already share some today, while Rogers is without a partner in this space, notes Canaccord Genuity analyst Dvai Ghose.

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Still, Mr. Ghose believes BCE will be hurt by Verizon's entry into Canada because it relies heavily on wireless growth to help propel dividend increases.

Vancouver-based Telus may be in the best position to weather Verizon's storm because it is the only competitor in Western Canada to offer bundles that span four products – home phone, TV, internet and wireless.

BMO Nesbitt Burns analyst Tim Casey said it will take years for Verizon to develop scale in Canada, and expects players such as Rogers, Telus and Bell to beef up their customer promotions to try to retain and gain market share. However, he lowered his expectations for wireless earnings before interest, taxes, depreciation and amortization by 3 to 5 per cent for 2014.

"We will re-assess these figures as the facts related to Verizon unfold," he said in a recent note.

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About the Author

Brenda Bouw is a freelance writer and editor based in Vancouver. She has more than 20 years of experience as a business reporter, including at The Globe and Mail, The Canadian Press, the Financial Post and was executive producer at BNN (formerly ROBTv). Brenda was also part of the Globe and Mail reporting team that won the 2010 National Newspaper Award for business journalism. More


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