Telecom shares slump after Verizon's $700-million bid for Wind

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Shares of Canada's major phone companies slumped today as analysts warned a potential entry into Canada by Verizon Communications Inc. could "disrupt the Canadian wireless market."

Verizon is pushing forward with its efforts to expand into Canada's $19-billion wireless market, putting an initial offer on the table for Wind Mobile and starting talks with Mobilicity.

The New York-based communications giant's opening offer for Wind Mobile values the small Canadian wireless carrier at roughly $700-million, according to two people familiar with the situation.

Verizon's initial bid for Wind values the carrier at about $700-million.

Shares of Telus Corp., Rogers Communications Inc., BCE Inc. and Quebecor Inc. fell today.

"We believe Verizon has several advantages it could use to become successful in the marketplace, such as its advantage with U.S. roaming, capital strength and, importantly, its handset-buying power," said Desjardins analyst Maher Yaghi, also noting recent changes by the country's telecom regulator, the Canadian Radio-television and Telecommunications Commission.

"Given the recent change by the CRTC to limit postpaid contracts to two years, the handset subsidy has become a more important factor in the consumer's decision framework and Verizon's handset-buying power allows it to be more aggressive in subsidizing handsets."

Verizon's initial offer for Wind is just one part of a broader strategy to potentially enter the Canadian market. Verizon has also held talks in recent days with stakeholders of Mobilicity, another small struggling startup carrier, and is also considering whether to participate in the federal government's auction of wireless licences. In total, analysts have put the price tag for getting into Canada at between $1-billion and $2-billion.

Ottawa is trying to salvage its goal of having four wireless competitors in every regional market. The policy is working in places such as Quebec and Atlantic Canada, but it has fallen short in the key markets of Ontario, British Columbia and Alberta. Wind, Mobilicity and another upstart, Public Mobile, have all struggled to break even, and all were put up for sale this year. Public has since been sold, but Wind and Mobilicity remain on the auction block.

Verizon, long barred from full ownership of a Canadian telecom company by foreign investment rules, now has an opening. Ottawa last year relaxed those restrictions on small telecom companies with market share of 10 per cent or less, with an eye to increasing competition for the big three phone companies, Telus Corp., Rogers Communications Inc. and BCE Inc.

Last week, chief financial officer Fran Shammo publicly confirmed that Verizon was examining the opportunity to enter Canada after The Globe and Mail reported the U.S. carrier was in talks to potentially acquire Wind. At the time, he characterized it as "dipping our toe in the water," and noted that unspecified regulatory issues could present an impediment. The government is expected to give more details about its policy on sales of wireless licences by the end of the month.

It's unclear if a deal will be concluded. But behind the scenes, Verizon is moving swiftly to size up its options. The company's business plan for Canada would likely revolve largely around its size advantage. Verizon's market capitalization is almost twice that of BCE, Rogers and Telus combined. Its wireless business has almost 100 million subscribers, almost four times as many subscribers as there are in all of Canada.

Verizon could use its buying power to acquire the latest smartphones at prices that can potentially undercut Canadian carriers. It could also use its U.S. network to offer cheaper roaming rates there. Its size would also allow for a sizable marketing budget – something the cash-poor upstarts have lacked.

"We think Verizon remains very interested in the Canadian market as a potential growth opportunity. Benefits to the company include the opportunity to acquire an asset at a steep discount to book value, to acquire 700-MHz spectrum contiguous to its U.S. spectrum, to leverage existing Verizon products in the Canadian market and to achieve net roaming savings," Greg MacDonald, a telecom analyst with Macquarie Capital Markets Canada Ltd., said in an e-mail.

Representatives of Wind, VimpelCom, Verizon and Mobilicity all declined to comment.

Earlier this year, Wind's foreign backers, VimpelCom Ltd. of the Netherlands, hired investment bank UBS AG to run a process to sell the Canadian company. Initial estimates of the price for Wind were between $500-million to $1-billion, putting the Verizon offer close to the middle of the range.

The price for Mobilicity would likely be lower. The company is smaller, and in dire financial straits. Telus offered earlier this year to buy Mobilicity for $380-million, but the government blocked that sale, citing rules that prevent the sale of the spectrum owned by upstarts such as Mobilicity to the Big Three. Those moratoriums expire next year.

Mobilicity is now facing a potential restructuring, and its bondholders have been squabbling about how best to solve the company's cash problems. A bondholder vote on a proposed recapitalization plan is scheduled for July 3.