Ottawa to rewrite telecom rules

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Ottawa's proposed liberalization of foreign ownership rules in Canada's telecom sector sets the stage for a wave of mergers and acquisitions that would reshape the industry.

In the prebudget Throne Speech yesterday, the government said it would open Canada's borders to greater foreign investment in the strictly regulated telecommunications sector.

The announcement marks a significant milestone in the Harper government's effort to loosen ownership restrictions, which are groaning under the crush of new technologies and consumer dissatisfaction with limited competition.

It is also likely to spark discussions about the numerous opportunities for mergers across the profitable telecom landscape - at companies both within and outside Canada.

"It certainly makes the sector more ripe for M&A," one Bay Street lawyer said yesterday, adding that it remains to be seen whether any of the new wireless entrants would make an attractive target for a U.S. telecom company like Verizon Communications or AT&T Inc.

The announcement comes after widespread controversy over cabinet's decision last year to overrule the federal regulator, which had determined that Globalive Wireless Management Corp. did not qualify as a Canadian company because of significant financial backing from an Egyptian company.

The country's big telecom companies, such as Rogers Communications Inc., BCE Inc., and Telus Corp., roundly criticized the Globalive decision. They said it threw uncertainty into the industry.

Industry Minister Tony Clement said the proposal would add new sectors to the Canada Investment Act, including satellites, telecommunications and uranium. However, he said foreign takeovers will be approved only if the deal represents a net benefit to Canada and does not pose concerns to national security.

"The facts indicate that it is actually beneficial to Canada and to Canadians for our jobs, for our economy, for our innovation, to have that foreign direct investment," he told reporters yesterday after the Throne Speech was delivered.

Mr. Clement also suggested the changes will likely require the government to pass legislation through the minority Parliament, meaning it will require the support of at least one opposition party. The Liberals said they are open to a review of foreign ownership rules provided that it does not place Canadian cultural protections at risk. The New Democratic Party is strongly opposed to the move, arguing the proposal does put Canadian culture at risk because of the overlap between telecommunications and broadcasting.

Anthony Lacavera, Globalive's chairman, has been explicit in saying access to foreign capital is necessary to go up against the large wireless providers. While maintaining foreign ownership rules were important to protect Canadian content, he said these rules may have to be re-examined in an era where people are getting content from a variety of devices. "We're talking about a balance here," Mr. Lacavera said. "We're talking about how do we ensure that Canadian content, Canadian heritage, is protected for the long term while we're recognizing the need for foreign capital?"

For the large telecom companies, the government's decision will make it easier to get access to capital and build new infrastructure. However, as competition heats up and technologies continue to converge, it also makes it much more likely that the sector will see consolidation ahead.

This may eventually lead to a renewed attempt to merge BCE's Bell Canada unit and Telus - known colloquially as "Belus." Analysts say this would inevitably create a domino effect across the Canadian telecom sector, as companies struggle to remain competitive against their rivals.

"With foreigners in, there could be a stronger case for Belus or it could happen earlier," said Jeff Fan, an analyst with Scotia Capital. "If Belus were to take place, [cable companies]will likely be next to consolidate."

The incumbent providers were hesitant to speak about the government's intentions, since the stakes are high and the details are vague. "We've always supported removal of the foreign ownership rules if it's done on a fair and equitable basis for all carriers," said Michael Hennessy, Telus's senior vice-president for government and regulatory affairs.