When the Big Three complain about how Verizon’s entry would lead to disastrous outcomes for Canadians, we should all be suspicious.Rick Wilking/Reuters
The mystery of why Verizon Communications suddenly cooled a few weeks ago on a plan to come to Canada appears to be solved: the U.S. phone behemoth is working on a much bigger and more strategic deal that requires all its corporate resources.
The Wall Street Journal reported Wednesday evening that Verizon and Vodafone Group have reopened previously stalled talks about a buyout by Verizon of their jointly owned Verizon Wireless business in the U.S. The price Verizon will have to pay for Vodafone's 45 per cent stake will likely be more than $100-billion (U.S.) , the Journal said. Bloomberg reported the parties are closing in on a deal at a price point of $130-billion, with an announcement possible in coming days.
When the Globe reported earlier this month that Verizon had suddenly shifted to a much slower track on its potential entry into Canada, the rationale was not clear. The speculation in the wireless industry was that Verizon's change was perhaps a negotiating tactic designed to get a better price out of the small wireless players that were for sale or better terms from the Canadian government in the upcoming auction of access to key airwaves.
It now seems Verizon's new foot-dragging tactics on Canada had little to do with anything in this country and everything to do with what was transpiring with Vodafone.
Getting full control of Verizon Wireless has long been a goal of Verizon's, and any opportunity to make that happen would easily trump an opportunity to move into Canada. Verizon Wireless is the biggest U.S. cell phone company. It had almost $76-billion in revenue last year, dwarfing the roughly $19-billion (Canadian) of wireless revenue reported by BCE Inc., Telus Corp. and Rogers Communications Inc. together in 2012. In one move, Verizon could gain full control over more subscribers and wireless revenue than it would ever likely be able to wrest from the Canadian market in years of trying.
The Vodafone negotiations will require almost all the financial heft that Verizon can bring to bear, given that Vodafone has been looking for as much as $130-billion (U.S.) for its stake.
Money is not the only issue.
In some ways, the talks with Vodafone are likely to be a lot simpler than anything that would be required in Canada. There is one counterparty, and the issue seems to come down to price.
In Canada, there are multiple counterparties and complications. Verizon, recall, was looking at a three-pronged plan that would involve purchasing one or both of Wind Mobile and Mobilicity, both small and struggling operators that are for sale, and then purchasing spectrum in the auction set for January. Mobilicity, in particular, is a messy situation with fractious stakeholders. And winning an auction is never a sure thing.
Cobbling together a business would require making three different deals happen, a risky venture, and likely add up to a few billion dollars.
Even so, until early mid-August, it appeared Verizon was moving along a path that would see it make offers for one or both of Wind and Mobilicity. Verizon, sources said, had put a preliminary offer valued at roughly $700-million on the table for Wind, and was having talks with Mobilicity stakeholders.
Then, unexpectedly, Verizon decided to put talks with the companies on hold and moved to a strategy that would see it enter the wireless spectrum auction first and then perhaps look to buy Wind and Mobilicity next year.
On that timetable, Canada can still be a backup plan. All Verizon must do in coming weeks is sign up, and pay a deposit, to enter the spectrum auction set for January. The deposit is refundable, meaning Verizon has until January to decide whether it wants to start writing real cheques to get into Canada.
That gives Verizon four months to get a deal done with Vodafone. If the Vodafone talks stall again, or Verizon manages to get Verizon Wireless for less than planned, Canada could be an option once again. If buying Verizon Wireless takes up all Verizon's time and money, the Canadian plan will likely be left for dead.
Given that, the news of the Verizon Wireless talks with Vodafone will likely prompt much cheering in the executive suites at BCE, Rogers, and Telus, which are fighting expensive public relations battles against the very idea of Verizon entering Canada. There will also be relief from investors wary of what Verizon could do to the wireless incumbents' profits.
The picture is likely going to be different in Ottawa, where the Conservative government has made wireless competition a key issue in Prime Minister Stephen Harper's campaign to be seen as consumer friendly.
(Boyd Erman is a Globe and Mail Capital Markets Reporter & Streetwise Columnist.)
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