Verizon eyes wireless entry as Ottawa aims to salvage competition

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Verizon Communications Inc. is looking at a move into Canada's cellular telephone business, one of several possible new entrants whose arrival would salvage the federal government's ambitions for a fourth wireless player across the country.

Ottawa, which is weighing alternatives as it seeks to preserve its plan for enhanced wireless competition, views Verizon as the most likely foreign option. Verizon has held exploratory talks with investors in Wind Mobile – one of two struggling new entrants in the wireless market – in recent weeks, but those discussions are still at an early stage. AT&T Corp. of the U.S., Vodafone Group Plc of Britain and Telenor Group of Norway are other names circulating within the telecommunications industry as possible investors, sources said.

The federal government relaxed foreign ownership restrictions last year in a bid to shore up competition in the wireless sector, where smaller new entrants such as Wind Mobile and Mobilicity were failing to make headway against larger incumbents. Up until now, there has been no indication that a foreign firm has been prepared to enter the wireless market.

The entry of a major new competitor would intensify price competition, as well as a choice of an additional next-generation high-speed wireless network in the key markets of British Columbia, Alberta and Ontario.

The game plan would be for Verizon to take over a smaller player such as Wind Mobile and participate in the coming auction of new wireless spectrum to create a strong fourth carrier, said two industry sources familiar with the situation. The most attractive target is Wind, the larger and healthier of the two small operators, but Mobilicity is also an option. "They [Verizon] are definitely taking a hard look right now," said one source.

A huge company such as Verizon could then roll out new, faster technology and low prices to undercut Canadian incumbents.

At the moment, Mobilicity and Wind Mobile, the two biggest new entrants in the wireless business, are struggling and for sale. Mobilicity tried to sell itself to Telus Corp., one of the big three Canadian wireless operators, but the government blocked that because it wants to keep the small players out of the hands of the large Canadian incumbents.

VimpelCom Ltd., the largest investor in Wind, has put the company on the auction block, seeking a price of more than $500-million. That sale process too is tied up amid talks with Ottawa, and it now seems certain no big Canadian company can buy Wind for now.

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

Executives at Verizon were said to be heartened by Industry Minister Christian Paradis' announcement in early June that Ottawa remains committed to having at least four carriers in every regional market, and is cognizant that new carriers require sufficient spectrum to better compete by offering advanced wireless services such as LTE.

Verizon is already familiar with the Canadian market due to its previous investment in Telus Corp. Until 2004, Verizon was a major shareholder in the Canadian company.

Under current federal rules, foreigners can own a Canadian wireless carrier, but only if it has 10 per cent or less of the market.

A Canadian option may also emerge. Catalyst Capital Group, a Toronto-based private equity fund operator, owns a big chunk of Mobilicity debt and has a plan to create a fourth wireless player.

Whichever company tries to create a new, stronger fourth carrier will have to cut a large cheque. VimpelCom's chief executive has stated he expects it would cost $1-billion to get Wind to a point where it is not bleeding cash. But Dvai Ghose, the telecommunications analyst at Canaccord Genuity, puts the figure "nearer an incremental $2-billion" for spectrum purchases, network upgrades and consolidation costs.

Should it be Verizon, the company has size on its side. Verizon reported almost $20-billion (U.S.) in wireless revenue in the first quarter alone. Verizon Wireless, owned by Verizon with junior partner Vodafone, runs the largest fourth-generation long-term evolution (4G LTE) wireless network in the U.S. Its almost 100 million subscribers dwarf Canadian rivals such as BCE Inc. and Rogers Communications Inc.

Verizon has massive buying power for smartphones including high-end devices like iPhones, enabling the U.S. carrier to win price wars with Canadian carriers like Rogers, Bell and Telus even on a two-year contract.

Verizon could also compete on speed, by replacing key parts of a smaller player's network and adding gear for faster LTE technology. Doing so would also allow Verizon to solve security concerns that have dogged Wind's sale process in part because key parts of its network are built with gear from China's Huawei, a concern for the government, as The Globe and Mail has reported.

Telenor as well should be familiar with Canada, through Wind, as it is VimpelCom's second-largest shareholder.