TORONTO – With Wednesday’s announcement that Mobilicity has entered into talks with new potential buyers, it’s a likely possibility that any offer for the struggling carrier would be considerably lower than the $380 million Telus was willing to pay to acquire Mobilicity before that deal was rejected by the federal government.
That’s a scenario that Scotia Capital analyst Jeff Fan had suggested may happen back in May. Of today’s news, Fan told Cartt.ca in an email that if there is a deal it is likely not as ideal, as the price may be “too low or contingent on other events…otherwise they would just take it and move on…they know what the value of their business is.”
Fan estimates that if Verizon is in fact in talks with Mobilicity, their offer price could be in the area of $250 million, which is roughly a third of the $700 million it has reported offered for Wind Mobile.
In a new research note, Scotia Capital estimates that if Verizon were to enter the Canadian market, it would come with a price tag of approximately $2.7 billion (for acquisitions, spectrum auction and network upgrades), and the company likely would not see much return on that investment for the first several years.
“On ROI alone, it does not appear to be a home run,” writes Fan. “We estimate Verizon’s weighted-average cost of capital (WACC) is approximately 6%-6.5%. For an investment in a new market to make sense, we believe the internal rate of return would have to be at least in the low to mid-teens. Based on our analysis…we estimate the IRR is just below 10%, with an eight-year payback.”
Fan writes that a new Verizon Canada company could see some growth by year four (or 2017 for the purpose of this estimate). Growth in earnings per share and free cash flow per share growth would be approximately 1% to 1.5%, with a long-term growth of approximately 5% by year eight (or 2021).
Fan’s forecast is based on several key assumptions:
- Verizon would likely consolidate Wind and Mobilicity in order to compete effectively against the incumbents.
- The estimated $2.7 billion cost of entry into Canada, broken down, would be allocated in the following manner: $950 for acquiring and consolidating Wind ($700 million) and Mobilicity ($250 million); $1.25 billion to buy C1 and C2 700 MHz spectrum (excluding Quebec); and $0.5 billion to upgrade Wind/Mobilicity networks to 4G LTE and expand coverage.
- Verizon would offer LTE-only services focused primarily on high-ARPU subscribers. Given Verizon’s current business in Canada, it will concentrate on the retail market, with particular focus initially on the enterprise segment. “It will likely differentiate itself from the incumbents with a U.S.-Canada integrated calling area (i.e., no roaming when using the service in the United States),” Fan writes. “We do not believe Verizon can differentiate itself from the Canadian incumbents on handsets as the Canadians have already deployed LTE and will closely follow Verizon’s VoLTE launch.”
- As the fourth operator without an integrated bundled triple-play offering, Verizon’s market share would grow by about 2% a year, and would eventually peak at 15%. Post-paid ARPU would gradually increase from Wind/Mobilicity’s $25 APRU to $58 through subscriber turnover, which is in line with the company’s U.S. post-paid ARPU, and about 15% less than the incumbents.
- The initial churn rate, as Verizon takes over Wind/Mobilicity’s subscriber base and targets higher-ARPU customers, will be high at about 4%, gradually declining to about 1.3%. Fan also estimates that Verizon’s size will enable it to offer a handset subsidy for about $250, or for 20% less than the incumbents, and a cash cost per user at $18.
- Verizon will be able to save approximately $100 million per year in roaming costs, based on a conservative estimate of the roaming revenue for Bell and Telus coming from Verizon.
Verizon would also have other factors to consider before making finalizing any buying decision. One consideration is how much 700 MHz spectrum it will need if it wants to align its spectrum holdings in the U.S. and Canada and offer a similarly robust network – that would mean buying at least two blocks to maximize LTE efficiency. Fan writes that if Verizon is looking for two blocks, auction prices will be much higher for all participants, since total demand across all Canadian markets is at least five blocks, and six blocks in some markets like Quebec, Manitoba, Saskatchewan and the Maritimes (compared to the four prime blocks that are available).
If acquiring two blocks is too expensive, Verizon may consider partnering with one of the incumbents. With BCE and Telus already partners, Fan says Rogers would be the most logical candidate. This could make sense for Rogers in Ontario, British Columbia, and Alberta since these are big markets where Rogers currently does not have partners.
However, since Verizon will focus on spectrum blocks C1 and C2, a partnership would mean Rogers would have to shift its preference away from the B or C blocks to C1 or C2 to be aligned with Verizon. That would also require Rogers to modify the VZ LTE handsets to operate 3G/HSPA in Canada on 850 MHz/PCS bands, which could create cost and time-to-market issues.
Fan notes that Verizon could face added complication by operating Wind or Mobilicity’s 3G/HSPA networks, as the handsets for Verizon Canada would be different from Verizon U.S. and Rogers handsets.
