TORONTO – The emergence of a fourth national wireless player would cause a ripple within the wireless sector in Canada, but the risk to the country’s three incumbents may be overblown, says Canaccord Genuity.
In a report on Monday, research analyst Aravinda Galappatthige proposed and evaluated a potential facilities-based wireless new entrant model based on the combination of Wind Mobile Canada, Mobilicity and Videotron’s spectrum holdings outside of its home province. Dubbed Newco, the fictional wireless provider was assumed to cover British Columbia, Alberta and Ontario, a model which combines Wind and Mobilicity’s existing 3G operations with Videotron’s AWS-1, AWS-3, 700 MHz and 2500 MHz spectrum outside of Quebec.
The report produced the following conclusions:
– NPV analysis returns a negative value of $226 million. This includes $250 million in costs for 600MHz spectrum and assumes a 12x EV/EBITDA terminal multiple (2020E). A discount factor of 15% was used.
– The business does not turn EBITDA positive until 2018 and even as of 2020, the margins would be less than half of the incumbents.
– Simple FCF (EBITDA minus capex) would not turn positive until 2020.
– The total capital required, which includes the operating losses (cash outflows through to 2020) and $250 million for 600 MHz spectrum, totals $1.5 billion. This is a “heavy lift” given the financial positions of the partners and the track record thus far.
– The financial projections assume steady progress both in terms of sub growth and ARPU growth. However, the incumbents could radically change the parameters of this analysis and thereby the economic viability of this project with aggressive competitive action of their own. This cannot be captured in a single scenario analysis.
“While there can always be varying views on the multitude of parameters from subscriber and ARPU growth to cost of retention, network opex and capex, looking at our own financial analysis, we feel that the fourth player project would not be favourably viewed by investors and potential partners”, the report continued.
The report added that the future for incumbents Bell, Rogers and Telus remains bright.
“…in our opinion, there is meaningful running room in terms of top-line growth and thereby EBITDA growth”, the report continued. “In fact, we see mid-single digit revenue growth and mid-to-high single digit EBITDA growth going forward. In some cases this potentially translates to FCF growth in the vicinity of double digits, as capex intensity is expected to remain low in wireless (as opposed to wireline), resulting in higher EBITDA to FCF conversion. Moreover, with no major spectrum auctions until 2018, balance sheets can be de-levered.”
– Lesley Hunter
