TORONTO – The financial performances of Canada’s telecom and cable companies will converge as their operating capabilities begin to align, according to a new report from Moody’s Investors Service.
Similar ‘quad-play’ packages of voice, video, Internet and wireless services between the two sectors will also lead to increased competition that will compress margins and restrict free cash flow, but should be manageable at current ratings.
"The companies have time to adapt to the changing environment, and we do not expect changes to their financial policies," said vice-president and senior credit officer Bill Wolfe, in a statement on Wednesday. "We therefore expect the companies to manage the ratings’ pressure by allocating relatively smaller portions of cash flow to shareholder returns, and expect ratings to remain unchanged."
Moody’s also predicts that:
– the Canadian broadband market will gradually become as competitive as the U.S. market, with margins gradually sinking towards the U.S. norm of plus or minus 30%, from a current plus or minus 40%;
– the convergence in product offerings will take place in the residential consumer market before it does in the business market;
– the advantages in wireline-broadband market that cable companies have held for approximately six years over the phone companies will erode as the phone companies upgrade their networks and offer more competitive Internet connections and Internet Protocol TV (IPTV);
– the phone companies, which have been able to offset declines in their residential wireline businesses with strong wireless growth, face increasing competition as cable companies and other rivals offer more extensive wireless services; and
– the rollout of 4G technology will most likely be credit neutral, with no company being disadvantaged by it.
