June 27, 2013 3 years 8 months ago

COMMENTARY: Five good reasons Verizon could come to Canada; and seven why they couldn't

THE BIG NEWS WEDNESDAY was that American telco Verizon has made a real offer to buy Wind Canada from its majority owner, VimpelCom. The Globe and Mail cited sources who claim that the big U.S. firm has put an opening bid of $700 million on the table and is also talking to Mobilicity about a potential purchase of that distressed company.

The speculation (nobody from any of the companies will confirm anything at this point, beyond reports last week from Verizon CFO Fran Shammo that the company is taking a peek north) caused Canadian telecom shares to endure an all-day hammering on the Toronto Stock Exchange on Wednesday as Rogers, Telus and Bell saw 9%, 8% and 4% trimmed from their share prices (hello, buying opportunity!).

At this point, those who are sure such a deal can actually happen (any offer Verizon has made must be rife with regulatory and other conditions) are still vastly outnumbered by the skeptics by a wide margin. We’ve covered the angle of the skeptics well (since we are one), so here’s a list of reasons, gleaned from a few sources, on why Verizon might truly be interested in Canada:

1. The Federal Government really wants it to happen. Industry Minister Christian Paradis has said the government will use “every tool” it has to make sure there is a fourth wireless player in every region in the country. That’s happening already everywhere but Ontario, Alberta and B.C. (most assume he doesn’t mean the far north) and that fact is not sitting will with the Prime Minister’s Office, we hear.

So, that means beyond new wireless spectrum transfer rules which are still expected from the Ministry this week, we may see things like mandated roaming tariffs or tower sharing tariffs imposed on the incumbents. There are some industry folks who believe both could happen. Such moves would take a chunk of the risk out of purchasing Wind for Verizon as it would provide cost certainty and diminish the need for an immediate national network build.

2. Verizon needs growth. It’s all but tapped out, Stateside. The vast majority of people who want a smartphone have one now so growth in the market is levelling off (that’s going to happen here, too, shortly). Verizon has nearly 99 million subscribers so there won’t be huge jumps in sub numbers there and the U.S. government recently struck down AT&T’s attempted purchase of T-Mobile, so there’s little likelihood growth can come in the States through acquisition. Canada, even as small and spread out as we are, is a natural growth path for any U.S. company, and Verizon may believe the big three incumbents are too complacent and ripe for the picking. Plus, AT&T recently decided to seek growth by pursuing wireless opportunities elsewhere, choosing Europe, an even more established wireless market than Canada.

3. Purchasing an existing company for $700 million or so would not be considered expensive for a company the size of Verizon. It may well consider the price a bargain, for a toehold which is already somewhat established. Plus, the upcoming 700 MHz auction is a natural entry point for a newcomer and Verizon can purchase contiguous blocks to its own spectrum Stateside. With its own network here, that would also allow the company to eliminate the expense of roaming deals in Canada– while being able to give its U.S. customers a unique “Canada-included” no-charge roaming option. “The roaming savings alone could potentially justify a deal,” wrote Macquarie Capital Markets analyst Greg MacDonald in a recent note to clients.

4. Canadians know and value the Verizon brand. People in the Canadian TV business heavily rely on the promotion of the U.S. television shows they purchase in order to drive viewership. In short, the huge marketing budget CBS spends on The Amazing Race, for example, greatly benefits the viewership of the show in Canada on CTV. Similarly, the barrage of Verizon advertising and promotion that already spills over from the south will help any Canadian division of Verizon.

5. It is expected by some that Industry Canada will not let set-aside AWS spectrum go to any of the incumbents when it releases its new spectrum transfer rules. If that’s the case, Rogers, Bell and Telus can not purchase Wind or Mobilicity, leaving them to private equity or other international players (possibly driving down the price).

Now, here’s the list of why the deal can’t happen

1. Verizon Wireless is 45% owned by U.K.-based wireless operator Vodafone and their shareholder agreement stipulates that Verizon can not pursue wireless operations outside of the United States. Verizon is reportedly trying to buy out Vodafone’s stake, but can that happen (then Verizon’s purchase of Wind) prior to the September 17th deadline for applications to be in the 700 MHz auction? Seems like a pretty tight timeline.

2. Verizon will likely only truly bid for Wind if the regulatory situation is cleared up and improved (like those roaming and tower-sharing tariffs) which may or may not come with the coming spectrum transfer release. Verizon has likely been speaking directly to the federal government looking for direction and apparently the company feels pretty positive about change in its favour, but if the regulatory conditions aren’t just right, why would Verizon bother with…

3. …Such a small market as Canada? We’re the size of California in population and while some ask whether or not can you picture Verizon not being in California, others say that with three companies already owning 90% of a market as small as California – and with many built in advantages that Verizon won’t be able to take advantage of – there must be far better growth opportunities elsewhere.

4. Wind’s uses HSPA phones on its AWS spectrum. Verizon does not have similar spectrum in the U.S. and could not offer its American customers the ability to roam on the Wind network in Canada because of that. And if Verizon wanted to offer LTE on Wind’s AWS, Wind’s existing customers would all need new LTE phones.

5. Verizon would have no fibre backbone. With Accelero’s recent purchase of Allstream, the largest Canadian fibre network for sale was taken out – and fibre backhaul is 100% necessary to run a wireless business. While Verizon could certainly lease that backhaul, having nothing to horse trade with would make operating more expensive here compared to the incumbents.

6. Verizon has no product in which to bundle with a Canadian wireless service and wouldn’t be able to come up with them, given the existing rules. Many Rogers, Bell and Telus customers take advantage of wired services like home phone and broadband – as well as television service – purchased in attractively-priced packages. But here’s the thing about being a broadcast distribution undertaking in Canada – you must be a Canadian company to get that sort of license. So, Verizon bringing its very popular FiOS TV service to Canada is a non-starter. Then again, what if Verizon went over-the-top in delivering video to Canadians?

7. Wind built most of its network using technology from Chinese manufacturer Huawei. Due to the serious security concerns of the U.S. government over the potential for Chinese spying or hacking via Huawei gear (an accusation that has never been shown to have happened), the company is non-existent in the U.S. and it would be politically sensitive for Verizon to take over a company based on the technology, so it would have to swap out much of Wind’s network gear.

What would be on your lists? Let us know in the box below or in an email to editorial@cartt.ca. We’ll keep the e-mails confidential, if you wish.