TORONTO – Some Bay Street telecom analysts believe that Verizon’s decision to walk away (for now at least) from purchasing Wind or Mobilicity is a negotiating tactic and not a signal it has decided to shelve a move into the Canadian wireless market.
As reported by the Globe and Mail Wednesday night (and re-reported by us and everyone else), unnamed sources have told the newspaper that Verizon has decided not to push ahead with a purchase of the two struggling wireless companies after all. (Ed note: It’s worth observing that the original stories saying Verizon has made a $700 million bid also quoted sources with no names and none of the companies involved have confirmed or denied the stories. The only confirmation of any interest Verizon has in Canada came when company CFO Francis Shammo said in July the company was “exploring” opportunities here. In a public appearance on Tuesday at an investor’s conference in Boston, Shammo didn’t mention Canada once, nor was he asked about it. As the transcript shows, the giant cellco has much bigger fish to fry when it comes to growth in its home market.)
Macquarie Securities analyst Greg MacDonald, however, is still bullish on Verizon’s plans to come to Canada. In a note to investors cleverly quoting The Rolling Stones called “Tiiiiime is on my side, yes it is” he writes that he believes this tactic is a way to apply more pressure to the Wind and Mobilicity ownership to reach a deal.
“Nothing has changed from a regulatory perspective in the recent past and while the incumbent PR message has been loud we do not believe it resonates in the U.S. and has little impact on the Canadian consumers (voters) and therefore the government (as is clear from Prime Minister Harper’s and Industry Minister Moore’s comments this past weekend),” writes MacDonald.
“Verizon is signaling it is now focusing on whether to participate in the auction regardless of asset negotiations. Given its hefty balance sheet this will likely keep other potential bidders for Wind and Mobilicity at bay. In our view, there is no downside for Verizon to submit its name as a bidder before the September 17 application deadline as the deposit is refundable.
MacDonald adds that since “Verizon has actually made a $700m initial bid for Wind,” that shows it doesn’t mind the Canadian government’s regulatory machinations and likes the opportunity it sees here. Plus, one of those regulatory machinations – the altered spectrum transfer rules surrounding the set aside spectrum from the 2008 AWS auction – extends the five-year moratorium on the sale of that spectrum, for all intents and purposes, indefinitely.
“The benefit of this as a negotiating strategy is that Wind and in particular Mobilicity are currently being funded on negative free cash by motivated sellers so time is on Verizon’s side. This is understated by the fact that as of the September 17 auction application deadline, negotiations are no longer allowed until after the auction is complete, which introduces real possibility that the new entrants will continue to bleed cash (and lose value) during this period,” explains MacDonald, who believes the chances of Verizon expanding north are greater than 75%.
For BMO Nesbitt Burns analyst Tim Casey, he too, still sees Verizon as a threat to enter the market here, despite last night’s story. It “may imply that Verizon’s interest in the Canadian market may be cooling, but we note that Verizon (1) remains the most attractive acquirer for Wind and Mobilicity (as the rules currently stand), and (2) can still participate in the 700MHz auction without first making an acquisition. This could also be a negotiating tactic to soften expectations in front of the spectrum auction,” he wrote in a note to investors.
Added Canaccord Genuity analyst Dvai Ghose in his e-mail to investors: “We wondered why Verizon would want to acquire Wind and Mobilicity ahead of the auction and thereby potentially become a ‘hostage’ to the auction,” he writes. “In other words, if Verizon acquired the new entrants before the auction, it would have to be committed to buying 700 MHz spectrum, almost regardless of valuation, or risk being stranded with Wind and Mobilicity and their AWS only spectrum, without any major prime blocks of 700 MHz spectrum.
All that said though, it could just be cold feet in the face of an uncertain opportunity where Verizon would have to pay significant roaming fees to incumbents, pay for integration and network upgrades of the Mobilicity and Wind networks, pay heavily for 700 MHz spectrum in a competitive auction and face future regulatory alterations, says Ghose.
“While the Canadian wireless campaigns against the Government's spectrum policy (from incumbents and new entrants like Videotron) may have just made the Government more entrenched, it may be having an impact on Verizon,” he writes. “After all, a wide range of organizations and esteemed individuals have come out publicly against the Government wireless policies on a wide range of issues. These include criticisms of Verizon's position in the U.S., which is vehemently against special treatment for spectrum poor carriers, even though they may benefit from such regulations in Canada, to lack of reciprocity for Canadian carriers who may want U.S. spectrum and concerns about Verizon's lack of commitment to rural broadband in Canada. This negative advertising may be a concern for Verizon.”
So, think all this Verizon speculation will now simmer down until about September 16th? Yeah, we don’t think so either.
