TORONTO – Reaction to last week’s news of Verizon’s entry into the Canadian wireless market has sent Telus and Rogers shares into decline, while market caps for BCE, Shaw, Bell Aliant and MTS have increased – a move that Canaccord Genuity analyst Dvai Ghose calls “baffling.”
Ghose says Rogers and Telus were oversold based on the perceived risk of Verizon entering Canada. Rogers and Telus shares have dropped 10.3% and 12.1%, respectively since June 17, when the Globe and Mail first reported Verizon was looking at getting into the Canadian market by purchasing Wind Mobile. In contrast, Shaw shares are up 10.2% and are at a 52-week high, Bell Aliant shares have increased 3.6%, and MTS shares are up 2.2%.
“We find this rotation from Telus and RCI to anything that does not have much wireless exposure to be questionable,” said Ghose in a report. “Even after we have chopped 3 to 6% off our incumbent wireless EBITDA forecasts, Telus and RCI shares seem to be trading at a significant discount to their wireline telco and cable driven peers.”
That represents a buying opportunity for Telus and Rogers shares, with Telus being the top pick, says Ghose, because it is in the strongest financial shape of the three incumbents, which could be a key factor in the 700 MHz auction if Verizon decided to bid aggressively.
While the Canaccord analyst takes the Verizon threat seriously, he adds the American carrier could face sizeable issues in the Canadian market, including the fact that it would it have no backhaul, distribution or bundling capability if it were to acquire Wind Mobile (and potentially Mobilicity as well).
Of the big three incumbents, Bell may be the most susceptible because it derives only 35% of its EBITDA from wireless business compared to almost double that amount for Rogers and Telus. It is also “reporting worst wireline subscriber and EBITDA declines and relies heavily on wireless for DPS [dividend per share] growth,” write Ghose. As such, Canaccord has downgraded its recommendation to Bell stocks to “hold” from “buy.”
