TORONTO – While we first reported here that Quebecor’s cable and wireless division Vidéotron might be interested in buying ailing Mobilicity and stocking up on 700 MHz spectrum in the ongoing auction, most reaction has been disbelief.
In a research note to clients on Monday, BMO Capital Markets analyst Tim Casey doesn’t buy it. “We acknowledge there is a potential opportunity for a non-incumbent bidder in the auction (such as Quebecor, EastLink, Novus or Feenix) to scoop up the remaining prime block of 700MHz spectrum (for Southern Ontario, Eastern Ontario, B.C. and Alberta) at attractive valuations. However, the value of the optionality of the spectrum – that is, the ability to flip it to an incumbent – is very unclear at this time. We are skeptical (and negatively predisposed to) that Quebecor will pursue a facilities-based wireless strategy outside of its Quebec footprint,” he wrote.
Vidéotron has strong brand recognition in Quebec, as well as the ability to bundle cable and internet with wireless, which is why is has enjoyed success there. Outside its home province, it has none of that. Plus, it would cost a ton of money to do it. “Consider Quebecor’s own experience in its home territory. Quebecor launched wireless operations in 2007. It enjoys material structural advantages (brand, wireline infrastructure, incumbent billing and subscriber relationships). It has committed roughly $1 billion of capital. And for all that, it is barely break-even on the EBITDA line (with ~500,000 subscribers), let alone cumulative free cash flow. We think it would cost another $1 billion to buy 700MHz spectrum and deploy LTE to become a fourth player in other regions. Buying WIND would add even more capital (WIND has invested more than $1.5 billion and is not yet profitable).”
Besides, added Casey, all this recent speculation is a moot point if Quebecor did not make the required (large) deposits in September 2013, when declarations for the auction were required. “Unless Quebecor submitted a large enough amount of financial deposit back when applications were due in September, it is our understanding that they are not be eligible (or are highly constrained) to bid on spectrum outside Quebec. Roughly $159 million was the total deposit amount required for an applicant requesting to be eligible to bid on one prime block of 700MHz spectrum nationally. To be eligible to bid on one prime block of 700MHz spectrum in Quebec only, the total deposit would have been ~$43 million. Simply put, there has been a presumption that Quebecor submitted a large enough amount of financial deposit back in September, which may not be the case, making this a moot discussion.”
And the rumours which say Vidéotron signed a non-disclosure agreement with Mobilicity? Big deal, says Casey. Everyone likely did that so they could get a look inside the struggling independent wireless company’s books.
Canaccord Genuity analyst Dvai Ghose has similar apprehensions about Vidéotron going national, telling his clients in a research note “such a strategy could cost $2 billion+ if we assume Vidéotron 1) buys a prime block in Western Canada and Southern Ontario at the reserve price of $96 million; 2) spends $190 million to buy Mobilicity (half of Telus' $380 million bid) and $400 million to buy Wind; and 3) builds the regulatory minimum 50% PoPs coverage over 10 years for $900 million, it would require $1.6 billion before EBITDA losses and 2500 MHz spectrum,” he wrote.
And buying new spectrum thinking you can sell it later “is risky, as the only obvious buyers are the incumbents, who are currently being blocked from owning these assets,” added Ghose. “As Vidéotron Wireless has not been that successful, we really wonder if it should go national and if the incumbents should be concerned – Vidéotron's wireless penetration, ARPU and losses in Quebec have been disappointing and Bell, the largest incumbent in Quebec, has led incumbent EBITDA growth despite Vidéotron. We doubt that Rogers would partner to help Videotron expand.”
"Should Quebecor decide to pursue a wireless strategy outside of its core footprint in Quebec, this could jeopardize the current 20-year agreement and likely elicit a competitive response from Rogers." – Tim Casey.
As well, added Casey, “Quebecor recently entered into a 20-year agreement with Rogers for spectrum/network sharing in Quebec/Ottawa, wholesale roaming rights on Rogers’ network outside of Quebec/Ottawa, and an option to sell AWS spectrum in Toronto. Should Quebecor decide to pursue a wireless strategy outside of its core footprint in Quebec, this could jeopardize the current 20-year agreement and likely elicit a competitive response from Rogers, who is most exposed as the largest wireless carrier.”
With Bell, Rogers and Telus each reporting their Q4 and YE 2013 results in the next 14 days (Bell on Feb. 6, Rogers on Feb. 12 and Telus on Feb. 13) Casey’s lines on the companies point to steady, single-digit growth from the just completed year – and into next – for all of the big three.
Bell: “Our consolidated revenue estimate (for Q4 ’13) is $5.41 billion (vs. consensus of $5.41 billion), which is up from last year and partly driven by the Astral acquisition (July 5, 2013). Our consolidated EBITDA estimate is $1.98 billion vs. $1.90 billion last year and modestly lower than consensus,” wrote Casey.
“In wireline, we expect continued, albeit slowing, erosion of network access lines partially offset by gains in Fibe IPTV and Internet subscribers. In wireless, we expect continued gains in postpaid partially offset by prepaid losses. We expect ARPU expansion to continue, driven by increased smartphone penetration and focus on western Canada and enterprise customers… We forecast mid-single-digit EBITDA growth in 2014E followed by low-single-digit growth in 2015E.”
Rogers: “Our consolidated revenue estimate (for Q4 ’13) is $3.30 billion (same as consensus), which is up 1% from last year. Our EBITDA estimate is $1.18 billion vs. $1.20 billion last year and consensus of $1.20 billion,” said Casey’s report. “In wireless, we expect continued gains in postpaid partially offset by losses in prepaid. We expect a modest dip in blended ARPU but a ~2% decline in postpaid ARPU due to the new U.S. roaming plans introduced in Q2/13. In wireline, we expect continued video subscribers losses, partially offset by gains in both Internet and voice subscribers… We forecast low-single-digit EBITDA growth through 2015E.”
Telus: “Our consolidated revenue estimate (for Q4 ’13) is $2.98 billion (vs. consensus of $3.02 billion), which is up ~5% from last year. Our EBITDA estimate is $988 million vs. $937 million last year and consensus of $967 million,” he wrote. “In wireline, we expect continued erosion of network access lines offset by gains in IPTV and Internet subscribers. In wireless, we expect continued gains in postpaid partially offset by modest prepaid losses. We expect ARPU expansion to continue, driven by increased smartphone penetration and data usage… We forecast mid-single-digit EBITDA growth through 2015E.”
