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Canadian Telecoms: A Very Public Brawl

August 18, 2013 | About:
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Gordon Pape

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This is getting really ugly - and very un-Canadian. The clash between the big three telecoms and the federal government has escalated to a level unseen in this country for a generation.

The last public slanging match of this magnitude between Ottawa and Corporate Canada that I can recall was way back in 1980 when the Liberal government of Pierre Trudeau introduced its controversial National Energy Program. It was widely vilified by the energy industry and Western political leaders, particularly Alberta premier Peter Lougheed. So bitter were the feelings that the Calgary headquarters of Crown corporation Petro-Canada became widely known as Red Square. The most popular bumper sticker of the day on cars west of Ontario read: "Let the Eastern bastards freeze in the dark".

We haven't quite sunk to that level of name-calling this time around, at least not yet. But we're getting close. Last week a director of BCE Inc., Anthony Fell, published a letter in the National Post in which he effectively accused new Industry Minister James Moore of arrogance, ignorance, and incompetence.

Within 24 hours, Mr. Moore had fired back with a public missive of his own, accusing the telecoms of orchestrating "misleading" and "dishonest" advertising campaigns and insisting that the government's position was carefully considered and is in the public interest. His office then announced he was going on a cross-Canada speaking tour to defend and promote the government's stance.

To say that this kind of high-level mudslinging is unusual is an understatement. Corporate executives generally keep a low profile in their dealings with governments, understanding that publicly backing politicians into a corner will probably not end well.

The fact the telecoms have come out swinging with an all-out media campaign shows how desperate they have become.

The heart of the issue, as we all know by now, is the possible entry of U.S. giant Verizon into the Canadian market on very favourable terms. In the interest of expanding competition and possibly lowering prices, the federal government appears ready to allow Verizon to purchase one or two troubled small wireless players, Wind Mobile and Mobilicity, at bargain prices while excluding Canada's Big Three from the bidding. As well, Verizon would be allowed to acquire more of the highly desirable 700 MHz spectrum than the Canadian firms in an auction scheduled for January.

The Big Three - Rogers, BCE, and Telus - clearly view Verizon's entry as a major threat to their business. The market agrees; the shares of all three companies have fallen sharply since it became apparent that Ottawa was on-side with the Verizon entry and was going out of its way to make it happen. The result has been a loss of billions of dollars in market capitalization.

We don't know how much Canada's telecoms are spending on this campaign but it has to be in the millions. Whether or not you agree with their position, it could be money down the drain. Prime Minister Harper has stated firmly on several occasions that he supports the entry of another competitor in the wireless sector and this is not a man who changes his mind easily or often.

Moreover, his policy seems to have a lot of public support. Many people feel they have been ripped off by wireless fees and contracts and would like nothing better than to have another choice. International roaming charges are a particular sore point; if Verizon came in offering Canada-U.S. cross-border deals that knocked those costs way down, it would reap a ton of business.

Of course, there's no guarantee that would happen. Verizon, which has remained silent throughout all the controversy, suddenly took on the role of reluctant bridegroom last week. According to a Globe and Mail report, the company put its expected takeovers of Mobilicity and Wind Mobile on hold under after the spectrum auction and has yet to confirm that it will even participate in it. There was much speculation as to whether Verizon is losing interest in Canada, seeking to drive down the price tag on Wind Mobile and Mobilicity, trying to obtain even better terms from Ottawa, or some combination of all three. In any event, the share prices of the three Canadian telecoms jumped on the report.

Even if Verizon does decide to come, don't assume it will make a significant impact on wireless prices and service. There are plenty of disgruntled Verizon customers in the U.S.; just check out some of the reviews on www.phonedog.com. A few are complimentary but most carry heads like "Verizon sucks", "Stay away from Verizon", and "Counting the minutes until I can change". Canadians who like the idea of Verizon coming here may end up being disappointed.

This battle isn't over but it's hard to see how Ottawa can back down now that the Canadian telecoms have taken such an aggressive public stance. A retreat would make the Conservatives appear weak, which is the last thing Mr. Harper wants with an election only two years away. He has a majority government and he is going to use it.

If Verizon is coming - and that remains to be seen - our domestic telecoms had better be ready. Spending some of those advertising dollars on lowering costs and becoming more competitive might be a good place to start.

Update on Canadian Telecom Stocks

BCE Inc. (TSX, NYSE: BCE)

Originally recommended on Dec. 15/08 (#2844) at C$21.30, US$17.06. Closed Friday at C$42.42, US$41.05.

BCE shares fell 17% in the space of about a month, pushed down by two separate developments: the sudden spike in interest rates and the news of Verizon's interest in coming to Canada. On May 22, BCE shares closed on the TSX at an all-time high of $48.90. By June 26 they were down to $40.58, leaving investors shell-shocked that the supposedly rock-solid telecom could take such a beating in as short a time.

As it turns out, the sell-off was overdone, which often happens in such situations. BCE shares have since rallied somewhat, closing on Friday at C$42.42, US$41.05. Because of the price decline, the yield has risen from 4.8% in late May to 5.5% today, based on an annual dividend of $2.33 a share.

On Aug. 8, the company announced second-quarter financial results. BCE reported a small 1.5% increase in operating revenue to $5 billion. However, earnings dropped 22% to $571 million ($0.74 per share) from $732 million ($0.94 per share) in the same period of 2012.

The company said that the drop in earnings related to a one-time tax gain last year, losses on equity derivative contracts, and increased interest charges related to the financing of the $3.27 billion purchase of Astral Media.

Astral properties acquired include pay and specialty TV services such as The Movie Network, including HBO Canada and TMN Encore, and such French-language services as Super Écran, Cinépop, Canal Vie, Canal D, VRAK TV, and Ztélé. As well, BCE gets one of Canada's largest out-of-home advertising businesses and 77 radio stations, including NRJ, Virgin Radio, Rouge fm, and EZ Rock.

As a result of the Astral deal, BCE increased its 2013 revenue growth guidance for the Bell division to between 2% and 4%, up from zero to 2% previously.

"Our successful closing of the acquisition of Astral supports the increased 2013 financial guidance we're announcing today," said Siim Vanaselja, chief financial officer for BCE and Bell. "After absorbing integration and other acquisition-related costs in the second half of 2013, we expect to begin realizing the full financial benefits of this acquisition in 2014 with strong free cash flow accretion to support our dividend growth objective."

BCE reported a year-over-year increase of 3.5% in wireless subscribers, a 5.3% jump in TV subscribers, and a small 1.5% gain in high speed Internet users.

Action now: Buy. Verizon is still a wild card but BCE's attractive yield should put a floor under the share price if the U.S. company does eventually decide to enter Canada.

Telus Corp. (TSX: T, NYSE: TU)

Originally recommended on Nov. 13/06 (#2640) at C$27.43, US$24.26 (split-adjusted). Closed Friday at C$31.97, US$30.93.

The Telus story is similar to that of BCE. The stock topped out at $37.94 on May 22 and then dropped more than 22% to close at $29.52 on June 27. Like BCE, it has since rallied and the shares took a big jump after the story broke about Verizon's possible rethink of a Canadian entry. However, it is still down 16% from its high and the yield on the annual dividend of $1.36 has jumped from 3.6% to 4.3%.

Telus also reported second-quarter results on Aug. 8. Revenue was up $161 million (6%) to $2.83 billion, reflecting growth in both wireless and wireline income. "This strong growth was supported by continued subscriber additions and higher average revenue per unit (ARPU) across all growth services including wireless, Optik TV, and high-speed Internet services," the company said in a statement.

The total customer base increased by 83,000 in the quarter to nearly 13.2 million. This reflected the net addition of 100,000 postpaid wireless customers, 31,000 TV subscribers, and 13,000 high-speed Internet customers. Partially offsetting these gains was the loss of prepaid wireless customers and legacy wireline services. Telus's total wireless base of 7.7 million is up 3.5% year-over-year, the TV subscriber base of 743,000 is up 25%, and high-speed Internet connections are up 6% to 1.36 million.

The company reported net income of $286 million ($0.44 a share), down 4.3% from a year ago. However, after stripping out one-time items adjusted net income was up 13.5% to $354 million ($0.54 a share) compared to 2012.

Telus announced it has received approval for a normal course issuer bid to purchase up to 15 million outstanding shares (to a maximum value of $500 million), until Dec. 31. As of July 31, the company had purchased approximately 16.5 million of its common shares for over $536 million under a one-year program that allows it to buy back up to 31.9 million shares to a maximum value of $1 billion. In a separate announcement, Telus said it has reached a deal to purchase and cancel up to 6.5 million shares from an arm's-length third party.

The company said its directors believe that "such share purchases are in the best interest of Telus and that such purchases constitute an attractive investment opportunity and desirable use of Telus' funds that should enhance the value of the remaining shares."

Action now: Telus become a Buy as a result of the share price retreat. Investors who want to own only one of these telecoms should choose BCE if income is the top priority. Telus offers better growth potential for long-term investors. - G.P.

About the author:

Gordon Pape
GuruFocus - Stock Picks and Market Insight of Gurus

Rating: 2.3/5 (6 votes)

Comments

MritikCapital
MritikCapital - 1 year ago
Gordon,

Nice article. What is your take on RCI which is most exposed to wireless and has more upside and downside based on how this turns.

The move by Rogers to back Canadian PE firm Birch Hill to bid for Wind Mobile and Mobilicity to thwart Verizon is also an interesting tactic that might throw a wrench in Conservative's plans.
Cornelius Chan
Cornelius Chan - 1 year ago
I noticed an article last week that suggested Wind Mobile may buy Mobilicity

What is your take on this possibility?

Please leave your comment:


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