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08Aug13

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Ottawa set to leave telecom door open for Verizon

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Canada's wireless industry is bracing for its biggest shakeup in decades as Ottawa appears impervious to pleas that it block U.S. giant Verizon Communications Inc from the lucrative market.

The three big domestic players, Rogers Communications Inc, BCE Inc's Bell and Telus Corp, which cater to 90 percent of the country's wireless subscribers, have launched a massive public relations campaign against rules designed to increase competition.

They include giving foreign carriers preferential access to airwaves being auctioned next year, and looser restrictions on foreign ownership of small wireless operators, which the local market leaders have been warned away from.

With full-page newspaper ads and the creation of a www.fairforcanada.ca website, the incumbents argue that the entrance of a company like Verizon would force them to cut jobs and trim coverage in rural areas.

"We don't think organizations like Verizon, that are deeply resourced ... need to be bootstrapped by the Canadian government," Telus Chief Executive Darren Entwistle told Reuters in an interview last month.

Telus and its peers have zeroed in on Verizon because the U.S. company offered to buy Canadian telecom startup Wind Mobile for $600 million to $800 million, and is in talks to acquire another startup called Mobilicity, sources familiar with the matter previously told Reuters.

But given years of concerted government efforts to boost competition in the sector, the Canadian carriers' chances of success appear slim.

"We want all regions of Canada to benefit from competitive market forces, which is why more progress must be made," Canadian Industry Minister James Moore said last week. "We will continue to stay the course by ensuring Canadians benefit from a competitive telecommunications industry."

Verizon has declined to comment in detail on any plans for Canada. Chief Financial Officer Fran Shammo said last month that Canada remained an "exploratory exercise" for the company.

Boosting Competition

The Canadian government has tried in the past to tilt the playing field in favor of new players, including setting aside airwaves in a 2008 auction that ushered in new entrants who have helped lower wireless prices in Canada.

Then the highest in the world, Canadian bills have since fallen to around U.S. levels. Bills in the two countries remain almost 80 percent higher than the OECD average, topped only by Japan and Australia.

A Verizon Wireless smartphone customer pays about $100 a month over a two-year contract for unlimited U.S.-wide talk and text and 2GB of data, similar to the cost for Canada's services. Canadian roaming charges are significantly higher.

For Verizon, the Canadian market offers the prospect of growth at a time when the U.S. market growth is slowing because most people already own smartphones and practically everyone has some kind of cellphone.

If Verizon does expand into Canada, it would likely be via a deal with one or more of the new entrants from 2008, plus a bid on two of four prime blocks of new wireless spectrum in the auction next year, according to executives, lawyers and other sources involved in the process. Canada's big three may each only bid on one prime block.

Verizon's entry would potentially raise the government's take from the auction, making it easier for them to balance the federal budget before an October 2015 election.

"Ottawa will welcome it with open arms, with brass bands and red carpets and Canadian champagne," Iain Grant, who heads telecom consultancy Seaboard Group.

Two of the four prime spectrum blocks on offer match with Verizon's frequency, while the other two match with that of AT&T Inc. AT&T declined to comment on whether it was interested in the Canadian market.

Verizon's push into Canada is not a done deal and its success is not guaranteed. Analysts say Verizon would still need to invest heavily to build a network across the world's second-largest country by area.

Imari Love, a Chicago-based telecom analyst at Morningstar, questions the economic viability of a Verizon foray into Canada, given the company would have to spend heavily to buy the small players, compete in the auction, build a network and then win subscribers in an established marketplace.

"I don't ever see them truly piercing the oligopoly of the big three or matching their scale in terms of subscribers, nationwide coverage, and integrated network infrastructure."

Giant Player

Canada still has curbs on foreign ownership in the telecoms sector, but they do not apply to telecom companies with a market share of less than 10 percent. Foreign players do not have to sell or seek a Canadian partner if they grow an initial investment into one with more than 10 percent of the market.

Verizon has 100 million subscribers on its home turf, making it more than 10 times the size of Canada's largest player, Rogers. That offers advantages in terms of cheaper deals for popular handsets, and Verizon could use its U.S. network to give Canadian consumers cheaper roaming rates.

The mere threat of a Verizon entry has already knocked some C$12 billion off the combined market valuations of Rogers, Bell and Telus, a share price fall of between 12 percent and 17 percent since mid-May.

Rogers, Canada's No.1 wireless company, last week sought to thwart Verizon by backing a private equity group that would bid for Wind and Mobilicity, according to sources. It is far from assured that such an arrangement would win approval from the federal government, analysts said.

The three domestic companies want to be able to buy the upstarts, who are struggling to turn a profit. They don't want to have to carry Verizon traffic on their networks and they say the government should not favor a big foreign competitor.

Amid the furor, some investors are looking to take advantage of the sharp fall in the shares of the local blue chips.

"Certainly with this pullback, we are seriously looking at building positions in the local players," said Michael Sprung, president at Sprung Investment Management, which has limited exposure to the telecoms currently. "They aren't going to sit still and let Verizon come here and eat their lunch."

[Source: By Alastair Sharp and Euan Rocha, Reuters, Toronto, 08Aug13]

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