Little Interest Seen in Proposed Changes to Canada Foreign Ownership

Analysts are uncertain if any major U.S. telecom operators would plan consolidation with Canadian players if a restriction on foreign ownership there is lifted (CD April 26 p3). Small wireless deals are possible, they said. Some major U.S. telcos were mum on their plans.

AT&T and Verizon, both with long histories of investment in Canadian telecom, seem focused on domestic operations, said Iain Grant, a Montreal analyst with the Seaboard Group. The demands of financing fiber and wireless in Canada are far more important than investments in the country, he said. Earlier, AT&T invested in Bell Canada and Verizon predecessor GTE in Canada’s national operator Telus. “Even if foreign ownership restrictions were lifted today, we do not see much foreign strategic interest in Canadian incumbents,” said Dvai Ghose of Genuity Capital Markets. Besides, Canadian telecom stocks have been trading at a premium to their U.S. counterparts, especially this year, said National Bank Financial’s Greg MacDonald. No major cross-border mergers and acquisitions are expected, he said. Carriers like AT&T and Verizon probably will wait to see the performance of new market entrants before considering any acquisition, he said.

Larger moves are possible down the line, said another analyst in Canada, though U.S. telcos like AT&T and Verizon have “massive buying power.” Widely-held companies like BCE and Telus may benefit in the longer term from possible takeovers by foreign players, he said. For family-controlled businesses like Rogers Communications, Shaw, Cogeco and Quebecor, the benefit is less certain until to the owners’ intentions are clearer, he said.

Smaller companies are making smaller bets on Canadian telecoms, Grant said. He said several Canadian advanced wireless services companies have raised capital in the U.S. The main beneficiaries of the proposed rule change would be new market entrants, especially in wireless, Grant said. Additional capital probably would be available to mobile upstarts like Public Mobile, Wind Mobile and Moblicity, while incumbents are likely to consider mergers as a defensive move, said Jeff Fan of Scotia Capital. There could be near-term benefits to new wireless entrants, said UBS Securities Canada analyst Phillip Huang.

Cable and broadcasting wouldn’t be affected by changes in the Canadian Telecom Act because they're covered by a different law emphasizing ownership of Canadian heritage, Grant said. Some players have argued that because cable and telcos compete with each another, it would be unfair to exempt one group from ownership rules while continuing to hamstring the other, he said.

The proposed CenturyTel/Qwest merger may have valuation, dividend and synergy implications for potential M&A and corporate reorganization activity in the Canadian wireline business, Fan said. Manitoba Telecom Services and Bell Aliant are the companies he covers that are most like CenturyLink and Qwest, he said. “Details of the CenturyTel/Qwest deal may be applicable to M&A or corporate reorganization activity at MBT or BA.”