BUSINESS

Verizon's entry into Canada could be costly for Rogers, Telus and Bell: analyst

06/26/2013 12:05 EDT | Updated 08/26/2013 05:12 EDT
The impact of the potential arrival of American giant Verizon in Canada's cellphone market has left analysts divided, with some seeing benefits for consumers and others a lot of negatives.

Verizon, the largest American carrier, has almost 100 million subscribers, easily dwarfing the combined 25 million held by Rogers Communications (TSX:RCI.B), Telus Corp. (TSX:T) and Bell Inc. (TSC:BCE).

News that it was in the market from some of Canada's smaller players sent the shares of the big three Canadian companies tumbling on Tuesday.

National Bank analyst Adam Shine called pullback in share prices a likely "overreaction," but said he expected some "acute" cost-cutting, including layoffs, as the Canadian companies move to deal with a big new competitor.

"This will mean significant layoffs which could easily trump the hiring to be done by Verizon, which besides a needed presence in retail outlets, should be able to initially handle a lot of functions (marketing, billing) from the United States," Shine said in a research note.

Shine also said the arrival of Verizon could also mean fewer low-cost monthly plans for cellphone users amid new entrant consolidation, adding that the price of Verizon’s arrival "may ultimately prove expensive for Canada."

But U.S.-based Edward Jones analyst Dave Heger described the entry of Verizon as a fourth, large player would likely be positive for consumers.

"I certainly think Verizon would try to be competitive and creative with pricing plans," Heger said from St. Louis, Mo. "Somebody like Verizon would have a better chance of making a go of it than a small startup."

"Certainly, the Canadian government has made it clear they'd like to have a fourth competitor in each geographic area," Heger said.

The Globe and Mail has reported that Verizon (NYSE:VZ) has made an initial $700-million offer for Wind Mobile and is starting talks with financially struggling Mobilicity. Both small carriers have just over 850,000 subscribers between them.

Verizon refused to comment Wednesday on its possible entry into the Canadian wireless market. The federal government has lifted foreign ownership restrictions on wireless companies with a 10 per cent or less market share.

The potential for competition from a big American telecom punished the stock of the large Canadian telecoms, although most were off early lows. Telus Corp. dropped $2.67 or eight per cent to $30.70, Rogers Communications fell $4.22 or 9.2 per cent to $41.67 and BCE gave back $1.75 or 4.04 per cent to $41.57.

Verizon gained three cents to US$50.47 on the New York Stock Exchange.

Wind Mobile is 65 per cent owned by Russian owned, Dutch-headquartered VimpelCom, while the remaining 35 per cent is owned by founder Anthony Lacavera.

Lacavera said he still wants to buy back the no-contract cellphone company he launched in 2009.

"I maintain my interest in Wind," Lacavera said, but added that he was not surprised that Verizon is taking a look at Canada.

"The whole environment is very advantageous for a major foreign operator to come in at this point," he said.

Telecom analyst Iain Grant, managing director of the SeaBoard Group, said Verizon is not a household name in Canada and noted that most of the country's cellphone customers are already under contract with a carrier.

"It's still a tough marketplace for an outsider to break into," he said.

"(However) It's always better to have no competition rather than strong competition," Grant said of the incumbents.

Desjardins analyst Maher Yaghi also noted the potential downside for some of Canada's telecom companies.

"We believe Verizon has several advantages it could use to become successful in the marketplace, such as its advantage with U.S. roaming, capital strength and, importantly, its handset-buying power," he said in a note.

Yaghi said that BCE, Quebecor (TSX:QBR.B) and Bell Aliant, which transferred its wireless business to Bell several years ago in a reorganization of BCE's holdings, are best positioned to weather the storm.