Verizon Coming To Canada? Wireless Carrier Frets Over Regulatory Structure

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VERIZON CANADA
Verizon Wireless says it's still eyeing the possibility of entering Canada's wireless market, but at this point "it's really just an exploratory exercise." (Associated Press photo) | AP

Verizon Wireless says it's still eyeing the possibility of entering Canada's wireless market.

"We continue to explore and have discussions, but at this point it's really just an exploratory exercise," said Verizon's chief financial officer Francis Shammo during a conference call Thursday.

The company said it sees ripe opportunity in Ontario and Quebec, the country's most populated provinces, which are also adjacent to Verizon's U.S. properties.

Verizon is also interested in participating in a January spectrum auction for the 700-megahertz frequency.

"It mirrors up exactly with what we launched here in the United States," said Shammo.

However, he cautioned that Canada's regulatory environment and rules around foreign takeovers could pose challenges.

Ottawa recently began allowing foreign takeovers of telecom companies that have a 10 per cent or less share of the market.

Verizon has reportedly been in talks to acquire startup carrier Mobilicity, and there are reports it has made an initial $700-million offer for Wind Mobile, another of Canada's small telecoms.

Maher Yaghi, an analyst at Desjardins Securities, said if Verizon decides to enter the Canadian wireless market, it could have a huge impact on incumbents BCE Inc. (TSX:BCE), Rogers Communications Inc. and Telus Corp. (TSX:T).

"Verizon has very, very deep pockets," said Yaghi.

"We're used to saying Bell and Telus and Rogers (TSX:RCI) are big companies and they make a lot of money, but if they go up against Verizon — it's not an even fight."

The entry of Verizon could have a material impact of 10 to 18 per cent on the incumbents' stock prices, Yaghi wrote in a report.

And if U.S. giant Verizon provides coast-to-coast service north of the border, it could snatch up as much as 10 or 15 per cent of the market after a few years, he said.

"Verizon still doesn't have all the pieces in place to enter the Canadian market," said Yaghi.

"I think they need to figure out a few things first. On the regulatory side, they want to make sure the spectrum auction stays as presented by the government right now. They don't want any of the rules to change."

The current rules on the sale or transfer of radiowaves used to operate cellphone networks don't allow incumbents to bid on and win more than one block, but this doesn't apply to new entrants, said Yaghi.

"The rules were set up for small entrants, to entice them to come to Canada, but maybe not a big company like Verizon," he added.

Telus Corp. called on Industry Canada to level the playing field so that a "foreign behemoth" like Verizon doesn't have an unfair advantage over incumbent Canadian carriers.

"We welcome competing with anyone, even an international giant such as the Verizon organization," said Josh Blair, the company's chief corporate officer.

"We just believe it needs to be on a fair basis and on a level playing field. They should be treated the same way as Telus or Bell or Rogers when it comes to the acquisition of spectrum, for example."

Verizon's comments Thursday came as the wireless company reported its latest quarterly results.

The largest cellphone carrier in the U.S. added 941,000 devices to its contract-based plans in the April to June period, exceeding analyst estimates and continuing a strong run. It boosted service revenues by 8.3 per cent from a year ago. Its closest rival, AT&T, is seeing revenue increases of around four per cent.

Almost all of the gains on the wireless side were due to customers upgrading to higher-priced plans or adding more devices to their plans, as opposed to an influx of new customers.

Analysts saw some weakness in the results, pointing to a decline in the profit margins on the wireless side, and Shammo's comment that the rate of device upgrades would be roughly the same as last year. Because the company subsidizes each new smartphone by hundreds of dollars, frequent upgrades are costly.

Verizon shares fell $1.07, or 2.11 per cent, to US$49.67 in mid-afternoon trading on the New York Stock Exchange. It was the first time the shares went below US$50 this month. The shares had hit a 12-year high of US$54.31 on the last day of April.

Net income at Verizon Communications was US$2.25 billion, or 78 cents per share, up 23 per cent from a year ago, the company said Thursday. Excluding a pension-related gain, earnings were 73 cents per share. That beat the average estimate of analysts polled by FactSet by a penny.

Revenue was US$29.79 billion, up more than four per cent from a year ago and in line with analyst expectations.

New York-based Verizon Communications owns 55 per cent of Verizon Wireless, which means that only that percentage of its profits flow to its bottom line. The rest goes to joint venture partner Vodafone Group PLC, a British cellphone company with wide-ranging international interests.

Verizon Communications has a long-standing interest in buying Vodafone out of Verizon Wireless, and analysts expect a deal could be reached later this year.

—With files from the Associated Press

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