Mirroring the telco consolidation south of the border in the US, Canada is now set for its own new wave of shake-out, with incumbent Bell Canada (BCE) in ‘non-exclusive’ talks with its major competitor Telus. This would create a highly dominant national wireline and mobile operator, combining BCE’s strongholds in the east with Telus’s superior reach in the rural west. It could also throw into question the future ownership and direction of Inukshuk, the WiMAX joint venture between BCE and its other main rival, Rogers, whose quad play ambitions would be put on the defensive by a merger of the two giants.
BCE has been the subject of takeover rumors for some weeks following its promise to conduct a strategic review, with the results to be announced in the third quarter. Three private equity groups, including a consortium led by Teachers’ Private Capital, are also in talks, but any deal will be highly priced, with the telco currently boasting a market capitalization of just over US$30bn and a share price over US$35 on the NYSE. Telus has a market cap of about US$20bn and a share price hovering around US$60. Together, the two operators made revenues of C$26.4bn (US$24.6bn) in 2006, with BCE significantly the larger on C$17.7bn.
Telus argues that merger would create an all-Canadian solution in a world where scale is vital to survival, and would result in a world class and truly national telco “similar to other G8, European and Commonwealth countries in an industry critical to national sovereignty”. It would also generate “significant operating synergies”.
Another option for BCE has been suggested by Toronto-based investment banking firm Catalyst Asset Management, which is proposing the recapitalizaton of BCE as an alternative to sale. It argues that its plan would eliminate Canadian concerns that a privatized Bell would be effectively controlled by American private equity and would avoid the possible antitrust implications of the Telus merger plan. Catalyst suggests that current Bell shares would be exchanged one-for-one into a special stapled security. While it would trade as a single unit, the stapled security would have an equity portion that would pay a dividend and a debt portion that would offer interest payments. The chief attraction of this plan for investors would be that the combined interest and dividend payment would initially be C$2.55 a share compared with Bell’s current dividend of C$1.46. However, it would increase BCE’s debt level – also likely to be a negative of a privatization option.
The private equity groups in the running are the Canada Pension Plan Investment Board and its partners, including US giant Kohlberg Kravis Roberts; a group led by the Ontario Teachers’ Pension Plan, Bell’s largest stockholder on 6.3%; and another led by Cerberus Capital Management working with unidentified Canadian investors.
Most analysts see Telus as the best option in terms of future BCE growth, and it also allows Bell shareholders to keep the hefty dividend they have gained for many years, as the PE firms clearly would not. Telus ownership could even increase future dividends by creating, in effect, a duopoly with Rogers. In fiscal 2006, BCE distributed C$1.1bn to shareholders in dividends, making it one of the largest sources of dividend income in Canada, while Telus distributed $411m.
While shareholders may eye the potential growth, dividends and lessened competition of a merger with glee, the news will be less welcome to customers, unless the regulator opens up the market significantly to new entrants to stimulate new services and price pressures. And for equipment vendors, another large customer will disappear off the horizon. Both Telus and Bell Canada use CDMA as their main wireless network and have recently started upgrading to EV-DO Rev A, although the larger operator has been considering its options beyond that, taking its cue from Sprint and others, making migration to LTE or another technology a presumed possibility.
On the WiMAX front, both are members of the WiMAX Forum, although Telus has mainly seen 802.16 as an option for fixed access and backhaul. Bell Canada has been more active, through Inuksuk, its 50:50 joint venture with Rogers Communications. This, completed phase one of its planned national roll-out a year ago and is now well into phase two. The future ownership of this venture may come under question if a Bell-Telus merger does take place, since Rogers will be the only major competitor left to them.
Rogers has been the most dynamic of the Canadian operators recently, moving rapidly towards its goal of a full quad play, and stepping up its challenge to Telus in the rural west. In May, the operator united its cable, wireless and media units to support the next move towards fully bundled services and billing more efficiently, and to simplify its corporate structure and consolidate its debt. The company is Canada’s largest mobile provider and MSO, but its amalgamation puts the primary focus on to wireless, which accounts for the majority of its sales. Wireless revenue rose 22% year-on-year percent in the first quarter of 2007, faster than the other two units, which grew at 11% apiece. Overall sales climbed 16% to C$2.3bn (US$2.08bn). Rogers, unlike its two rivals, uses GSM and UMTS.
A combined Telus and BCE will obviously be a major potential threat to Rogers’ current ambitious growth rates and new service launches, but the inevitable pain of the merger process could also distract them, allowing the third player to build on its wireless strengths with a highly focused approach and attractive bundles.