Canadian wireless changes on hold

[Der84]

Given the beating experienced by the S&P/TSX composite index, investors in names like BCE Inc., Rogers Communications Inc. and Telus Corp. are clearly responding positively to the CRTC’s decision that prevents Globalive Wireless from becoming Canada’s fourth major cellphone provider indefinitely.

New competition in the wireless space has big a major overhang for incumbent carriers. This development potentially removes a big chunk of that competitive risk as only Videotron and two smaller new entrants are now set to launch.

Globalive is evaluating its options after the industry regulator determined that it is in fact controlled by Orascom, a non-Canadian company, which currently makes it ineligible to operate as a telecommunications common carrier in Canada. But don’t expect it to give up.

The CRTC does not object to Orascom’s 65% ownership level since similar thresholds have been approved in the past. And the regulator only recommended minor changes elsewhere in the governance and shareholder structure.

Even if those changes were made, the CRTC objects to Orascom’s high level of debt. At $508-million, this amounts to more than 80% of the total firm capital (including the 65% equity stake).

Meanwhile, its technical expertise and branding gives Orascom the ability to determine Globalive’s strategic decision-making, noted Jonathan Allen at RBC Capital Markets. He suggested that the CRTC probably declined to offer a specific remedy for how much to offload in an effort to avoid setting a precedent.

The debt issue appears to be Globalive’s biggest hurdle, so Orascom will likely have to transfer its debt to a bank or third party before Globalive can getting going. It tried to obtain external financing to replace Orascom’s loans, but had little success since this coincided with the credit crunch. This would likely be easier now, but it naturally depends on bank appetite and that could take a few months.

Globalive will probably appeal to cabinet to overturn the CRTC’s decision, but the length of this process and the probability of it turning out in their favour is a big question mark. Mr. Allen thinks there are probably grounds for a legal case since Industry Canada and the CRTC went two different ways.

Another option, which surely wouldn’t be quick, is to go the political route and ask for the foreign ownership rule to be removed.

Since Globalive has received Industry Canada approval for the licenses, it still owns and controls the spectrum. So it is probably not eligible for a refund.

Globalive could decide to sell the spectrum to other new entrants and Shaw Communications Inc. may be interested, according to UBS analyst Phillip Huang. That is because Globalive’s licenses cover Shaw’s cable footprint.

He also suggested that Public Mobile and DAVE may be interested in Globalive’s licenses in Ontario, while Bragg may be interested in the licenses in Atlantic Canada. Globalive could also merve with one of these new entrants.

Either way, it is stuck with a big chunk of spectrum. It can either hold it or sell it at a loss.

Canadian wireless changes on hold - FP Trading Desk

[Der84]

Sorry about the length of the post. I was just going to show the link to it, but I wasn't sure if it would ever expire. So I just posted the whole article.

[Mobile Mike]

I hope the outcome is WIND having a chance to start and become a true competitor to Rogers/Fido, Telus, and Bell.

One thing I have to say is Canada's wireless business is hotter than ever, what with the UMTS birthing on Telus and Bell, plus the possibility of WIND. IMO, it's much more interesting than what's going on south of Canada...

[Der84]

I'm definitely looking forward to seeing how this all comes out in the next while. I'm also stoked about seeing the new equipment and cellular sites from these competitors once they come out, ha ha.

I will try to keep this info updated though.