NEW YORK -- Canada’s big three cellphone companies could be in for some serious competition.
A new proposal from Ottawa that appears aimed at allowing foreign interests to roam over the border and invest in smaller entrants in the near oligopolistic market would create some tough rivals for BCE Inc., Rogers Communications Inc. and Telus Corp.
“We have some of the highest prices in the world, which is one of reasons the government is so interested in helping new competitors come into [the] marketplace,” said Iain Grant, president of SeaBoard Group, a Montreal-based telecommunicataions consulting firm. “New entrants have to go through too many hoops now.”
Such a change in Canada’s foreign ownership rules — floated on Wednesday in the Throne Speech — is far from assured. It is being proposed by the minority Conservative government and would need a legislative change.
Telecom industry analysts said plenty of investors would be interested in Canada, which has big profit potential because of its relatively low cell-phone adoption compared even to many developing nations around the world.
Fledgling wireless companies such as WIND Mobile and Mobilicity could get a big boost from foreign backers, either through an outright takeover or a financial stake, which would give them money to grow.
Dvai Ghose, a telecom analyst with Genuity Capital Markets, said two of the most likely candidates that would be looking for investment opportunities are Mexico’s Carlos Slim, a deep-pocketed investor who has complained about Canada’s closed telecom market, and T-Mobile, a German mobile phone provider that has built an extensive network in the United States.
Duncan Stewart, a telecom expert with consultancy Deloitte Canada, said big established American names such as AT&T Inc. and Verizon – which often have their TV commercials broadcast on TV channels across the border – might look to back some of the smaller Canadian entrants and re-brand under their own names.
European brands such as Orange Plc and Vodafone would probably be less interested because their brands aren’t as established in North America.
Opening up Canada’s telecom sector to foreign ownership might come in two steps, industry observers said.
First, new entrants would be allowed to get backing or taken over entirely by foreign interests. The Canadian government is expected to impose a 10% cap on how much market share each those companies could take.
Then, after five years, the sector might open up more to allow foreign ownership of the giant incumbents, Bell, Rogers and Telus.
Allowing big foreign companies to swoop in now and buy the incumbents would do nothing to solve the country’s current competition problem because it would simply put the dominant companies in the hands of others.
Encouraging competition from smaller rivals should make Canada a much more competitive market and foster innovation, analysts said.
Only about 70% of Canadians have a cellphone, compared to over 100% for much of Europe, 99% for Chile, 78% for Mexico and 92% in the United States, said Ronald Gruia, lead telecom analyst with Frost and Sullivan, a business research and consulting firm in Toronto.
“That status quo was benefiting the incumbents, which are quaisi ologopolistic,” he said. “They started dropping their prices last summer, but that was more reactive than proactive.”
Philip Brown, a mergers and acquisitions lawyer with Torys in New York, said his firm has gotten a flurry of calls from private-equity investors in the past when Canada floated the idea of opening its telecom market.
“I suspect they’ll be calling again, asking, ‘What does this mean?’” he said.
Financial Post