January 14, 2014 / 8:23 PM / 4 years ago

UPDATE 1-Canadian telecom shares climb after Wind leaves wireless auction

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By Alastair Sharp

TORONTO, Jan 14 (Reuters) - Shares of Canada’s top telecom providers, BCE Inc, Rogers Communications Inc and Telus Corp, all climbed on Tuesday after Globalive’s Wind Mobile withdrew from a major auction of wireless spectrum.

The move all but assures that the three players will take the lion’s share of the prized spectrum at a lower price than they might have otherwise expected to pay.

But the gains were tempered by concerns among some investors that Canada’s Conservative government, which has pushed to increase competition in the wireless space, could respond with more stringent regulation of the industry.

The Conservative government has pitched itself to voters as fighting the dominant telecoms on their behalf to lower prices and improve service.

Globalive’s decision to bail out of the auction dealt a double blow to the government, which was also hoping that strong proceeds from the auction would help it lower the budget deficit heading into next year’s federal election.

There is now a strong chance of more regulation being drawn up, but Ottawa should tread carefully to avoid damaging the economy, said John Goldsmith, deputy head of equities at Montrusco Bolton, which owns shares in the Canadian telecom majors.

“If you force companies to cut pricing ... what ends up happening is you have companies invest less and fire more people,” he said. “So you will have more of an unemployment problem, as companies try to keep margins where they are at.”

The federal government has recently moved to cap the rates big operators can charge rivals whose customers use their networks while roaming. It also toughened penalties for companies that break rules on cellular tower sharing, and forced operators to ditch three-year contracts.

Canada’s industry ministry, which is handling the auction, did not respond to questions about possible further regulation, but said the auction would provide Canadians with the latest high-speed wireless technologies.

The 700 MHz spectrum is particularly valued for its ability to carry a signal over long distances and to penetrate thick walls, making it useful for both urban and rural deployment.

The opposition New Democrats said in a statement the government had created uncertainty for investors with mixed messages, confusion and mismanagement of the auction.

FOREIGN PLAYERS STEER CLEAR

The withdrawal of Wind, a relatively new operator with some 650,000 customers, sent shares of Rogers, Canada’s largest wireless company, up 2.3 percent and Telus up 1.7 percent by early afternoon trading on the Toronto Stock Exchange, while BCE shares rose about three-quarters of a percent.

Regional operator Quebecor Inc jumped 2.4 percent, while Manitoba Telecom Services Inc was flat. RBC Capital Markets analyst Drew McReynolds said that Wind’s absence from the auction helps the pair in their respective home markets of Quebec and Manitoba while also clearing a path should they have national wireless ambitions.

Bidders in the auction are barred from discussing their strategy or intentions in public or with rival bidders.

Wind, which is Canada’s fourth-largest wireless carrier but dwarfed by the top three, said on Monday it quit the auction after its main backer, European telecom giant Vimpelcom Ltd , decided not to fund its participation.

“We believe Wind’s withdrawal from the auction is yet another confirmation that Vimpelcom is not looking to invest in Canada for the long term,” said Barclays analyst Phillip Huang in a note to clients.

Despite the government’s best efforts to boost competition, foreign companies have broadly steered clear of Canada. This is partly because foreign firms are prohibited by law from controlling a telecom company that holds more than 10 percent of the market.

Analysts have also cited high entry costs required to serve a small population spread across a huge area and the difficulty of challenging well-established operators.

The government has loosened restrictions on foreign ownership of small operators such as Wind. But it has shown an aversion to letting the airwaves of small players end up with the three biggest operators. This essentially closes off one exit for foreign investors in the event things turn sour.

Vimpelcom said it is still in talks with Globalive chief executive officer Anthony Lacavera and the Canadian government about how to develop Wind into a strong fourth player.

Lacavera retains voting control of Globalive despite holding a minority economic interest, a holdover from an arrangement that circumvented earlier restrictions on foreign ownership. (With additional reporting by Euan Rocha in Toronto, Randall Palmer and David Ljunggren in Ottawa, and Maria Kiselyova in Moscow; Editing by Meredith Mazzilli and Jeffrey Hodgson)

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