Coming year could see drama aplenty for major telecom players
Many analysts point to telecom as one of their favourite investment areas in 2009
By Simon Avery
The telecom industry has provided some of the most dramatic moments in Canadian business in 2008, including the frantic bidding for new wireless spectrum licences, the death of cable and wireless pioneer Ted Rogers, and BCE Inc.'s troubled journey to privatization.
The year ahead could produce even more drama in the sector, with the birth of new independent mobile phone companies, the emergence of a refocused and more competitive Bell Canada and the inauguration of a new leader at Rogers Communications Inc.
Major events have caused gyrations in the values of Canada's communications players this year and could continue to do so through 2009, but many analysts point to telecom as one of their favourite investment areas in the year ahead.
Both in Canada and internationally, the telecom sector has performed better than the general market. Canada's benchmark S&P/TSX is off about 40 per cent over the year, for example, but the S&P/Telecom Index is down by 23 per cent in 2008.
A new survey by UBS AG says the global telecom market has outpaced the broader market by 7 per cent in 2008. The firm says that with the economy expected to slow dramatically in 2009, phone companies represent one of the best defensive plays in the stock market.
UBS analysts list Rogers Communications as one of its top 10 global telecom picks, citing strong growth in both its cable and wireless phone business, the company's exclusive rights to sell Apple Inc.'s iPhone in Canada, and a strong balance sheet with no significant debt obligations until 2011.
Greg MacDonald, an analyst with National Bank Financial Inc., also cites telecom as a shelter in the storm. "Despite the recent volatility in this sector we believe the stable cash flows, growing earnings and, for some, growing dividends provide good support against the backdrop of recessionary concerns," he said.
Mr. MacDonald points to Bell Aliant Regional Communications Income Fund as a favourite because of the 12.9-per-cent yield the trust is paying today.
Rogers Communications has just lost its founder, chief executive officer and biggest personality, Ted Rogers, who passed away at age 75. But in a testament to his succession planning and the depth of management talent at the company, the stock has remained stable throughout the family crisis. In the coming days, a special committee of the board will choose his successor from a group of internal and external candidates.
The Street strongly favours the appointment of Nadir Mohamed, president and chief operating officer of the communications group at Rogers, whose successes include transforming the company's wireless business into the No..1 player in the country.
Regardless of who lands the top job, Rogers Communications is about to begin a new course, where it is no longer defined by bold, dramatic moves, but instead runs more like a blue-chip operation, with a focus on boosting profitability and strengthening operations. Analysts expect Rogers to hold the line on pricing even as competition increases. It will keep pushing its package of bundled phone, Internet and TV services to residences and try to differentiate its wireless business with popular handsets and high-speed service.
Private or public, BCE will have a new focus on operations in 2009. George Cope, the much-celebrated new CEO who was promoted at the insistence of the company's biggest shareholder and lead investor, the Ontario Teachers' Pension Plan - will intensify his overhaul of the company. He cut jobs, launched a re-branding of Bell Canada and bolstered customer service in his first few months.
Bigger moves are expected once the deal-making is done, including a sale of non-core assets and a new strategy on capital expenditure. If Teachers, which owns about 6 per cent of the publicly traded company, cannot complete a buyout with its partners, expect more shareholder activism from it.
The country's second-largest phone company faces some big challenges, including finding a way to slow the loss of residential phone customers to Shaw Communications Inc. One solution could be to offer customers a package that includes television service. Telus TV has launched in some areas, but analysts want to see a faster rollout to try to hold the line against Shaw.
Shaw, the top cable player in Western Canada, has a focused and conservative strategy to keep investing in its core services and will wait at least a year before bringing its own wireless business to market.
Telus also needs to bring down its costs, which could it announcing more layoffs in 2009, and needs to bolster sliding revenue per user in its wireless business. An agreement this fall with Bell Canada to do a joint overlay of their networks will see both carriers better able to compete with Rogers with the wireless standard known as GSM/HSPA. Both companies are also investing in new optical gear for their networks from Nortel Networks Corp. that will increase wireless transmission speeds by as much as four-fold.
As it wrestles with day-to-day operations, Telus will face plenty of market speculation about plans to take another run at BCE, providing the leveraged buyout with Teachers' fails. "Belus" would create a communications powerhouse operating coast-to-coast, but most analysts say the regulatory environment will not allow such a deal until some of the new wireless entrants launch their businesses.
Globalive plans to roll out cellphone service in five cities by late next year. The Toronto-based firm, one of several players hoping to tap the lucrative market for wireless services, has the financial backing of Orascom Telecom Holding SAE, the largest wireless provider in the Middle East.
Tony Lacavera, the CEO and co-chairman, says Globalive will initially offer a simple service to appeal to consumers tired of being locked into contracts by Rogers, Bell and Telus. Eventually, it will need to raised additional funds to fulfill plans to become a bigger player selling services to both consumers and businesses.
Joining Globalive in shaking up the wireless sector are Quebecor Inc.'s Vidéotron Télécom Ltée, which plans to have a wireless business running in Quebec within 18 months.
BMV Holdings Inc., a new firm backed by U.S. venture capitalists, says it will offer wireless phone service for $40 a month in Ontario and Quebec by the third quarter of 2009. And recently-created Data & Audio Visual Enterprises Wireless Inc., plans to roll out service to 10 cities, including Toronto, Vancouver, Calgary, Edmonton and Ottawa. The company hasn't provided a time frame.