Telecom Trends

Jeffrey Fan, telecom analyst at UBS, has released a report that looks at the impact of new entrants on the Canadian wireless industry. The report is certain to generate substantial discussions, if not heated arguments in the countdown to Industry Canada's release of the AWS spectrum auction rules.

Among the most significant findings in the report are:

• Videotron and Shaw have positive business cases for wireless, substantial opportunities for Videotron, even without any incentives from the government. In the case of Videotron, UBS estimates that it can afford to pay 3 times the cost of spectrum in the 2001 auction. Shaw could afford to pay almost double the 2001 price.
  
• MTS Allstream does not have a business case if it has to pay the average price for spectrum from the last auction. It has a negative NPV and very low IRR. "We fail to find the economic rationale for MTS Allstream to expand its wireless operations nationally." The UBS model shows a negative NPV of $684M for MTS Allstream - which seems to indicate that the present value of new entrant concessions would need to be that high, just to make the business case break even.
• UBS believes foreign carriers will not find Canada's AWS auction being sufficiently attractive for invest at a minority position.

What would it take to make the MTS Allstream business case go positive?

To make it viable, we believe MTS would want: 1) little cost incurred for the spectrum licences; and, 2) to build out less than two-thirds of the sites that would typically be required.

UBS raised its target for MTS Allstream last Wednesday, however the new paper discusses a number of factors that could impair MTS Allstream's success. Among them:

• the company's ideal customers are seen as a challenge for a wireless business plan since the business services market is already mature;
• business clients would be most demanding on roaming capabilities which would be costly until the national network is largely built;
• the success in developing domestic and international partnerships is not likely; and,
• external capital will be required, given the current dividend stream.

We can expect considerable discussion of this paper, which also quantifies changes in stock market valuations taking into account the potential impact of additional wireless players.

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AWS, MTS Allstream, UBS