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Verizon Calls Up Canada for Growth

Proposed deal would shake things up north of the border


Canada is a much smaller wireless market than the U.S. Still, it just might be the answer for a U.S. carrier looking to grow its customer base in the face of a highly competitive and increasingly saturated American market.

At least that’s what Verizon (VZ) thinks. News just broke that the company has offered $700 million for a small Canadian operator called Wind Mobile.

Granted, the deal doesn’t seem all that attractive at first glance. Wind Mobile is a small player in the Canadian market with only 600,000 wireless customers. It has limited coverage (localized to major metropolitan areas like Toronto and Vancouver) and its customers are budget-conscious.

The company has also been through a rough six months of ownership and leadership turmoil, while Canada’s big three telcoms — Rogers (RCI), Telus (TU) and BCE (BCE) — dominate the market with 90% of wireless subscribers.

What could Verizon, a company with 98.9 million subscribers, want with a foreign carrier that boasts just 600,000 customers?

“Easy” growth.

In a mature U.S. wireless market, VZ has to compete against the likes of AT&T (T) and Sprint (S) for existing customers if it wants to grow its mobile subscriber base in a meaningful way. At the same time, it’s fighting churn that can just as easily see its own subscribers jump ship to a rival.

Canada’s total wireless market is worth $19 billion, about equal to Verizon’s wireless revenues for the first quarter of 2013. While Rogers, Telus and BCE control the market with roughly 90% of subscribers, there is significant consumer discontent with “the big three” — a situation that led to the launch of alternatives like Wind Mobile and Mobilicity five years ago.

The small, regional alternatives have failed to make much of a dent despite Canadians’ frustrations because of limited networks, lack of LTE, a lack of in-demand phones like Apple’s (AAPL) iPhone 5 and the expense of those smartphones they do offer — a BlackBerry (BBRY) Z10 starts at $299 through Wind Mobile, for example, compared to $149 on a three-year contract through Rogers.

With that in mind, a huge wireless carrier like Verizon has the potential to seriously shake up the Canadian market. For one, Verizon’s buying power will allow it to undercut what the big three currently charge for smartphones. That Z10 that currently goes for $149 on a three-year contract in Canada is offered on a two-year contract by Verizon for $99.

The news that Verizon is interested in the Canadian market hit the incumbent carriers hard. The announcement of the company’s Wind Mobile bid caused stocks to drop, fast — within 15 minutes of opening on the Toronto Stock Exchange, Rogers and Telus were both down 9% while BCE was off by 5%.

Going back to that easy growth, there are some additional factors that make the Wind Mobile deal even more attractive for Verizon. First, Canadians are frequent travelers to the U.S. and according to the CBC, they racked up $1.5 billion in cross-border roaming charges in 2012. Owning infrastructure in both countries, Verizon could make a play for Rogers/Telus/BCE customers by reducing those roaming charges.

Even more intriguing, there is an upcoming wireless spectrum auction in Canada. The Canadian government, trying to foster competition, has set aside big chunks of the coveted 700 MHz spectrum (ideal for streaming data) in each market for competitors to the big three, giving preferential treatment to smaller carriers.

At the same time, the government introduced rules last year that allowed foreign companies to buy Canadian telecoms so long as they had no more than 10% of the Canadian market. BCE has already complained that the regulations mean a U.S. giant like Verizon could “take advantage of rules intended for small start-ups and unfairly buy twice as much spectrum as Canadian companies at a fraction of the price.

In other words, if the deal to buy Wind Mobile is accepted and all the regulatory approvals passed, Canada’s big three could go from having a minor irritant in a few markets to a big problem across the entire country. Analysts are saying that could result in 1.5 million customers ditching Rogers, Telus and BCE for Verizon within the next five years.

And if Verizon were to invest in LTE infrastructure in major Canadian markets, that number could grow significantly.

Admittedly, there’s nothing “easy” about spending $700 million and then investing in retail stores and building out LTE infrastructure. But with U.S. wireless subscribers largely spoken for, the lure of 26 million Canadian wireless subscribers who are frustrated with high prices and service levels of the big three incumbent carriers may be hard to pass up … especially if all the pieces fall into place for a preferential shot at available wireless spectrum.

Verizon seems determined to pursue the Canadian market and if the Wind Mobile deal falls through, it’s also reportedly in talks with Mobilicity.

Whatever happens, it has to be soon before the window of opportunity closes: Carriers must have their ownership and plans in order by Sept. 17 to qualify for the wireless spectrum bid.

As of this writing, Brad Moon did not own a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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