Ottawa to ignite takeover frenzy in cellphone
sector
Friday, January 29, 1999
ANDREW WILLIS and SHAWN McCARTHY
With files from reporter Tyler Hamilton.
Toronto and Ottawa -- ANDREW WILLIS
in Toronto
SHAWN McCARTHY
in Ottawa
Industry Canada is going to liberalize rules governing cellular phone
companies, sources say, a move analysts expect will generate
takeover battles.
Ottawa is reviewing a four-year-old cap on the amount of the
broadcast spectrum that each phone company is assigned for its
personal communications services, or PCS. The so-called
"spectrum cap" blocks takeovers because the acquiring company
would breach its assigned limits.
Sources in the investment community say the spectrum cap on PCS
will be lifted in the next three months.
If that happens, telecommunications analysts and bankers predict
rivals BCE Inc. and BCT.Telus Communications Inc. will
attempt to broaden their PCS units by bidding for Clearnet
Communications Inc. Such a deal would likely be worth more
than $700-million, based on Clearnet's current market price.
An official at Industry Canada said that last Friday was the deadline
for industry submissions on the issue of lifting the spectrum cap,
adding that no decision has been made on the policy.
The spectrum cap was put in place in 1995, when PCS licences
were handed out, to foster competition in the sector. The U.S.
cellphone industry employed much the same system.
Domestic heavyweights Bell Mobility Communications Inc. (a
subsidiary of Montreal-based BCE) and Rogers Cantel Mobile
Communications Inc. of Toronto got slots, as did startups
Clearnet and Montreal's Microcell Telecommunications Inc.
"Four years ago, the incumbent cellphone companies would have
dominated PCS if it weren't for the cap," said a Bay Street
telecommunications analyst, who asked not to be identified. "Now,
Industry Canada is asking, 'Do we still need the cap to foster
competition?,' and I think the answer they're going to come up with
is 'No.' "
Clearnet is one of the companies pushing for an end to the PCS
spectrum cap. In the Toronto-based company's submission to
Industry Canada, director for regulatory and government affairs
Serge Bertuzzo wrote: "Clearnet is convinced that the spectrum cap
is no longer required and should be removed entirely."
Mr. Bertuzzo added: "Removal of the spectrum cap in and of itself
at this time is not sufficient to have any negative impact on
competition and choice. We also note that after three years, the
spectrum cap is beginning to have unintentional and undesirable side
effects."
The Clearnet executive said cellphone companies have run out of
space to operate under the existing cap and will have difficulty
adding a new generation of PCS services.
Analysts and investment bankers view Clearnet's national PCS
network, which holds a 6-per-cent share of the market and is
adding subscribers each quarter at a 20-per-cent clip, as a tasty
target for both BCE Mobile and BCT.Telus (the pending name for
the Telus Corp.-BC Telecom Inc. merger), as the two companies
strive to build phone systems that span the country.
Unlike Microcell, Clearnet's technology matches that of the two
giant phone companies, making integration much easier.
"Clearnet has the strongest strategic position and is the most
attractive takeover candidate in the Canadian wireless sector," said
a report two weeks ago from Dvai Ghose, an analyst with HSBC
Securities Inc. in Toronto. "We could envisage a scenario under
which BCT.Telus would purchase Clearnet's eastern [Canadian]
PCS spectrum while Bell Mobility could purchase Clearnet's
western PCS spectrum."
Other analysts said for competitive reasons, both BCT.Telus and
Bell Mobility would likely want sole ownership of Clearnet.
Clearnet has a market capitalization of $623-million and $1.1-billion
of debt. A voting and non-voting share structure gives 63-per-cent
control of the company to the Simmonds family of Port Perry, Ont.
A recent flurry of cellphone acquisition activity in the U.S. market
has helped boost Clearnet's stock price -- the stock closed at $17.50
yesterday on the Toronto Stock Exchange, unchanged on the day
but up from the $12 level at the beginning of the year.
In a blockbuster deal last month, Vodafone PLC, the largest cellular
phone operator in Britain, offered $55-billion (U.S.) for cellphone
concern AirTouch Communications Inc. of San Francisco, trumping
a $45-billion bid by Bell Atlantic Corp., the largest U.S. local phone
company.
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