After weeks of mounting speculation, US telecom giant Verizon (VZ) has allegedly offered a deal valued at $700 million to acquire Canadian mobile provider Wind Mobile. In addition to potentially acquiring Wind Mobile, Verizon is also in talks to acquire another carrier, Mobilicity, and it could enter the bidding for government spectrum offers.
Why is Verizon interested now?
For years, Canadian regulations have previously disallowed a foreign entity from fully-owning a domestic telecom business, but it has only been recently that ownership rules have started it loosen. Still, the country remains dominated by the "Big Three" in the mobile carrier space: Rogers Communications (RCI), BCE (BCE), and Telus (TU). However, Canadian regulators seem to now want at least four competitors in every major market, and that simply isn't possible as upstarts try to battle the deep-pocketed Big Three. Verizon, on the other hand, could easily enter the Canadian market and become a serious player.
Verizon's market capitalization is currently larger than all three Canadian companies combined, and it does not even own all of Verizon Wireless. Such financial strength could allow Verizon to outspend rivals with respect to marketing and leverage existing relationships with smartphone and mobile phone OEMs to achieve a lower cost basis on its phones. Verizon also has spectrum expertise, and we believe it could build one of the best 4G service offerings in Canada, especially if the firm is able to acquire spectrum on the cheap. Additionally, Verizon has a strong brand reputation in the US, and we doubt it would take very long (or much effort) for news to spread north. For consumers who frequently travel between countries, entering the Canadian market could lower roaming costs for Verizon customers on both sides of the border. No Canadian (or American) carrier can match that product offering, in our view.
Though we are excited about Verizon's potential entry into Canada, it's not a done deal yet. The Canadian government is notoriously protective of its native industries, and it has been known to reject deals that would give foreign companies ownership of valuable assets. We also believe the Canadian government may block the deal simply on the basis of just how strong Verizon could eventually become in the Canadian wireless market (money would flow across the border into the US).
Even though Canada is a substantially smaller market than that of the US, we believe Verizon's entry into the country would be an inexpensive proposition relative to the potential payoff of gaining a foothold there. The US has become well-served, and we doubt there will be any drastic changes in market share after US regulators rejected AT&T's (T) recent proposed acquisition of T-Mobile (TMUS). Canada could be a relatively inexpensive way to add growth.
However, Verizon's entry is not a sure thing by any means due to Canadian regulatory concerns. Still, given the nature of the wireless carrier business, we believe regulators acknowledge that a deep-pocketed rival is the best option to gain market share against the Big Three. We love Verizon's strong wireless business and solid (but slowly dying) traditional business, and we think the firm offers investors fantastic dividend growth potential. We'd love to add the company to the portfolio of our Dividend Growth Newsletter, but we're still waiting for a better entry point.