Canada Rule Change Could Shake Up Telecom Market

Includes: BCE, ORSTF, RCI, T, TU, VZ
by: Streetwise Blog

By Andrew Willis

Industry Minister Tony Clement just opened the door to foreign ownership of Canadian telecom.

By overruling a regulatory decision that blocked Globalive Communication’s wireless launch, the federal government has given bright lawyers and financiers carte blanche to design takeovers of the country's biggest telecom companies: Telus (NYSE:TU), BCE (NYSE:BCE) and Rogers Communications (NYSE:RCI). With the right funky share structures, global players now have the ability to do what the law of the land is meant to prevent.

That’s not what Mr. Clement intends. There is much brave talk from the Industry Minister on Friday about the fact that this decision is not precedent-setting. The official line is that Globalive’s backers at Cairo-based Orascom (OTC:ORSTF) have cut a deal that meets the letter of the law that prevents foreigners from controlling Canadian telecom and media.

That talk is just plain wrong. Mr. Clement made a populist decision to ensure inceased competition in wireless, a policy move with enormous implications for ownership of the sector.

Step back, and look at Globalive’s structure. It is a triumph of org charts over common sense.

Right now, voting control of Globalive rests with Canadian chairman Anthony Lacavera. Orascom is a minority shareholder with 32% of the votes.

However, Orascom is lending Globalive more than $500 million, the bulk of its debt financing, owns 65% of its shareholder equity and has a $100 million services contract.

For all Mr. Lacavera’s votes, Orascom clearly hold enormous sway, including a path to full control in the event Globealive defaults on its debt. It was those loans that the Canadian Radio-television and Telecommunications Commission objected to, and with good reason. The Canadian telecom industry is littered with players that had to be recapialized. The Egyptian company clearly knows how to play these games, as it holds stakes in telecom plays around the world, and claims 80 million subscribers

Letting Globalive launch, without substantive changes to its capital structure, defies the spirit of domestic ownership regulations. The CRTC said as much.

Telus and other wireless players took out ads in the run-up to Mr. Clement’s decision, explaining that they would have to revisit their ownership in the wake of a favourable ruling on Globalive.

Imagine what bright lawyers and banks can dream up, based on this decision. Give super-voting shares in Rogers or Telus or BCE to the company’s Canadian-born CEO. Then sell the bulk of the equity and operating control to Verizon (NYSE:VZ) or AT&T (NYSE:T), which would see a market with relatively high wireless margins, and relatively low cell phone penetration. Shareholders in domestic telecom companies will welcome Mr. Clement's decision, as it should introduce a small takeover premium into their holdings.

The door is now open to that kind of deal-making, and all that it implies for a made-in-Canada telecom policy, despite Mr. Clements best intentions.