Could New Wireless Rules Lead to a Bell-Telus Merger?

While the increased competition that will likely result from Industry Canada’s new wireless spectrum rules may impact some of the incumbent players, one analyst says shares in the industry’s leaders are still a good value. He also thinks there is a possibility that merger talks between Bell Canada Inc. (BCE) and Telus Corp. (TU) could be reignited.

Desjardins Securities analyst Joseph MacKay thinks the recent sell-off in Telus and Rogers (RG) shares “more than adequately reflects” industry Canada’s announcement, and creates a buying opportunity in both stocks.

He also doubts whether every company rumored to be entering the auction procress will actually do so. Mr. MacKay cited wireless penetration rates that are expected to reach as high as 65% in 2008, noting that a new entrant needs a residential customer base to cross-sell services.

He expects Videotron will remain the most likely candidate to run a network in Quebec, but thinks MTS/Allstream lacks the customer base to be successful.

For Rogers, while it is expected to lose some market share like its fellow incumbents, the likelihood that new entrants operate GSM networks and roam on Rogers’ network means additional revenue.

Bell and Telus, meanwhile, appear to be facing a defining moment as to whether they make the move to GSM, Mr. MacKay said in a research note.

Given the mandated roaming capabilities of the auction process and the potential for several new entrants to enter the Canadian wireless market, the analyst said the door for a potential Bell-Telus merger could be reopened.

BCE vs. TU 1-yr chart: