Analyst Lowers Rogers and Telus’ Price Targets on Aggressive Spectrum Bidding

In light of the aggressive wireless spectrum auction bidding which to date has now raised C$2.96-billion, Vince Valentini, an analyst with TD Newcrest, downgraded his price targets of Quebecor, Rogers Communications Inc. (RCI) and Telus Corp. (TU).

While Quebecor's participation has greatly exceeded analysts (or everyone's for that matter) expectations, the risk of its expansion outside Quebec has forced Mr. Valentini to lower the 12-month price target from C$39 to C$38.

In a note to clients Mr. Valenti wrote:

The aggregate high bids on 30 MHz of set aside spectrum across the four large regions of Quebec (Eastern, Southern, Northern, and Outaouais) are now at C$201-million versus our original DCF model estimate for Videotron of only C$81-million.

As for Rogers and Telus, their stock targets have been lowered as a result of the magnitude of bidding by new entrants indicates they are not pursuing a strategy of buying spectrum simply to resell it at a profit in five years, noted Mr. Valentini.

Mr. Valentini said:

We must assume that they have the funding and desire to actually compete as a fourth (or fifth) carrier in this mature market. We do not believe that these new entrants will thrive, especially with the heavy upfront costs for spectrum, but we must now acknowledge that they are serious about giving it a try.

As Shaw keeps fighting for licenses in western Canada, it could withdraw if other new entrants keep raising the minimum bids for licenses in B.C. and Alberta. However, if Shaw and another independent player (DAVE Wireless, Globalive, Novus) are successful in winning licenses, Mr. Valentini said he would likely move forecasts for Telus down to the aggressive scenario.

With the auction dying down (it is looking it will end as early as Tuesday of next week), Mr. Valentini concludes that it is likely that at least one new wireless network will be built in all of the top ten markets in Canada, and there will be a possibility for two new networks to be built in a handful of cities.