Will BCE/Telus Joint Upgrade Affect Rogers Communications?

With BCE Inc. (BCE) and Telus Corp. (TU) expected to announce a joint next-generation upgrade to their wireless networks as early as this week, the impact on the stocks of Canada's incumbent carriers should be "more neutral" than the market suggests, said National Bank Financial telecom equity analyst Greg MacDonald in a note to clients.

As originally reported in the Financial Post this past week, a new 3G HSPA network built by both Bell Canada and Telus will cost anywhere between C$440-million to C$1-billion in capital expenditure. However, Mr. MacDonald estimates Telus would generate roughly C$250-million more in revenue, C$85-million more in EBITDA and 250,000 more subscribers than it would be without the HSPA overlay.

However, Mr. MacDonald's "neutral" analysis of the value of the HSPA overlay estimates both the opportunity cost of not making the investment as well as the upside of making the investment, and takes into account the fact the equity markets appear very resistant to giving companies value for future opportunities

Mr. MacDonald wrote:

Given our model assumptions, it appears Telus would pay off the investment in roughly three years. Interestingly, this would bring us to the end of 2011, which is about when engineering experts expect the LTE standards to allow for 4G network upgrades.

Although the stock of Rogers Communications Inc. (RCI) has been down more than 7% since news that its two closest competitors will soon have the same high-speed network it operates, thus taking away its exclusivity and potential roaming revenue stream, Mr. MacDonald feels the market is too "skeptical" on its stock.

Mr. MacDonald said:

Though Rogers will likely lose roaming benefits from Canadian new entrants, it will remain the major roaming partner for non-Canadian GSM carriers.

Separately, though Rogers will lose its major handset exclusivity distinction, we note that it will remain the one wireless carrier that also boasts a superior broadband network with which it can bundle wireless services for a large part of its wireless subscriber base.

Furthermore, Rogers’ position in both the wireless and wireline broadband segments highlights Mr. MacDonald's investment thesis that superior assets lead to greater pricing power, lower capex risk and ultimately higher likelihood of positive free cash flow catalysts for equity investors.