Fixed Mobile Convergence

Timing is indeed everything and that could now be the case for a ‘Belus’: a Canadian coast-to-coast-to-coast telecommunications giant created from a union of East-Coast-based Bell Canada (News - Alert) and West Coast-headquartered Telus.

 

A new report from RBC Capital Markets carried by CBC Wednesday said such a merger is looking "very likely" within the next two years. It cited the impending launch of new cellphone companies, the continuing trend of customers ditching their landlines, and the saturation of Internet and TV services are combining to eat away at growth opportunities for Bell and Telus.

 

The new creature may be powerful enough to combat competition from Rogers plus cable firms that are entering the wireless arena like Shaw could have born a few years back when the prospective parents were dancing with each other. Yet the environment then wasn’t quite right. And then Bell decided to try and go private which at $50 billion was the largest such buyout ever attempted but which ended in a dismal failure, which may have made it, and presumably regulators who tut-tutted the engagement realize that Telus was right for the carrier after all.

 

RBC analyst Jonathan Allen said in a research note to clients that those factors are putting pressure on both companies to cut costs, something they could achieve better as a merged entity. The spectre of increasing competition, particularly in wireless, should also ease regulatory and government concerns.

 

"The biggest hurdle to a Bell-Telus merger has traditionally been getting wireless through the Competition Bureau … but over the next year, there are three to five new wireless carriers launching service," Allen wrote. "The more disruptive the new entrants are, the better the merger odds will be."

 

A combined Bell-Telus would hold more than 60 per cent market share of the wireless business in six provinces, with the highest concentrations in the Atlantic region and Alberta. However, Allen said, the Competition Bureau tends to look at market power rather than just share. With competition set to increase, a merged company will see its ability to control prices lessen.

 

"The rule of thumb is usually whether the combined company can implement a five-per-cent price [increase] and sustain [it] for more than a two-year period without suffering market share loss," he said. "In the current market environment and over the next 12 months, we believe Bell and Telus will have a strong argument that the combined company will not have significant market power in most of its markets."

 

At least four companies have said they are launching new wireless services either by the end of this year or in early 2010. Globalive Wireless, which this week announced it would provide service under the Wind brand, plans to launch in Toronto and Vancouver by the end of this year, providing it passes a CRTC review of its ownership structure next month and then nationally except for Quebec next year.

 

Public Mobile and DAVE Wireless are also planning Toronto launches this year with further expansion to follow. In Quebec, Videotron (News - Alert) is planning its own service by spring 2010. Bragg Communications in the East and Shaw in the West also purchased airwaves in last year's government auction and could launch services, though neither has announced any plans to do so.

 

Competition from Canadian cable firms is not to be underrated. An unidentified Shaw installer told TMC (News - Alert) that the firm has the equipment ready to go for wireless. Other Shaw staff have seen consumers sign on and switch to Shaw instead or from Telus for TV and Internet service because they were dissatisfied with the available bandwidth and quality from the legacy carrier.

 

The RBC report said a combined Bell-Telus would also have a significant share of business telecommunications, controlling about 85 to 90 per cent of the market. RBC believes this would be less of a concern for the Competition Bureau. That is because competition and pricing in the market is fierce, and there are still other companies offering services, including MTS Allstream (News - Alert) and cable providers.

 

Telus made a bid for Bell in 2007 but quickly withdrew after it realized the Competition Bureau would likely force the combined company to sell off some of its highly prized wireless assets. The government and Bureau were already concerned with the state of competition in wireless and were unlikely to allow the winnowing of three national providers to two.

 

A union between the two companies would now be a merger of equals, Allen said, and would not load up Telus with extra debt. The duo has already embarked on cost-savings programs together, including a joint HSPA wireless network that will help it compete better with market leader Rogers, and a recent agreement that will see Telus resell Bell's satellite TV service.

 

A combined company would be two-thirds controlled by Bell and one-third by Telus and save approximately $1.2 billion annually, Allen said. As the icing on the cake, Bell chief executive officer George Cope also spent time as an executive at Telus and is familiar with the culture of both companies.

 

The merger would also be good for Rogers, Canada's biggest wireless provider, because it would result in less downward pressure on cellphone prices, Allen said.

 

The markets seem to approve. The Globe and Mail, which also carried the RBC story, reported that Bell and Telus shares rose when the report came out.

 

“There is only so much cost cutting that can be achieved individually, “Allen wrote. “The scale benefits from a merger of Bell and Telus are substantial.”