Verizon Communications Inc. (VZ), BCE Inc. (USA) (BCE), TELUS Corporation (USA) (TU): Canada’s Big 3 Wireless Providers Show Value

There have been rumors that Verizon Communications Inc. (NYSE:VZ) might enter the Canadian market. Those rumors gained steam in the spring of this year when reports resurfaced that Verizon’s wireless arm was considering a purchase of Wind Mobile, a small wireless company with around 600,000 subscribers.. The likelihood of Verizon Communications Inc. (NYSE:VZ) taking over Wind Mobile appears weak. Despite this, the news has artificially depressed the price of Canada’s largest wireless providers, providing value for risk-tolerant investors.

Verizon’s entry into the Canadian market appears unlikely

The likelihood of Verizon Communications Inc. (NYSE:VZ) entering the Canadian market is very low for two reasons:

1. The difficulty in having an offer accepted will be extremely high. Wind Mobile has a rather complicated ownership structure. CEO Anthony Lacavera owns 35% of the company while Orascom Telecom Holding, an Egyptian company, owns the remaining 65%. VimpelCom, in turn, owns a 51% stake in Orascom. Russian telecom firm Altima owns VimpelCom.

Speculation is that this ownership structure is to blame for the failure of Orascom’s bid to take control of the company by buying out Lacavera. This problem will persist if Verizon is serious about buying Wind Mobile.

The cost will also be far above a true valuation. VimpelCom has said it would want $500 million for its share, which would mean Verizon would be on the hook for $800 million or more for a controlling interest in the company and roughly twice that for total ownership. Verizon Communications Inc. (NYSE:VZ) would then be looking at $1 billion to $2 billion in spectrum auctions to build a competitive wireless operation.

2. The return on Verizon Communications Inc. (NYSE:VZ)’s potential investment seems limited. Roughly $2 billion at a minimum for a 51% stake in a wireless operation of 600,000 subscribers does not look very strong. The total Canadian market has over 27 million wireless subscribers. The potential return does not seem worth it, especially given the dominance of the market by 3 companies.

A 4-player market in a country the size of Canada seems unlikely. Given the huge built in advantages the three current large players in Canada already have, Verizon appears likely to sit this out. Canada has a very difficult geography, and its urban core – where the vast majority of customers are located – is a very mature market. Verizon would have a long and slow road to profitability in the market.

Canada’s big three growing in everything but share price