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What Verizon Communications Inc. (VZ)’s Entry Into Canada Means

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News has swirled fast that American wireless carrier, Verizon Communications Inc. (NYSE:VZ), is considering a purchase that will take the company to Canada. In the northern country, three key communications conglomerates control 90% of the wireless market. The question remains whether or not Verizon Communications Inc. (NYSE:VZ) can gain market share and recoup costs. The other question is what kind of a financial impact the three competitors would face from the entry of Verizon Communications Inc. (NYSE:VZ).

The potential deal

Verizon Communications Inc. (NYSE:VZ)

Verizon Communications Inc. (NYSE:VZ) is interested in acquiring Wind Mobile, one of three new wireless companies in Canada trying to compete with the giants. Wind Mobile has over 600,000 subscribers, which gives it only a fraction of the estimated 26.9 million wireless subscribers in Canada. More complicated is the ownership structure of Wind Mobile, which could cause Verizon Communications Inc. (NYSE:VZ) headaches, or make the company overpay for Wind.

Wind Mobile is 65% owned by Orascom Telecom and 35% owned by founder and CEO, Anthony Lacarera. VimpelCom owns 51.1% of Orascom and is pushing for a sale of Wind Mobile. VimpelCom is expected to seek $500 million for its stake in Wind Mobile. Verizon Communications Inc. (NYSE:VZ) may have to pay more than that to acquire the whole company. Other estimates see Verizon needing to put $1 billion-$2 billion into the spectrum in upcoming auctions.

The three giants

In Canada, the three leading telecommunications companies have a 90% market share. These three companies, which are all traded in the United States, are Bell Canada, Rogers Communications Inc. (USA) (NYSE:RCI), and TELUS Corporation (USA) (NYSE:TU). These are Verizon’s potential rivals.

Bell Canada is the largest communications company in Canada, with the No. 1 television network in the country. The company gets more revenue from the television and internet side. In fiscal 2012, wireless made up 32% of the company’s $19.98 billion in revenue. In 2012, Bell had 7.8 million wireless subscribers. The company’s No. 1 goal is to accelerate its wireless. Plans to expand the company’s market-dominant 4G LTE position are underway. Wireless revenue increased 6.5% in fiscal 2012, and the company increased its wireless customer base by 3.4%.

Rogers Communications Inc. (USA) (NYSE:RCI) will provide the most competition for Verizon. The company is Canada’s largest wireless company, with over 9 million customers. Rogers got 58% of its fiscal 2012 revenue from its wireless segment. Wireless revenue in fiscal 2012 was $7.3 billion. Along with a dominant position in wireless and cable (26% of revenue), Rogers owns a nice portfolio of sports teams and assets that I previously wrote about.

The third leading company in Canada is TELUS Corporation (USA) (NYSE:TU). Surprisingly, Verizon had a partial ownership stake in Telus until 2004. Telus had 7.7 million wireless customers in fiscal 2012. The company also sees a large portion of revenue (54%) from its wireless segment. Wireless revenue increased 7% in fiscal 2012, which was the best of the three companies. Telus has coverage available to 99% of Canadians and also saw big gains in internet subscribers (+5.7%) and television subscriptions (+33%) in fiscal 2012. Despite its third position and smallest market capitalization, Telus is posting impressive gains.

Canada wants competition

Back in 2008, Canada auctioned off spectrum for new entries into the wireless field. None of the three giants were allowed to bid in the auction. The three companies that won spectrum were Wind, Public Mobile, and Mobilicity.

The problem is, no one has been able to compete with the three telecom giants, despite the Canadian government’s efforts. Wind is now up for sale. Public Mobile was acquired by private equity, and Mobilicity was almost swallowed by the big three. Telus attempted to acquire Mobilicity, but was blocked by the government as it would have given the new spectrum to the company.

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