Verizon Communications Inc. (VZ) Must Think Long Term on Wind Mobile

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According to recent reports, Verizon Communications Inc. (NYSE:VZ) wants to acquire Canadian wireless telecommunications company, Wind Mobile. The company seeks to make an entry into the Canadian telecommunications industry by acquiring one of its struggling domestic players. AT&T Inc. (NYSE:T) and Britain’s Vodafone Group Plc (ADR) (NASDAQ:VOD) are also reported to be interested in venturing in the Canadian market. If Verizon Communications Inc. (NYSE:VZ) seals the deal with Wind Mobile, this will be a return to the country following its initial spell as a majority shareholder of Telus Mobility, which ended in 2004.

Verizon Communications Inc. (NYSE:VZ)

The opportunity

The acquisition of Wind Mobile would result in some revenue for the U.S.’s second-largest telecommunications company. However, the significance of the benefits compared to the amount of capital, effort, and time devoted to the process may raise some questions.

Apparently, Canada will only allow a foreign company to acquire a domestic company if the domestic company accounts for less than 10% of the market share in the industry in which it operates. Wind Mobile’s market share in the Canadian mobile telecommunications industry is well below that threshold at just 2.23%, which paves way for bidders to place their offers.

Wind Mobile has only 601,719 subscribers, as compared to Verizon Communications Inc. (NYSE:VZ)’s 100 million. The company’s average revenue per user stands well below that of the three heavyweights at just $27.60 per month as reported for 1Q13. Based on the 601,719 subscribers, that would translate to revenue of just $49.83 million for the most recent quarter. When compared to Verizon Communications Inc. (NYSE:VZ)’s $20 billion plus, this is nothing more than a balancing figure.

According to analysts, Verizon Communications Inc. (NYSE:VZ) would spend at least $2 billion for spectrum purchases, network upgrades, and consolidation costs. Assuming constant revenue throughout the next three quarters, Wind Mobile would report just under $200 million for the year. This means that, based on the current figures, it would take ages for Verizon Communications Inc. (NYSE:VZ) to recoup its investment.

However, Verizon’s acquisition may also mean giving Wind Mobile some muscle to compete with the domestic elite. The company’s LTE network could be a key factor in boosting Wind Mobile’s monthly ARPU and subscriber base. This is the only window of opportunity for Verizon. Otherwise, there is no immediate gain. A Verizon spokesperson told Bloomberg that Wind Mobile is just one of the various options the company has for an investment.

“Wind Mobile is ‘one of many’ options under consideration, Bob Varettoni, a spokesman for Verizon, said in an e-mail. ‘We constantly evaluate a wide variety of business opportunities.’ “

This, therefore, means that in as much as the interest remains real, chances of placing a bid for Wind Mobile will depend on a cost-versus-benefit assessment of the available options. Meanwhile, Verizon remains strong fundamentally, with wide margins and double-digit earnings growth rates.

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