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

Canada eased restrictions for foreign investment. The government now allows foreign ownership in a telecommunications company if it has less than 10% market share. This allows an acquirer like Verizon to buy out Wind Mobile. However, this prevents Verizon from going after a larger company, like Telus, or growing too fast and gaining on rivals. Essentially, Verizon will be capped at 10% market share maximum unless the government changes legislation.

How Verizon can win

Verizon is the No. 1 wireless carrier in the United States. At the end of April, Verizon had a 36.3% market share in the United States, versus a 26.3% share from rival AT&T Inc. (NYSE:T). With this dominant position, Verizon enjoys a stable flow of cash that could help it build out in Canada. More importantly, Verizon also has good relationships with phone providers, which could help it to gain exclusive rights to certain phones and increase Wind’s market share.

Verizon would need to be dominant in the 2014 spectrum auction. Bids are due by September 2013, so Verizon will have to move fast if a deal is appropriate. The company may also consider trying to buy out Mobilicity or Public Mobile to create a more dominant fourth company and get closer to a starting base of one million customers.

Conclusion

Verizon is smart to enter the Canadian market, as it is adjacent to its market dominance in the United States. However, the worry is the price Verizon will pay to acquire Wind Mobile and additional spectrum. Others have failed at competing with the giants. Shaw Communications, a large Canadian company, recently cancelled plans for the wireless segment and sold its spectrum to Rogers.

Verizon is a “buy” regardless of whether or not the company enters Canada. If it doesn’t go north, it will still have the No. 1 position in the United States and a huge cash flow that will continue to be used for acquisitions or returned to shareholders. Analysts expect the company to post only 4% revenue gains in fiscal 2013 and fiscal 2014, leaving plenty of room for upside with new deals or product launches.

On the Canadian side, the three rivals should not be too worried about Verizon’s entry. I have long loved Rogers Communications for its diversification of media assets and ownership of its sports portfolio. As the wireless leader, Rogers could have the most subscribers to lose, yet also has the best defense for revenue lost. Telus, as No. 3, probably has the most to lose in the Verizon entry. With over 50% of revenue coming from wireless, Telus needs to keep its seven million subscribers. Bell Canada is the largest complete company, but gets the majority of its revenue from wireless. Wireless revenue declined 3.8% in fiscal 2012 to $10.2 billion. The company’s 50% revenue from wireless makes it a more risky play.

The article What Verizon’s Entry Into Canada Means originally appeared on Fool.com and is written by Chris Katje.

Chris Katje has no position in any stocks mentioned. The Motley Fool recommends Rogers Communications (USA). Chris is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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