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Canadian Telcos Sail Into Uncharted Waters

By Chad Fraser on July 21, 2016

Mention Canada’s three main wireless carriers—BCE Inc. (TSX: BCE, NYSE: BCE), Telus (TSX: T, NYSE: TU) and Rogers Communications (TSX: RCI.B, NYSE: RCI)—to Canadian investors and consumers, and you’ll likely get two different responses.

Investors love them, and it’s easy to see why. Holding the so-called Big Three (which also offer home phone, broadband and TV service) has paid off over the past decade, thanks to their superlative dividend growth; current yields in the 3.7% to 4.4% range; and total returns of 90% to 187% (in Canadian dollars), easily topping the Toronto Stock Exchange’s 27% gain.

Consumers, however, tend to hold the Big Three in somewhat lower regard, mainly because their grip on the wireless market (a roughly 90% share between them) means Canadians’ monthly wireless bills are among the developed world’s highest.

But could that be changing?

Investors certainly thought so back in mid-December, when cable provider Shaw Communications (TSX: SJR.B, NYSE: SJR) announced it would buy Wind Mobile, an upstart that had struggled in the shadow of the Big Three, and put its financial muscle behind revamping Wind’s outdated network.

The day after, shares of BCE, Rogers and Telus fell 5.7%, 2.5% and 6.5%, respectively, on the TSX. (We saw the drop as a buying opportunity and on Dec. 18 recommended that subscribers to our Canadian Edge service purchase shares of BCE and Telus; those who did have seen gains of 26% and 13%, respectively, in U.S.-dollar terms.)

But then the landscape shifted again, with BCE announcing a C$3.9-billion takeover of Manitoba Telecom Services (TSX: MBT), that province’s biggest telecom provider, on May 2.

So what can investors expect from Canada’s telecom sector going forward? With earnings either on tap or just out from the country’s major players, let’s take a look.

A Steady Wind

When the Wind deal was announced, it was hard to see what all the fuss was about. The carrier does offer lower prices than the Big Three, generating around $36 in annual revenue per subscriber, compared to the industry average of $61. But it only had 940,000 subscribers as of Dec. 16. To put that in context, BCE, which has the smallest wireless operation of the Big Three, has around 8 million.

Wind’s network also uses older 3G technology, and if you want to use your Wind device outside major cities in Alberta, British Columbia and Ontario, you have to pay roaming fees.

But five months in, Shaw is making headway. According to the company’s just-released earnings report, Wind’s subscriber count jumped 7% from December, to just over 1 million. It has also installed new radio systems in Western Canada, which are boosting download speeds.

But Telus, BCE and Rogers investors shouldn’t fret yet, because despite those changes, Wind’s network still relies on 3G, while the Big Three all operate 4G LTE systems that cover more than 95% of the country—and all three are now testing the 5G standard.

Wind, for its part, is working on its 4G LTE build-out, but it’s not expected to launch for more than a year. That gives the incumbents plenty of time to get ready.

Besides, Wind’s price discount may not end up being enough to encourage many subscribers to switch anyway. “I see pricing somewhat discounted but probably closer to the incumbents as we go forward, which allows us to increase average revenue per user,” Shaw CEO Brad Shaw told The Globe and Mail in December.

New Government Keeps Quiet

Just as consumers were cheering the Wind deal, the potential for lower prices dried up, at least in Manitoba, when BCE said it would gobble up MTS, the province’s largest telco.

That deal handed 480,000 subscribers to BCE, 424,000 of which are on long-term contracts. To appease regulators, BCE says it will sell one-third of the contract accounts to Telus and invest heavily in MTS’s networks.

So far, at least, the 10-month-old federal Liberal government has said little about the deal, or its telecom policy in general. That’s a shift from the previous Conservative administration, which was vocal about the need for a fourth national carrier, and went to great lengths to encourage one.

But the sale is still no slam-dunk. It will still have to pass muster with the Competition Bureau and the Canadian Radio-television and Telecommunications Commission (CRTC), in addition to the federal government. That’s a lot of bureaucratic hurdles to clear without at least some changes. BCE, for its part, expects to finalize it in late 2016 or early 2017. Stay tuned.


Despite the shifting sands in the Canadian wireless sector, we’re still bullish on its long-term prospects, thanks to unshakable trends like surging demand for mobile data. To see which stocks we view as the best buys now, consider a no-risk trial to Canadian Edge.

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