If you want to get a strong response from a Canadian, ask about the cost of wireless service in the country.

They’ll be quick to tell you that it’s pricier than almost anywhere else in the world—and the latest numbers suggest there’s some truth to that.

Every year, the Canadian Radio-television and Telecommunications Commission (CRTC), the independent organization that regulates the country’s airwaves, commissions a study of how much consumers shell out for wireless, high-speed Internet and land line service. It’s known as the Wall Report, and the latest edition came out June 18.

On the wireless side, the Wall Report looks at costs across five major categories, ranging from voice-only plans to packages offering unlimited talk and text and upwards of 2 GB of mobile data.

In all, it found Canadians paid an average of 5% more across each category in 2014 than in 2013. The heaviest users were the exception: they enjoyed an 11% price drop.

Canadian Prices “on the High Side”

The Wall Report also showed that depending on usage levels, Canada’s smaller wireless challengers, including Mobilicity and Wind Mobile, which together control only a tiny slice of the market, offered prices 26% to 50% lower than the mainline brands of the Big Three carriers, BCE Inc. (NYSE: BCE, TSX: BCE), Telus Corp. (NYSE: TU, TSX: T) and Rogers Communications Inc. (NYSE: RCI, TSX: RCI.B).

In comparison to seven other countries—Australia, France, Japan, Germany, Italy, the UK and the United States—Wall found Canada had either the highest prices or was “on the high side” of the group, again depending on usage levels.

That’s despite the best efforts of the Canadian government. It has labored for years to boost competition, including by tilting the field in favor of new entrants at auctions of wireless spectrum (or the radio frequencies necessary to operate a network).

 These moves have helped fracture the Big Three’s hold on available spectrum: their share has fallen to about 75% this year from 98% in 2006, according to an Industry Canada statement. But they maintain a tight grip on the overall market, controlling about 90% between them.

Mobilicity’s Move

It’s against this backdrop that Rogers announced it would buy Mobilicity in a deal valued at CAD465 million last week. At first, that would seem to put a damper on competition, but as with most things in the Canadian wireless business, it’s not so simple.

Mobilicity has been operating under court-supervised creditor protection since 2013, but Ottawa has shot down two previous attempts by Telus to acquire it, fearing further concentration of wireless spectrum.

Rogers, however, seems to have cracked the code. The clincher appears to be that the company agreed to transfer a significant amount of spectrum to another tiny player, Wind Mobile. Regulators have now signed off on the deal, which is slated to close later this week.

According to Industry Canada, Wind will get 26 new spectrum licenses, including 10 from Mobilicity and 16 from Shaw Communications Inc. (NYSE: SJR, TSX: SJR.B) that Rogers will buy under a previously agreed option.

That will increase Wind’s spectrum holdings in BC, Alberta and Eastern Ontario, boosting the company’s efforts to roll out a 4G LTE network alongside its existing 3G service. According to a June 25 bnn.com article, Wind is now looking for equipment suppliers to help with its build-out and working on making newer iPhones available to its customers.

Rogers, for its part, gets Mobilicity’s 157,000 customers, CAD175 million in tax losses from the smaller carrier and additional spectrum from Wind, Mobilicity and Shaw in BC, Alberta and Southern Ontario. This new spectrum is contiguous—or next door—to Rogers’ current holdings. That’s a key point, because it lets the company offer speedier service to customers in those regions.

A Mightier Wind?

A key question is whether Wind can grow to the point where it can mount a realistic challenge to the Big Three.

To be sure, the additional spectrum is a step in the right direction, but the six-year-old upstart still faces some big hurdles. For one, it boasts just 800,000 customers compared to about 8 million each for Telus and BCE and 9.5 million for Rogers.

As well, the new frequencies don’t change the fact that its network is limited to major cities like Ottawa, Toronto, Vancouver and Calgary, and its customers must pay roaming fees to Wind (and indirectly to the bigger carriers) if they leave its main coverage areas.

Meantime, Canadian telecoms continue to work through a government-mandated shift from three-year to two-year wireless contracts. Effective June 3, users were able to cancel pre-existing three-year deals—which were the norm in Canada—without paying additional charges, so long as they have completed two years of the contract.

This new wave of free agents could be an opportunity for Wind, but the Big Three have been proactive, courting their customers with promotions both in the run-up to the deadline and since.

And according to their latest earnings reports, our two favorite Canadian telcos, BCE and Telus, continue to boast lower churn rates than Rogers. That makes their clients more likely to stick around—even if they may grumble about the cost.

Dividend Champions Update

By Deon Vernooy

Over the past week, several of our Dividend Champions or companies on our watch list, made headlines. We highlight two:

Potash Corporation of Saskatchewan Inc. (TSX:POT, NYSE:POT), announced that it has made a private proposal to K+S Aktiengesellschaft (SDF: GR) to buy K+S. No further details were provided by PotashCorp. According to press reports, the suggested price was set at just over Euro 40, a 28% premium to the pre-offer trading price.

K+S is a Germany-based company which produces potash fertilizers and salt. K+S sold 6.9Mt of potash products in 2014 compared to the 8.7Mt produced by PotashCorp. K+S currently operates mines in Germany and plans to bring its $4.1 billion Legacy potash mine, located in Saskatchewan, Canada into staged production from 2016 reaching 2.9Mt pa by 2023 and 4.0Mt pa by 2035.

Although PotashCorp. already has considerable spare capacity (total capacity of 15Mt pa), the Legacy mine could be of considerable interest given the advanced state of development. This mine, together with the current idle capacity at PotashCorp could be utilised to replace some of the high cost production in Germany (running at a cash cost of $165-175/ton compared to PotashCorp $75/t). Together the two companies would control 30% of global potash production which would certainly raise concerns at the German Cartel Office who previously in 1997 rejected a similar attempt by Potash Corp to buy K+S.

The salt business, which is the largest in the world, encompasses the production and marketing of food grade salt, industrial salt and salt for chemical use, de-icing salt and sodium chloride brine. It may make sense from the Potash Corp perspective to sell this business to provide finance for the acquisition.

The revenue of K+S was 3.8 billion Euro in 2014 with roughly equal contributions from the 2 main sections. However, the potash and magnesium operations are considerably more profitable with profit margins almost 3 times higher than the salt operation.

K+S is considerably smaller than PotashCorp with a market capitalisation of just over $6 billion, about one quarter the size of Potash Corp. EBITDA profit in 2014 was 895 million Euro, about 33% of the PotashCorp profits. The main shareholders of K+S are institutional with the top 50 shareholders holding only 26% of the shares.

Pre the announcement, K+S was valued at a considerable discount to PotashCorp with an Enterprise Value/EBITDA ratio of 6.5 times versus the 9.0 times of PotashCorp. The share price of K+S has been in a declining mode over the past few years and expressed in US$ is currently almost 35% lower than 5 years ago. PotashCorp has done considerably better with a flat performance over the same time period.

Several other major producers of potash are planning to bring new mines into production over the next few years. This includes Uralkali (4Mt pa), BHP (8Mt pa) and Eurochem (8.3Mt pa).

Except if PotashCorp can acquire K+S at an absolute bargain price, the acquisition does not seem to make a great deal of sense as it will add higher cost production capacity to the already idle resources at PotashCorp.

2) The newly elected Alberta Government has announced an increase on carbon emission taxes for large facilities that exceed target carbon emission levels. For facilities that are unable to meet the targets, the operators will be fined $20/tonne for emissions above the emission targets in 2016 and $30/tonne in 2017. This compares to the current $15/tonne.

According to the Alberta Government, this change would translate into an average cost of $0.3-$0.4 per barrel of oil equivalent production (boe) for the large emitter facilities which is $0.2-0.3/boe higher than the cost of the current levies. This would not have a meaningful impact on the cost of production for the major producers such as Suncor (TSX:SU,NYSE:SU).

The important royalty review by the new Alberta government is expected to start as soon as the review panel has been assembled with possible implementation of recommendations in 2016.

Happy investing,

Deon Vernooy

Chief Investment Strategist