Canada is Good Buying Opportunity, Eh?
February 21, 2000
Just north of the border, the wireless market is ripe with opportunity, say high yield investors and analysts.
According to Deutsche Banc Alex. Brown high yield analysts Robin Lochner and Christina Blanco, the Canadian wireless market has strong operating fundamentals, and is an attractive environment for investment.
"Canada has fewer operators per market than are present in most markets in the United States, a faster subscriber growth rate, lower levels of churn, and the potential for regulatory changes that could be favorable for investors," the analysts said in a recent report.
And portfolio managers are quick to agree.
Toronto-based high yield investor Barry Allen, manager of the Altamira High Yield Bond Fund, said the Canadian wireless market was one that U.S.-based investors were foolish to ignore.
"[Canadian wireless players] are my biggest position," Allen said. "They're so cheap - much less risk than U.S. carriers, their costs are lower, there's a single regulator, more upside and a stronger subscriber base."
Fewer operators in each market means less competition, and an absence of the aggressive pricing wars common in the U.S. market make for an attractive buying opportunity, sources said.
Furthermore, the Canadian wireless market lags behind the U.S.'s - translating into a bigger upside in terms of subscriber growth than its U.S. counterpart. Deutsche Banc reports that penetration levels in the Canadian market today are similar to those in the U.S. in the beginning of 1998. By the end of 2000, projections call for a penetration rate of 27%.
Penetration growth in Canada will not only be fueled by lower subscriber costs for digital service and an increasing number of pre-paid calling plans, Allen said, but also the geographic concentration of the population.
"The population is smaller and more concentrated. Almost 90% of the population is concentrated within 100 miles of the U.S. border, so once you've built-out six or seven major cities, you've covered 80% of the population," Allen said.
While Deutsche Banc highlighted the slight possibility of currency risk when investing in Canadian currency, Allen downplayed the notion. The Canadian dollar, he pointed out, is hardly volatile; it has never fluctuated more than 5% in any given year. While the Canadian dollar peaked at approximately 90 cents on the American dollar in 1991 and 1992, it now hovers around 68 cents on the dollar.
Approximately 60% of Allen's portfolio is in U.S. dollar-denominated bonds. All of his wireless holdings, however, are Canadian names.
"I own Clearnet and Microcell because they're the cheapest, and with 600 to 650 basis point spreads, you're more than compensated. They're by far the best risk-reward," he said.
The Market Players
Currently, three high yield names operate in the Canadian wireless market: Clearnet Communications, Microcell Telecommunications and Rogers Cantel Communications. All three have national footprints, with spectrum assets that blanket the entire country.
Clearnet operates two separate digital networks, one based on Motorola's iDEN digital wireless technology, virtually identical to Nextel Telecommunications' U.S. network and a PCS network based on CDMA technology, similar to Sprint PCS' U.S. operations.
According to Deutsche, ownership of the two networks makes the company attractive to both iDEN and CDMA merger partners. And, the company has been focusing more on developing its subscriber base than its competitors.
Microcell, on the other hand, has the only GSM-based network in Canada. Since GSM is the most popular standard in the world, the company has signed roaming agreements with 100 carriers across the globe. Its network covers 53% of the Canadian population and by year-end, it will cover 60% of the population.
Rogers Cantel is the largest wireless provider in Canada, with an approximate 32% subscriber market share. Last August, British Telecom and AT&T took a 33% equity share of the company for approximately $1.4 billion.