Canada's Big 3 Wireless Providers Show Value

There have been rumors that Verizon (NYSE: VZ  ) might enter the Canadian market. Those rumors gained steam in the spring of this year when reports resurfaced that Verizon's wireless arm was considering a purchase of Wind Mobile, a small wireless company with around 600,000 subscribers.. The likelihood of Verizon taking over Wind Mobile appears weak. Despite this, the news has artificially depressed the price of Canada's largest wireless providers, providing value for risk-tolerant investors.

Verizon's entry into the Canadian market appears unlikely

 The likelihood of Verizon entering the Canadian market is very low for two reasons:

1. The difficulty in having an offer accepted will be extremely high. Wind Mobile has a rather complicated ownership structure. CEO Anthony Lacavera owns 35% of the company while Orascom Telecom Holding, an Egyptian company, owns the remaining 65%. VimpelCom, in turn, owns a 51% stake in Orascom. Russian telecom firm Altima owns VimpelCom.

Speculation is that this ownership structure is to blame for the failure of Orascom's bid to take control of the company by buying out Lacavera. This problem will persist if Verizon is serious about buying Wind Mobile.

The cost will also be far above a true valuation. VimpelCom has said it would want $500 million for its share, which would mean Verizon would be on the hook for $800 million or more for a controlling interest in the company and roughly twice that for total ownership. Verizon would then be looking at $1 billion to $2 billion in spectrum auctions to build a competitive wireless operation.

2. The return on Verizon's potential investment seems limited. Roughly $2 billion at a minimum for a 51% stake in a wireless operation of 600,000 subscribers does not look very strong. The total Canadian market has over 27 million wireless subscribers. The potential return does not seem worth it, especially given the dominance of the market by 3 companies.

A 4-player market in a country the size of Canada seems unlikely. Given the huge built in advantages the three current large players in Canada already have, Verizon appears likely to sit this out. Canada has a very difficult geography, and its urban core – where the vast majority of customers are located – is a very mature market. Verizon would have a long and slow road to profitability in the market.

Canada's big three growing in everything but share price

BCE (NYSE: BCE  ) has seen its stock price take a dip recently. In mid-May the company was trading above $47 per share. After rumors of Verizon looking to purchase a stake in Wind Mobile began surfacing the stock steadily declined. It now trades around $40 – an almost 20% decline.

This decline in price signals to me a great value in BCE.  The market appears to be factoring in some degree of likelihood that Verizon will purchase Wind Mobile. As these rumors dissipate, I expect BCE to see solid growth in its price.

BCE will continue to see gains in price per customer as it focuses in on signing up more lucrative postpaid customers.  Gains will also come from continued cost cutting.  The company trimmed costs by a whopping $1.5 billion last year and is in the middle of trimming an additional $170 million this year.

The two other large Canadian wireless providers, Rogers Communications (NYSE: RCI  ) and TELUS  (NYSE: TU  ) have each seen double digit declines despite strong earnings and growth.

Rogers recently reported net profit growth of 4% and grew its postpaid wireless subscription base 30% more than analysts predicted. Despite this the company has seen its stock take a dip of over 20% since mid-spring when rumors of Verizon's entry into Canada started to be hear.

One reason Rogers is well position for the future is that the company is more diversified than its Canadian competitors.  Its media and cable revenue for the most recent quarter totaled over $1.3 billion and totaled almost 42% of revenue.  Its media division led the charge with a 7% gain in revenue.  This diversification can be a hedge to a potential Verizon entry into the market.

Likewise, TELUS has seeen a roughly 20% drop in price since early May. Nonetheless the company looks very strong. Last week it reported profit, subscriber, and sales gains that beat analysts' estimates. Wireless revenue itself increased almost 6% on strong postpaid subscriber growth.

For investors looking for great shareholder value TELUS appears to be a strong opportunity.  The company recently announced plans to buyback $1 billion of its own shares in 2013 and $500 million for the three years following.  Earnings per share will see a nice bump this year and into the future from the buyback plan alone.

Verizon's entry into Canada already (mostly) priced in

The sharp drops in share prices for Canada's big 3 wireless companies can be attributed almost 100% to rumors of Verizon's entry into the market. While it is difficult to gauge what the exact impact such an entry will have the double digit price drops despite strong fundamentals show that Verizon's entry is already (mostly) priced in the Canadian companies' stock price.

With the threat of Verizon's entry unlikely, there is great value in each of the Canadian companies' stock. For investors who have a medium degree of risk tolerance an investment in these companies have the potential to produce significant return if and when Verizon pulls back on their bid of entry into Canada. Plus, even if Verizon pulls the trigger, investors will still be holding stock in solid companies with large subscriber bases in a mature market.

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