From Bloomberg:

Borrowing costs at Canada’s largest wireless providers are rising almost twice as fast as those of other firms on speculation Verizon Communications Inc.’s entry into the domestic market would erode profits.
Relative yields on the debt of BCE Inc., Rogers Telecommunications Inc. and Telus Corp. have widened an average 12 basis points since June 18, when New York-based Verizon confirmed it’s weighing a bid for Wind Mobile of Toronto to create a Canadian toehold. That compares with an average spread expansion of 7 basis points in the broad Bank of America Merrill Lynch Corporate Canada Index.
Verizon, with a market value of $146 billion — more than double that of Montreal-based BCE, Telus of Vancouver and Toronto’s Rogers combined — may be considering Wind as a springboard to acquire other smaller Canadian challengers and buy wireless spectrum to build a fourth national carrier, according to analysts. The threat Verizon poses to the average revenue per user, or arpu, and profit margins of Canada’s big three is probably what has bondholders most worried, said Stephen Dafoe, director of corporate bond research at Scotiabank in Toronto.
“More competition which drives down arpu and margins is the chief concern,” Dafoe said in a telephone interview. “A new world-class entrant magnifies those concerns.”

Formidable Challenge

Industry Minister Christian Paradis last month blocked Telus’s acquisition of smaller Mobilicity and said the ruling should be interpreted as a precedent, which may clear the way for Verizon to bid without the threat of counter-offers from BCE, Telus and Rogers.
Elsewhere in credit markets, the extra yield investors demand to own the debt of Canadian investment-grade corporations rather than the federal government was unchanged yesterday at 126 basis points, according to a Bank of America Merrill Lynch index. Yields held steady at 3.19 percent.
In the provincial bond market, relative yields were unchanged at 72 basis points yesterday, according to another Bank of American Merrill Lynch index. Yields remained at 2.94 percent. Corporate debt has lost 0.2 percent this year, Bank of America data show. Provincial securities have slid 2.1 percent, and federal-government bonds have dropped 1.8 percent.

Meaningful Threat

Verizon poses a formidable potential challenge to the three largest carriers because it would target the wireless business that provides the bulk of their growth in a way that smaller, more-recently started competitors such as Wind haven’t been able to do, said Maria Berlettano, a fixed-income portfolio manager at J. Zechner Associates in Toronto.
“It’s a more meaningful threat than the new entrants have presented so far,” said Berlettano. Her firm manages C$1.6 billion ($1.5 billion), including bonds of Telus and Rogers. “There’s still the potential for spreads to drift a little bit more from here.”
Since the June 18 Verizon report, yields on Telus’s 3.35 percent bonds due in 2023 widened by 16 basis points to 1.56 percentage points above equivalent maturity Canadian benchmarks and spreads on BCE’s 3.35 percent debt maturing in 2023 expanded
19 basis points to 1.68 percentage points, according to data compiled by Bloomberg.

Rogers Spreads

Relative yields on Rogers’ 4 percent bonds due June 2022 expanded 9 basis points to 1.77 percentage points yesterday, from 1.68 on June 25, the day before the Globe and Mail newspaper reported Verizon submitted a C$700 million bid for Wind. Average spreads on bonds in Bank of America’s 7-10 Year Canadian Corporate Index widened 4 basis points in that period.
Canada’s telecommunications bonds lost 3.1 percent in the month through June 3, worse than the average 2.4 percent decline in the Merrill Lynch Bank of America Global Telecommunications Index.
Verizon Wireless, co-owned with Vodaphone Group Plc, has about 93 million subscribers on contract in the U.S, almost triple the Canadian population. That size would allow it to offer popular smartphones like Apple Inc.’s iPhone 5 at prices Rogers, BCE and Telus would struggle to match, said Berlettano.
“They have excellent performance numbers in the States and people look at that and say ‘this is a very knowledgeable, experienced operator and they can come in and execute strategies that could be quite successful here,’” she said. “It’s a fight for market share.”

Greater Competition

Verizon’s interest is the result of a series of moves by the Canadian government to foster greater competition in the nation’s wireless industry, including setting aside a certain amount of wireless spectrum in a 2008 auction for emerging providers to bid on.
Since then, those so-called new entrants have struggled to make a dent in the dominance of BCE, Telus and Rogers, which control about 90 percent of the wireless market, prompting Industry Canada decisions to ease foreign-ownership restrictions on smaller carriers to stimulate investment, and blocking Telus’s bid for Mobilicity.
BCE spokeswoman Jacqueline Michelis reiterated the government’s spectrum rules were designed to support new Canadian competitors and it would be unfair to give “major U.S.carriers access to more spectrum and at a lower price than Canadian companies.”
“Bell is always ready to compete”, Michelis said, but “favoring big foreign companies was clearly not the intention, and the government needs to address the issue as soon as possible.”

Competitive Environment

Rogers, Canada’s largest wireless carrier, stands by comments it made last week when news of Verizon’s bid sent the stock plunging the most since October 2008.
“The Verizon story is speculation at this point – it hasn’t been confirmed,” Patricia Trott, a Rogers spokeswoman said then. “We already operate in an extremely competitive environment and know we have what it takes to succeed.”
“Telus has never shied away from competition and that won’t change if a U.S. carrier opens shop in Canada,” said Shawn Hall, a spokesman for Vancouver-based Telus.
Ultimately, it’s Verizon’s size and its potential to disrupt the Canadian incumbents’ business model that’s the biggest difference, said ScotiaBank’s Dafoe.
“Size matters,” he said. “Clearly, the new entrants in Canada have thus far not made much impact because of their limited pocketbooks for spending and Verizon doesn’t have that limitation.”