Last week Telus Corp. offered $1.1 billion in a hostile takeover bid for Microcell Telecommunications Inc., operator of the Fido wireless brand.
“Telus’ bid to acquire Microcell is consistent with our strategy to focus on the growth markets of wireless, IP and data, and increases the speed at which we can enhance our position, particularly in Quebec and Ontario, given the location of Microcell’s customer base,” said Darren Entwhistle, president and CEO of Telus in a statement.
However, one industry analyst was shocked to hear news of the takeover bid.
“It certainly caught me by surprise,” said Mark Quigley, research director at the Yankee Group in Ottawa. “To a certain extent I can understand the logic of making the acquisition in that it does increase the revenue generated by wireless services for Telus.”
Wireless has been one of the few areas where telcos make money these days, but that doesn’t mean Microcell’s customers will automatically turn to Telus if the acquisition takes place.
Just over half of Microcell’s subscribers (651,000) pre-pay for their service as compared to post-paying (605,000) customers, and pre-paying clients produce less average revenue per user (ARPU) and churn — cancel their service — more often, Quigley said. Churn rates for Microcell in Q1 of 2004 were 2.8 per cent for both pre- and post-paid clients compared to 1.5 per cent for Telus, 1.3 per cent for Bell and 2.1 per cent for Rogers AT&T.
“[The pre-paid product] hasn’t proven itself to be terribly successful financially in the Canadian market,” Quigley said.
Additionally, Microcell’s post-paying customers aren’t locked into the one- or two-year contracts required by Bell Canada Mobility, Roger’s AT&T Wireless and Telus, he added.
“[If the bid is successful] there’s going to be a substantial number of existing Fido subscribers that aren’t under any contract today, so it’s going to be that much more difficult [for Telus] to ensure it gets the lion’s share of them on the Telus network because these folks can simply go somewhere else if they choose to,” he said.
However from a tactical perspective, Quigley said getting Microcell out of the wireless market would be beneficial for all wireless providers including Telus, Bell Canada and Rogers AT&T.
“Microcell’s way to win the hearts and minds of consumers has been through price. It has been the most price-competitive player in the marketplace when the rest of the market is trying to push themselves away from that by reducing handheld subsidies, [for example],” he said.
Fido’s flat-rate promotion in Vancouver, where users get unlimited calling for $45 per month, has been tremendously disruptive for all facets of Telus’ business, Quigly added. If a customers gets rid of its Telus wireline service in favour of Fido wireless that means Telus also loses that subscriber revenue not only for wireless, but for wireline, long distance and likely for Internet services, he said.
Microcell announced Monday that starting on May 20, City Fido will be available in Toronto. However, if Telus’ bid is successful, City Fido will be halted and its expansion to other cities like Montreal would be prevented, Quigley said.
The Telus bid represented 38.1 per cent and 36.5 per cent premiums over the closing price of Microcell’s Class A shares and Class B shares respectively on May 12, the day before Telus made this announcement. This means holders of Class A and B shares would receive $29 per share. Holders of Warrants 2005 would receive $9.67 per warrant whereas holders of Warrants 2008 would receive $8.89.
The bid will be open for acceptance until 9 p.m. EDT on June 22, 2004. Telus said it would file the circulars and other materials to securities regulators Monday.