Wind posts ‘modest’ Q2 results: Analyst

If you want to know why it is difficult for a coming together of Canada’s financially struggling startup cellular carriers, the latest figures from Wind Mobile may be part of the answer.

Wind had another quarter of what financial analyst Dvai Ghose of Canaccord Genuity calls “weaker than expected subscriber additions,” according to figures released today.

The numbers, in the second quarter financial results of Wind’s main financial backer Orascom Telecom Holdings, and its parent, Amsterdam-based international carrier VimpelCom Ltd., said that in the three months ending June 30 the Canadian division added 18,732 new subscribers. Canaccord thought it would add 25,000.

By comparison, in the same period a year ago Wind added 41,522 new subscribers. Still, Ghose noted, the Q2 number was up from 11,281 Wind added in the first quarter.


To put things in perspective, Ghose said, Rogers Wireless added 42,000 net new customers in its last quarter.

Telus Corp. and BCE Inc.’s Bell Canada report their latest quarterly financials Thursday. Ghose has made some estimates on what they will announce and, if accurate, would mean Wind has accounted for only nine per cent of net new subscribers added by all carriers in the quarter.

 What this means is that anyone negotiating with VimpelCom to buy Wind – and reports are that U.S. carrier Verizon Communications is one, Toronto’s Birch Hill Equity Partners is another  – has a strong hand because Wind’s subscriber growth seems to be slowing. It has just over 620,000 subscribers.

 VimpelCom wants to realize some return on its investment in Wind, which could be close to $1 billion. Reports are Verizon has offered around $700 million.

 Some industry analysts have always said there are too many cellular carriers in the country and predicted that Wind, Mobilicity and Public Mobile all couldn’t survive. There have been reports of merger talks that failed in part because financial backers couldn’t agree on valuations.

It is rumoured that Verizon and Birch Hill would buy and merge Wind and Mobilicity if the price is right.

“Looks like Wind is in a holding pattern ahead of a sale,” Ghose wrote in a note to investors. “Verizon may have a lot of work to do to fix Wind, but we assume that Verizon would only really buy Wind for its spectrum, and if it does not face competition from the incumbents.

Ghose, however, believes the numbers won’t influence Verizon. “While Wind’s modest results may leave some to wonder why Verizon would want to acquire the asset, we assume that Verizon would really only buy Wind for its AWS spectrum, at a valuation well below invested capital, and without competition from the incumbents” – a reference to Industry Canada’s policy refusing to allow new entrants to sell their spectrum to an incumbent carrier.

As a result, Ghose writes, “we do not believe that Wind’s Q2/13 results will have much bearing on Verizon’s decisions. However, he added, Wind’s  poor network coverage in major Canadian cities, weak subscriber growth; “modest ARPU” of just over $28  (average revenue per user), “subscale and declining distribution” and choice of China’s Huawei Technologies as a core network switch supplier leads him to believe that Verizon has a lot a work to do before it can rebrand the company as Verizon Canada.

“As a result, we would not expect Verizon to have any real impact on Canadian wireless incumbents until 2015.”

The U.S. could have problems with Verizon buying Wind if Huawei equipment remains in its network. Last year the U.S. Congress issued a report asking telecom operators there not to buy its gear over possible ties to the Chinese government. According to one news report, the Obama administration convinced Sprint not to sign an already negotiated contract with Huawei for network gear.

VimpelCom gained its investment in Wind after taking over Orascom, which holds the largest equity stake in the company. However, actual voting control is still in the hands of Toronto telecom entrepreneur Anthony Lacavera. Orascom advanced most of the $442 million Wind needed to buy its frequencies in the 2008 spectrum auction and the millions more it needed to build its network.

Earlier this year Orascom/VimpleCom said they wanted to buy Lacavera out and take complete control of Wind, subject to approval by Industry Canada. That would be allowed under new rules passed by the Harper government last year letting foreign companies own carriers with less than 10 per cent of the market.

However, in June VimpelCom [NYSE: VIP] abandoned the move. In his note to investors Ghose said he assumes Industry Canada has told VimpelCom it won’t approve change of control before a possible sale of the company.

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Jim Love, Chief Content Officer, IT World Canada

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