By Randall Palmer and Alastair Sharp
OTTAWA/TORONTO Feb 19 Canadian telecommunications companies paid a record C$5.27 billion ($4.78 billion) in an auction to secure wireless airwave licenses, the federal government said on Wednesday, as a new national challenger emerged from Quebec.
The stronger-than-expected result was a windfall for taxpayers and a welcome outcome for the ruling Conservative party, which has made pro-consumer wireless policies a key plank of its 2015 re-election strategy.
The high prices will likely be viewed less positively by shareholders of the country's major telecom companies and could weigh on their shares when the market reopens on Thursday.
"To be quite frank, I thought this would be a much more sedate auction with people sitting on their hands, it turns out to be not so," said Iain Grant, managing director of telecom consultancy Seaboard Group.
Market leader Rogers Communications Inc was by far the biggest spender, paying out C$3.29 billion, or more than 60 percent of the total, to grab a so-called prime block in every region of the country except its three remote northern territories.
But it was Quebecor Inc's Videotron that made the biggest splash at the auction, as the regional cable and wireless company expanded its reach outside its home base in the mostly French-speaking province of Quebec.
The two other major national players, BCE Inc's Bell and Telus Corp, also scooped up large chunks of the 700 megahertz spectrum, which is valued for its ability to carry a signal over long distances and to penetrate buildings, making it useful for both urban and rural areas.
Winners of the 700 MHz spectrum, vacated by television broadcasters during their transition to digital signals, will help support booming demand for mobile data such as video streaming, though the cost to improve networks could constrain profit margins just as subscriber growth starts to plateau.
"It seems that Rogers had a greater appetite than Bell or Telus and Videotron seems to have come through the middle," said Seaboard's Grant.
Quebecor paid C$233 million for airwaves in Ontario, Alberta and British Columbia, as well as Quebec. Those four provinces combined are home to much of Canada's population.
Rogers said it was happy it was able to secure particularly wide blocks of airwaves in all major markets.
"Not all 700 MHz spectrum in the auction was the same; we secured the beachfront property we wanted," Rogers CEO Guy Laurence said in a statement.
Videotron also beamed about what it was able to achieve - potential coverage of four in five Canadians - for substantially less than its national peers.
"Given the way the auction unfolded, Quebecor Media could not pass up the opportunity to invest in licenses of such great intrinsic value in the rest of Canada," Videotron CEO Robert Dépatie said. "We now have a number of options available to us to maximize the value of our investment."
Industry Minister James Moore, who engaged in a public spat last summer with Rogers, BCE and Telus, told reporters the auction results validated Ottawa's goal of promoting four competitors in each region.
"The outcome of the auction supports more choice for Canadians by enabling a fourth wireless player in every region of the country," Moore said. "There were those who doubted whether or not this would be realized in this auction. Those doubters have now been silenced."
A lack of interest from major foreign telecoms and late withdrawals by small domestic operators spurred speculation that bidding would be subdued. Initial estimates were that the government would raise C$1.5 billion to C$2.5 billion.
Analysts raised their forecasts this week to around C$5 billion on the assumption that Rogers, Videotron and others spent heavily.
Ryan Bushell, a portfolio manager at Leon Frazer, which holds positions in the three big telecoms, said the proceeds were shocking.
"The numbers made my eyes pop out of my head, the Rogers number especially," he said. "That's a big number. That's probably multiples of what investors thought Rogers were going to spend, so that is going to be a concern and likely weigh on the stock."
Telus and Bell share a national wireless network, meaning each only needs to spend roughly half as much as Rogers to acquire airwaves and expand and improve the network.
But Rogers ended up paying almost double Telus and Bell's combined outlay. Telus bid C$1.14 billion, while Bell spent C$565.7 million.
The total proceeds far exceeded the minimum opening bids of C$897 million.
Seaboard's Grant said Videotron must now plan its expansion, perhaps with the aid of a wholesale agreement or other partnership with other cable companies or Wind Mobile, a recent entrant which had to pull out of the auction late after its funding dried up.
Wind CEO Anthony Lacavera said ahead of the results that he remains open to possibly co-operating or sharing spectrum with other recent entrants, which would include Videotron.
Wind already has almost 700,000 subscribers in Ontario, Alberta and British Columbia, while Videotron has grabbed more than half a million customers since launching in Quebec in 2010.
Regional operators other than Quebecor were more restrained, with companies focused on the provinces of Manitoba, Saskatchewan and the Atlantic region all acquiring airwaves in their home markets.
The auction was completed on Feb. 13, Industry Canada said.
The last major auction of wireless licenses in Canada in 2008 raised C$4.25 billion for the government, which is essentially leasing access to the publicly owned assets.
An auction of 700 MHz frequency in the United States, with 10 times the population, raised almost $20 billion in 2008, while in Australia last year one-third of the airwaves went unsold.
The Australian auction raised almost A$2 billion, but also included spectrum in the 2.5 GHz range, which Canada plans to sell next year.