Is Canada in AT&T, T-Mobile's cellphone crosshairs?

By Peter Nowak — A number of foreign players have already revealed their intentions of bidding in Canada's auction of cellphone airwaves, but two companies that are keeping quiet may trump them all: AT&T Inc. and T-Mobile.

While neither company would confirm to CBCNews.ca their involvement in the auction, neither would deny partnering with a bidding party or funding a bid.

"AT&T is not commenting on the Canadian wireless spectrum applications at this time," a representative for the company said. A spokeswoman for T-Mobile in Germany also did not deny involvement in the auction. "I can only give you a 'no comment,'" she said.

Either firm may be backing an auction application lodged earlier this month by unknown entity Niagara Networks Inc., which has no current operations in Canada. The company surprised industry observers two weeks ago when it appeared on an Industry Canada list of applicants for the spectrum auction beginning on May 27. Niagara Networks has applied to bid on all the spectrum being auctioned, requiring a letter of credit for $881 million.

Douglas Evashkow, president of Niagara Networks, told CBCNews.ca at the time that he was unable to disclose who was funding his company because of confidentiality agreements.

Analysts say getting a bank to agree to that much credit would require the backing of a significant player. And while any number of non-telecommunications players could be funding Niagara Networks' bid, the company will require wireless experience and knowledge to set up and run a cellphone network, making an alliance with an existing carrier likely.

Most other major U.S. and global cellphone companies say they are not interested in Canada's spectrum auction. Spokespeople for the second- and third-largest U.S. cellphone companies, Verizon Wireless and Sprint-Nextel respectively, both told CBCNews.ca their companies were not involved in the auction. U.K.-based Vodafone Group, the largest multinational cellphone company, also said it was not partnered with any potential bidders in Canada, nor was it funding any.

Spain's Telefonica, which operates cellphone networks in 17 countries, is also an outside contender for taking part in the auction. Analysts discount the likelihood, however, because Telefonica has concentrated mostly on Spanish- and Portuguese-speaking countries. Company officials in Spain could not be reached for comment.

AT&T and T-Mobile are thus the odds-on favourites.

"From their U.S. operations, Canada's a natural place" to expand to, said Lawrence Surtees, principal telecommunications analyst for research firm IDC Canada.

No strangers to Canada

San Antonio, Texas-based AT&T, the largest multinational telecommunications service provider in the world, is no stranger to the Canadian cellphone market. AT&T owned 34 per cent of Rogers Wireless before selling it back to the company in 2004 for $1.35 billion US in order to "monetize its stake" and concentrate on its U.S. operations.

In recent years AT&T has reversed course and expanded its international operations. In one of its latest big moves, AT&T in October applied to enter India's upcoming spectrum auction in partnership with a local company, Mahindra Telecommunications Pvt. Ltd.

AT&T also announced earlier this month that it will invest $1 billion US in 2008 in its international businesses, 33 per cent more than it spent last year and double its expenditure in 2006.

In a recent interview with CBCNews.ca, AT&T Canada executives declined to say how much of the investment would go to Canada but said the country was a key priority. The company provides telecommunications services — minus cellphones — to multinational corporations operating here.

Maura Lendon, chief counsel for AT&T Canada, praised recent moves by the government to boost telecommunications competition, including the favouring of new entrants in the spectrum auction.

The government in November ruled that 40 per cent of the airwaves up for auction would be reserved for new entrants, meaning that existing players Rogers, Bell Canada Inc. and Telus Corp. are restricted to bid on the other 60 per cent.

"We do see more positive trends in the Canada market, which I think are opening opportunities. It trends towards more open competition," Lendon said.

T-Mobile, the wireless arm of Deutsche Telekom AG, is also no stranger to Canadian wireless, having owned 15 per cent of Microcell Telecommunications Inc., which operated under the Fido brand. T-Mobile's stake was sold to Rogers in 2004 when it took over Microcell.

The German company entered the U.S. market in 2001, where it is now the No. 4 carrier, and last year said it was looking at further international expansion. T-Mobile singled out its operation in the United States — a market similar to Canada's — as a prime area of future growth.

In the United States, the cellphone company has established itself as the choice of budget-conscious customers — a role analysts say it would seek to duplicate in Canada.

Foreign ownership restrictions loom

Neither company would likely be able to field a full bid, however. Ownership rules limit foreign firms to controlling 20 per cent of voting shares of a company that has telecommunications infrastructure. The rules allow a further 26 per cent in a holding company, giving foreign players a maximum stake of 46 per cent, which means some sort of Canadian partner would be needed to acquire spectrum.

The same rules affect the other foreign players who have already announced their interest in the auction. Last week, Winnipeg-based MTS Allstream Inc. and the Canada Pension Plan Investment Board revealed a partnership that includes New York-based private equity firm Blackstone Group.

Toronto-based Globalive Communications Corp. also said last week it had the backing of Egypt's Weather Investments and London's Novator. Boston-based M/C Venture Partners and Virginia-based Columbia Capital revealed themselves as partners through a numbered company, in conjunction with Canadian investment firm Novacap. Some of the other 30 applications may have foreign partners as well, but these won't be known until Industry Canada provides further information on bidders on March 31.

While it's unlikely that AT&T and T-Mobile are both backing Niagara Networks' application, it's possible that either company could be supporting another bidder, such as Canadian entrepreneurs John Bitove or the Ghermezian brothers.

Winds of change on the foreign ownership rules are also blowing. The government's Telecommunications Policy Review Panel in 2006 advised that foreign ownership restrictions were limiting competition in Canada's markets.

The government last year appointed the Competition Policy Review Panel to examine issues affecting Canada's international competitiveness. The panel, which is scheduled to make its report by June 30, is expected to similarly recommend lifting ownership restrictions on telecommunications companies.

AT&T has also recommended the rules be changed, arguing that they limit investment and competition. The company has written to the government and said it would like to invest more in Canada, with a cellphone network as one option.

Analysts say that with the possibility of ownership rules changing, now may be the time for foreign companies to get in on the ground floor by partnering with a Canadian company, with an eye to buying them out when the limits are lifted.

"There is a precedent whereby T-Mobile purchased a minority stake initially, before moving to majority when the rules allowed," wrote CIBC World Markets analyst Robert Bek in a recent research note to clients.

In other words, partnering with a Canadian firm for the spectrum auction could simply be the first step in the grander plan of a foreign cellphone provider.

"It's part one of a multi-act play," Surtees said. "When the foreign ownership rules change, we'll be looking at some sort of shakeup."