Virus hands telecommunications firms a win
CRTC rethinking ruling that limits how much companies can charge for network access
Investors have worried about the changing rules for Canada’s big communications companies. But a few of those regulatory clouds may be about to lift.
For all that COVID-19 has disrupted the Canadian economy, there’s a silver lining for telecommunications firms, according to National Bank Financial analyst Adam Shine. Having huge numbers of people working from home has made everyone — including regulators — more aware of the importance of reliable internet access, he said in a note this week.
That’s one reason Shine expects the Canadian Radio-television and Telecommunications Commission (CRTC), which regulates the industry, to change a 2019 ruling that slashed how much the country’s incumbent telecom companies are allowed to charge internet resellers for access to their networks.
Big carriers have said the new rates, which were cut as much as 77 per cent in some cases, retroactive to 2016, were below cost and could jeopardize future spending on networks, resulting in slower expansion into remote or rural areas. On the weekend, Innovation Minister Navdeep Bains issued a statement that agreed with that argument.
“It may not get fully reversed, but the CRTC is inevitably going back to the drawing board,” Shine wrote.
Shares underperformed The three largest Canadian players — BCE Inc., Rogers Communications Inc. and Telus Corp. — have all underperformed the S&P/TSX Composite Index this year, with Rogers’ 13 per cent drop being the largest. That’s
partly because COVID-19 hit their earnings hard. All three have large wireless operations, and with consumers staying home and stores closed, revenue from roaming and selling new phones dropped. BCE and Rogers also have big media and sports operations.
But Ottawa has also created problems. Since the beginning of the year, the valuation gap has widened between the American and Canadian telecom industries, Shine wrote.
That may be partly due to the perception of a better regulatory environment in the U.S., where the $26 billion (U.S.) merger of T-Mobile and Sprint closed in April.
“Muddled regulatory decisions can overhang valuations and undermine strategic and investment decision-making,” Shine wrote. Major Canadian telecommunications companies tend to perform well and enjoy a valuation premium over U.S. peers, “except during periods of more regulatory pressure,” he said.
Bains’s Aug. 15 statement struck a friendlier tone for the incumbents. “The COVID-19 pandemic has only reinforced the importance of connectivity,” he said. The government “is concerned that these rates may undermine investment in high-quality networks, particularly in rural and remote areas.”
Sector reactions The minister’s remarks were welcomed by the country’s three biggest telecommunications companies.
“We trust the CRTC’s review will reflect the government’s objective to drive network investment, especially in rural and remote regions, with wholesale rates that are fair and reasonable,” said Caroline Audet, a spokesperson for BCE. Resellers such as TekSavvy Solutions Inc. will lose if wholesale rates rise again. Andy Kaplan-Myrth, the company’s vice-president of regulatory and carrier affairs, said the company has already decided to increase prices.
“We lowered our prices after that decision a year ago because we took it to heart,” he said. “The CRTC’s goal was to give us fair rates that we could use to compete.”