Telecom Shares Dip in Canada on Spectrum Sticker Shock

Rogers Communications Inc. fell as much as 2.3%, the most since March, and other Canadian telecom stocks declined after a report that the country’s wireless spectrum auction may have raised about C$8 billion ($6.4 billion).

The amount, reported by the Globe and Mail newspaper, suggests that at least one company “got highly undisciplined” and spent far more than expected, according to TD Securities analyst Vince Valentini.

The C$8 billion number “is shockingly high in our view,” Valentini said in a note to investors. The costs will inflate debt and hurt equity values, he wrote, “but they could also negatively impact investor sentiment as we face two more auctions (3800 MHz and mmWave) in the next two years.”

Rogers, Canada’s largest wireless company by subscribers, ended the day down 0.4% in Toronto. The company’s bonds also weakened slightly. Western Canadian rival Telus Corp. saw its shares fall 0.6% and BCE Inc. declined 0.2%.

The industry’s three dominant national players are expected to be the biggest spenders in an auction that’s a major step to rolling out faster 5G services. Shares of Cogeco Communications Inc. dropped 1.2% and Quebecor Inc. declined 0.7%; both are regional companies that were expected to bid.

A spokesperson for Canada’s industry department declined to comment on the auction results.

Telecom Shares Dip in Canada on Spectrum Sticker Shock

RBC Capital Markets analyst Drew McReynolds had forecast the three largest companies would spend a combined C$3.25 billion in the auction, with Cogeco and Quebecor spending a total of C$650 million, McReynolds said in a note to investors late Wednesday. The auction also included other regional telecommunications providers.

“It is somewhat higher than what the market was expecting, which was in the C$5 billion to C$6 billion range,” said Max D’Alessandro, a fixed-income portfolio manager at FDP in Montreal. “Telcos can tap their credit lines and stagger the issuance over time so as to diminish the impact of coming all at once with big deals.”

McReynolds said a spectrum cost of that magnitude is “negative,” but that the impact for shareholders will probably be modest. Each additional C$500 million in spending erodes BCE’s net asset value by 55 Canadian cents a share and Telus’s by 40 cents a share, the analyst wrote.

For Rogers, the comparable hit to NAV is about C$1 per share, McReynolds said. Rogers is in the process of trying to buy Shaw Communications Inc., a western Canadian rival that owns the No. 4 wireless provider, Freedom Mobile.

McReynolds added that it’s still unknown how much each company spent, “along with the associated nature and amount of spectrum acquired.” The sale, which is for 3,500 MHz spectrum, is slated to end by July 23, the Globe said.

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