In interviews, Darren Entwistle has been waving the flag of Canadian nationalism and national security to help sell his plan to keep the whole shooting match of a merged Bell and TELUS entity. I find it interesting that other suitors, made up primarily of capital from Canadian and government employee pension plans are being characterized as “foreigners”.

In a call last Thursday with industry analysts, Darren referred to the high proportion of northbound connectivity that is controlled by foreign carriers, the number of countries with national scale incumbents, the fear of Canada’s national security assets falling under control of foreign investment or foreign carriers. He raised the threat of AT&T; and Verizon controlling Canadian telecom.

But at the end of the day, those aren’t reasons for TELUS to acquire Bell. Shareholders, Bell and TELUS alike, expect the deal to be good for them – in fact, they expect it to be the best deal for them. If it happens to be good for Canada too, that is serendipity, not a reason to do the transaction.

There is an interesting take on the issues from Derek DeCloet in the weekend’s Globe and Mail.

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Bell, TELUS, Globe and Mail, Derek DeCloet

My posting from last Sunday attracted a number of comments – way more than I would have expected on a beautiful Father’s Day.

Brian Gordon said:

So, it all comes down to whether or not Industry Canada believes it would be in the public interest to have more competition in the cellular market. IF they believe more competition is needed, then they have to determine if it would be in the public interest to introduce some specific measures into the auction process in order to give the competition they want a chance to succeed by allowing new players to have the ability to hit the ground running.

I am not certain that the decision tree necessarily starts with needing to determine whether it is in the public interest to have more competition in the cellular market.

It’s possible that there needs to be a decision made about what would give sufficient cause to intervene in the market place. Given other pronouncements from this government, one would assume that there must first be convincing evidence that the market isn’t working. The ex-post versus ex-ante thing.

We might want to start with the possibility of a Bell / TELUS combination. It is interesting that TELUS is suggesting that, under its combination proposal to retain all of the acquired assets of Bell, it agrees there would be a sufficient reduction in competition to warrant new entrant concessions in the spectrum auction, including a set-aside. Such concessions, characterized as a subsidy by TELUS just a few weeks ago, will ease the ability for, but not provide the assurance of, additional viable industry players.

More competition is always desirable: for cars, gas, groceries and communications services. I welcome the possibility of additional service providers. So the first decision in the tree (would it be in the public interest to have more competition in the cellular market) is easy to answer – of course it is.

The real question is whether it is in the public interest to introduce specific measures into the auction process, versus measures to prevent the market contraction. The concern, expressed by TELUS itself, is that interference in market forces in the auction could lead to disastrous unintended consequences. But that is another posting.

Who thinks that TELUS and Bell can combine without having to spin out lots of assets?

I disagree with Greg O’Brien’s assessment in CARTT:

Using year-end 2006 figures, a “Bellus” would own approximately 82.5% of the traditional telco customers in Canada. What’s that you say, the telecom field is hyper-competitive with many newcomers like cable and others? Even factoring those in, a Telus-Bell combo would own 77% of all local lines in the country.

As a consumer, those are hard to swallow numbers. Potentially anti-competitive numbers.

In my view, Bell and TELUS don’t compete today for residential local lines other than where wireless competes for wireline substitution. Each has maintained a regional focus in the residential sector.

It is on the wireless and enterprise side that competition concerns should arise. As such – it seems clear to me that wireless and enterprise will need to be spun out from a combined Bellus, no doubt causing significant upheaval for customers.

That means great opportunities for competitors picking up the pieces; opportunities from buying pieces being spun out and opportunities to win customers unhappy with being traded around like baseball cards.

What kind of distractions would this merger cause for management? What kind of chaos will this cause for national and multi-national enterprise customers?

Let me paint an alternate scenario. Start by looking at the most likely assets to be permitted to be retained by the combined entity. That creates a list of assets that could be sold to TELUS by the victorious acquiring private equity firm and also identifies the assets that would need to be dealt elsewhere.

TELUS and Bell talking to each other helps crystallize a dissolution plan and perhaps helps drive improved valuations from the remaining bidders.

After the dust settles, I’d suggest that telecom in Canada will remain competitive, thanks to Rogers and MTS Allstream on a national level and cablecos such as Shaw and Videotron on a more regional level.

A merger of Bell and TELUS may create an opportunity for someone (or some group) to instantly become a national wireless player buying existing spectrum and with millions of customers.

Are there any un-conflicted investment banking firms left out there?

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Bell, TELUS

I have received some interesting feedback – on and off the record – that is worth sharing.

A comment on my Monday post points out a good reason for people to comment anonymously – lack of corporate support for their involvement in blog commentary. The comment said:

If you say something that even hints at being confidential, proprietary, libelous, discriminatory, etc. and it’s found out, you’ll get a rather large chunk of your hide taken out by HR, not to mention your boss of the moment. So a lot of people use prudence, rather than their real identity.

I had a chance to have a brief conversation at The 2007 Canadian Telecom Summit with John Roese about the challenges for an officer of a public company to speak freely on his blog. I fully understand that concern.

So, let me provide a screen for a couple good contrary viewpoints that have been sent into me privately.

Here is one on the spectrum auction:

For some strange reason I am of the view that the government should set aside spectrum from a policy perspective. What analogies miss, such as Bangor Lodge, is that in wireless, the government owns all the available real estate and has it awarded it to just three innkeepers. I believe that anyone in cottage country who can get the zoning permission can start an inn.

The other issue I take with the incumbents is that they have all benefited in some way shape or form from spectrum grants, with the understanding that the licenses were for a limited amount of spectrum for a defined time period. I didn’t think they came with a caveat that all future spectrum grants would allow them equal access. Isn’t it a case of ‘buyer beware’?

A number of people point to the fact that the current incumbents received their initial spectrum without large upfront payments. Many of these folks tend to forget that there was no certainty to the success of cellular as a service. Indeed, a celebrated study conducted in 1980 forecast a total market of less than a million subscribers in the US in the year 2000 – off by more than 2 orders of magnitude. The spectrum had no proven value at the time that Rogers and the ILECs got started.

So what would have been the right market price in 1984 for the spectrum? In hindsight, our vision is crystal clear. Isn’t it possible that the risk sharing model – carriers paying as demand grew, was the appropriate model in a high risk period of time for the industry?

“Bruce,” commenting on Sunday’s posting, noted:

As I said in my original comment, the goal should be to ensure there is spectrum available to a new entrant, but not at a discount for the new entrant. (Yes, this will reduce the total government take because it removes the incentive for incumbents to pay more in order to hoard the spectrum.)

Brian accurately gets at the broader policy issue — should the government go beyond steps that enable a new entrant to ones that specifically benefit a new entrant.

This is a more complicated issue.

Michael Geist writes:

Viewed through the lens of planned spectrum use, the choice boils down to the chance for increased Canadian competition through a set-aside or an open auction that offers little in the way of change. For a Minister who has made his mark reshaping the Canadian telecommunications landscape, the decision may not be so difficult after all.

Contrary to the viewpoint expressed in Michael’s piece this week, I tend to agree with Bruce. I think the Minister has some very difficult decisions to make. The auction policy is very much a complicated issue, with serious implications for the carriers, potential new entrants and all of us consumers.

We’ll be watching the reply comments that are due on June 27. More input, more guidance and likely even more twists in the road.