Telus could be next takeover target

In the wake of an offer from private equity players to acquire Bell Canada, the country’s second biggest telecom carrier, Telus, may be the next takeover target for investors, Canaccord Adams analyst David Lambert said in a research note this week.

“Assuming foreign ownership restrictions are removed over the next three years, we believe that Telus could become a target of U.S. or international carriers,” Lambert wrote. “Therefore, a financial buyer could [privatize Telus] and, for the following three years, reinvest the company’s free cash flow into its networks to drive growth in order to maximize the company’s valuation.”

Lambert identified four ways in which investors could spruce up Telus for sale to other carriers: boost its mobile market share in Eastern Canada, perhaps by partnering with cable companies there; overlay a GSM network on top of its existing CDMA network to get more roaming revenue and subscribers; monetize the company’s cell towers and deploy fiber-to-the-premises and carrier Ethernet services.

Adopting that strategy, private equity investors could potentially acquire Telus for slightly more than $30 billion and sell it for slightly more than $38 billion three years later, Lambert wrote.

Any plan to sell Telus to U.S. or international carriers would rely on the Canadian government loosening current restrictions on foreign ownership, however. But the government has pledged to move in that direction. “While we agree that an immediate change to these restrictions could be difficult in the current political environment, we believe it could be inevitable in light of the fact that Canada is one of the most restrictive among [Organization for Economic Cooperation and Development] countries regarding foreign ownership restrictions and because of technological improvements, which make these regulations obsolete,” Lambert wrote.

Bell Canada announced late last week that a private equity consortium including the Ontario Teachers Pension Fund had made an offer of nearly C$52 billion for the carrier. Some analysts believe Telus may yet try to outbid that group, given the synergies it could attain that a private equity group, in theory, could not. But other analysts point out that Telus would have to offer too high a premium to win Bell Canada at this point.