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Cablegate: Quebec Telecoms Struggle with Overcapacity, Lack Of

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 MONTREAL 000245

SIPDIS

USDOC WASHDC
FCC WASHDC

STATE FOR EB/CIP ALEWIS AND SSHIPMAN AND IO/OIC

STATE PASS USTR FOR J.MCHALE AND J.MELLE

FCC FOR INTERNATIONAL - D.ABELSON, J.MANN AND P.COOPER

USDOC FOR 4310/IEP/OOC/WH/J.BENDER

USDOC FOR 4320/ITA/MAC/WEST HEMIS/INTL-
AMER/AFFAIRS/JBENDER/CBUSQUETS

USDOC FOR 6420/ITA/TD/IT/OFF OF TELECOM TECHNOLOGIES

E.0. 12958: N/A
TAGS: ECON ECPS EFIN EINV ETTC CA BEXP
SUBJECT: QUEBEC TELECOMS STRUGGLE WITH OVERCAPACITY, LACK OF
CAPITAL

REF: 02 OTTAWA 3290

1. SUMMARY: QUEBEC'S TELECOMMUNICATION INDUSTRY, A SECTOR
WHICH AT ITS PEAK IN 1999 SUPPORTED 114,500 JOBS, CUT MORE
THAN 21,000 JOBS IN 2002. ANALYSTS ARE PREDICTING ANOTHER
ROUGH YEAR WITH LOW INVESTMENT RATES AND A POSSIBLE INCREASE
IN BANKRUPTCIES IN SMALLER COMPANIES. END SUMMARY.

2. MONTREAL-BASED BELL CANADA ENTERPRISES (BCE), CANADA'S
LARGEST AND OLDEST TELECOM, ANNOUNCED IN JULY 2002 A C$8
BILLION WRITE DOWN ON ITS INVESTMENTS IN TELEGLOBE, THE
INTERNATIONAL LONG-DISTANCE SERVICES COMPANY. IN THE WAKE
OF THE WRITE-DOWN, JEAN MONTY, WHO HAD BEEN WITH THE COMPANY
FOR 28 YEARS AND CEO SINCE 1997, RESIGNED. MONTY WAS
REPLACED BY HIS OBVIOUS SUCCESSOR, MICHAEL SABIA, WHO HAVING
BEEN A PROTEGE OF PAUL TELLIER AT CN, MOVED TO BCE, IN 1999
AS PRESIDENT OF BELL CANADA INTERNATIONAL. SABIA'S FIRST
MAJOR DECISION WAS TO SELL BCE'S HIGHLY PROFITABLE PHONE
DIRECTORIES BUSINESS TO A U.S. INTEREST FOR $C3 BILLION IN
CASH IN ORDER TO REPURCHASE THE 20 PERCENT STAKE U.S.-BASED
SBC INC. HELD IN BCE. JOHN HENDERSON, TELECOM ANALYST AT
SCOTIACAPITAL, SAYS "SABIA GOT A GREAT DEAL, BUT I DON'T
THINK HE HAD TO SELL THE PHONE DIRECTORIES BUSINESS TO DO
IT." HENDERSON FEARS THAT THE SALE OF WHAT WAS SEEN AS A
CASH COW MIGHT HURT BCE IN THE LONG-TERM. BCE, WHICH HAD
AGREED TO EITHER REPURCHASE THE SBC STAKE OR PERMIT SBC TO
INCREASE ITS OWNERSHIP, OPTED TO MAINTAIN ITS INDEPENDENCE.

3. MONTREAL-BASED MICROCELL TELECOMMUNICATIONS, OWNER OF THE
FIDO MOBILE PHONE BRAND (THE SMALLEST OF CANADA'S FOUR
WIRELESS PHONE COMPANIES), FINALLY CAVED IN TO ITS CREDITORS
AND DECLARED BANKRUPTCY AFTER MOUNTING LOSSES AND OVER C$2
BILLION IN DEBT. THROUGH A COURT ORDERED RESTRUCTURING
PLAN, MICROCELL GAVE UP 68 PERCENT OF ITS EQUITY TO ITS
CREDITORS IN RETURN FOR THE ELIMINATION OF ITS C$2 BILLION
DEBT LOAD. THE RESTRUCTURING PLAN CALLS FOR MICROCELL TO
DOUBLE ITS CUSTOMER BASE AND RETURN TO PROFITABILITY BY
2005. "MICROCELL HAS A VERY DIFFICULT YEAR AHEAD, THERE IS
NO INDICATION THAT THEY WILL BE ABLE TO REBOUND FROM THE
BANKRUPTCY THIS YEAR, LET ALONE IN 2005," SAID
SCOTIACAPITAL'S HENDERSON. HE DOESN'T BELIEVE THAT THE
BANKERS NOW HOLDING THE LION'S SHARE OF MICROCELL STOCK WILL
HOLD THEIR EQUITY INTEREST FOR LONG.

4. MICROCELL IS THE ONLY TELECOM COMPANY IN QUEBEC WHICH
USES THE EUROPEAN-FORMAT GSM MOBILE PHONE TECHNOLOGY, A
FORMAT THAT PERMITS USERS TO RETAIN THE SAME TELEPHONE
NUMBER AND MOBILE PHONE NO MATTER WHERE THEY TRAVEL, SIMPLY
BY CHANGING A CHIP WITHIN THE PHONE UNIT. AS SUCH, ANALYSTS
HAVE SUGGESTED MICROCELL MIGHT BE A POSSIBLE TAKEOVER TARGET
FOR ONTARIO-BASED ROGERS/ATT WIRELESS, WHICH USES THE SAME
GSM TECHNOLOGY. HENDERSON BELIEVES THERE ARE GREAT
SYNERGIES FOR ROGERS/ATT AND SUSPECTS A MOVE IN 2003.
LAWRENCE SURTEES OF INTERNATIONAL DATA CORPORATION CANADA
(IDCC), A LEADING INDUSTRY INTELLIGENCE RESEARCH COMPANY,
DOES NOT CONCUR, ASKING "WHY WOULD ROGERS PAY FOR SOMETHING
THAT IS REDUNDANT." SURTEES SAYS MICROCELL'S BIGGEST
PROBLEM IS LACK OF SERVICE COVERAGE OUTSIDE OF MAJOR AREAS,
LEADING TO THE HIGHEST RATE OF CUSTOMER "CHURN," (WHEN
CUSTOMERS DROP ONE SERVICE FOR ANOTHER). FARAJ NAKHLEH,
VICE-PRESIDENT OF THE INFORMATION TECHNOLOGY ASSOCIATION OF
CANADA (ITAC) BELIEVES, FIDO IS A GOOD DEAL AND WILL BE
BOUGHT OUT THIS YEAR FOR UNDER $C1 BILLION. "[FIDO] HAS
OVER ONE MILLION CUSTOMERS AND NO DEBT; WHO WOULD NOT WANT
SUCH A PLUM," HE ASKED.

5. ANOTHER QUEBEC-BASED PLAYER IS TELECOMMUNICATION
EQUIPMENT MAKER SR TELECOM (SRT), A COMPANY WHOSE MARKET IS
ALMOST ENTIRELY OVERSEAS. SRT HAS DEVELOPED AN INNOVATIVE
TECHNOLOGY THAT PROVIDES FIXED WIRE PHONE LINE SERVICE WITH
WIRELESS EQUIPMENT, ALLOWING REMOTE OR UNDERSERVED AREAS TO
HAVE FULL TELECOMMUNICATION ACCESS. FOUNDED IN 1981, SRT
NOW EXPORTS ITS EQUIPMENT TO OVER 100 COUNTRIES WORLDWIDE.
CHIEF FINANCIAL OFFICER DAVID ADAMS TOLD AMBASSADOR CELLUCCI
DURING A RECENT VISIT TO THE COMPANY HEADQUARTERS IN
MONTREAL THAT SRT WANTS TO SELL ITS EQUIPMENT IN THE U.S.
ACCORDING TO ADAMS, "APPROXIMATELY SIX PERCENT OF THE U.S.
DOES NOT HAVE ACCESS TO LAND-LINE TELEPHONES; WE PLAN TO
FILL THAT NICHE." HOWEVER, SRT HAS NOT ESCAPED THE BURST OF
THE TELECOM BUBBLE. THE COMPANY HAD RECORD REVENUES IN 1999
OF C$ 180 MILLION, BUT HAS POSTED TWO CONSECUTIVE YEARLY
LOSSES SINCE, INCLUDING A 2001 LOSS OF C$13.7 MILLION. SRT
IS A SMALL PLAYER BY U.S. STANDARDS, BUT IT IS A WORLD
LEADER IN ITS FIELD. EMILIO IODICE, VICE PRESIDENT OF SRT,
SAYS "WE HAVE A GOOD PRODUCT, ONE THE U.S. WILL BE ABLE TO
BENEFIT FROM AND ONE THAT WILL REDUCE THEIR DIGITAL DIVIDE."

6. ONTARIO-BASED NORTEL NETWORKS, THE ONE-TIME DARLING OF
THE STOCK MARKET AND ONE OF THE WORLD'S LARGEST TELEPHONE
SWITCHING PROVIDERS, HIT AN ALL-TIME LOW OF C$0.67 A SHARE
LAST OCTOBER. NORTEL REDUCED ITS WORK FORCE IN CANADA BY
OVER 8,000 EMPLOYEES IN 2002 AND SOLD OFF ITS ONCE-PROUD HI-
TECH FACILITIES IN MONTREAL. THE APPROXIMATELY 2,000
REMAINING NORTEL EMPLOYEES IN QUEBEC ARE MAINLY SWITCHING
SYSTEM ENGINEERS AND TECHNICIANS.

7. JOHN HENDERSON OF SCOTIACAPITAL NOTES THAT A
PARLIAMENTARY COMMITTEE IS DISCUSSING INCREASING THE GOC'S
PRESENT LIMIT OF 20 PERCENT DIRECT FOREIGN OWNERSHIP IN
TELECOM COMPANIES TO 33.4 PERCENT (REFTEL). HENDERSON
BELIEVES THAT RELAXATION OF FOREIGN INVESTMENT RULES WOULD
BRING NEW CAPITAL TO THE INDUSTRY. MICHAEL SABIA, CEO OF
BCE, TOLD THE COMMITTEE (02/18/03) THE INCREASE IN FOREIGN
OWNERSHIP WOULD ALLOW A "GREATER FLOW" OF CAPITAL. WHILE
HENDERSON DOES NOT THINK U.S. CAPITAL WOULD RUSH IN GIVEN
INCREASED INVESTMENT CAPABILITY, HE BELIEVES COMPANIES SUCH
AS FRANCE TELECOM AND DEUTSCHE TELECOM MIGHT BE TEMPTED.

8. FARAJ NAKHLEH, VICE PRESIDENT OF ITAC, SEES 2003 AS A
YEAR OF CONSOLIDATIONS, WITH A SLOW RETURN TO PROFITABILITY.
HE AGREES WITH HENDERSON THAT A RELAXATION OF GOC FOREIGN
OWNERSHIP RESTRICTIONS COULD HELP INTRODUCE NEW CAPITAL INTO
THE QUEBEC TELECOMS. THE DECISION, WHICH NAKHLEH TERMED
"LONG-OVERDUE," WOULD ALLOW EUROPEAN TELECOMS TO GAIN A
FOOTHOLD IN NORTH AMERICA THROUGH ENTRY INTO THE CANADIAN
MARKET.

9. COMMENT: REVISIONS TO THE FOREIGN OWNERSHIP RESTRICTIONS
COULD BRING NEEDED CAPITAL TO THE QUEBEC TELECOM INDUSTRY,
BUT IN THE SHORT-TERM, THIS SECTOR IS EXPECTED TO
CONSOLIDATE RATHER THAN EXPAND. AS SUCH, THE FIDO NETWORK
STANDS OUT AS A TAKEOVER TARGET, EVEN BY A EUROPEAN TELECOM,
GIVEN PARENT MICROCELL'S DEBT-FREE STATUS FOLLOWING ITS
BANKRUPTCY REORGANIZATION AND ITS USE OF EUROPEAN FORMAT
MOBILE PHONE TECHNOLOGY. END COMMENT.
ALLEN

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