US embassy cable - 03MONTREAL245

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, Telecommunication, Communication 
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