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### Viewing cable 03MONTREAL245, QUEBEC TELECOMS STRUGGLE WITH OVERCAPACITY, LACK OF

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
03MONTREAL245 | 2003-02-25 12:12 | 2011-04-28 00:12 | UNCLASSIFIED | Consulate Montreal

`

    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

`