Bell and Telus will merge within 2 years, RBC predicts

A merger betweenBell and Telus, two of Canada's largest phone and internet companies, is looking "very likely" within the next two years, according to a report from RBC Capital Markets.

The impending launch of new cellphone companies, the continuing trend of customers ditching their landlines, and the saturation of internet and television services are combining to eat away at growth opportunities for Bell and Telus, RBC analyst Jonathan Allen said in a research note to clients on Wednesday.

Those factors are putting pressure on both companies to cut costs, something they could achieve better as a merged entity, Allen said. The spectre of increasing competition, particularly in wireless, should also ease regulatory and government concerns.

"The biggest hurdle to a Bell-Telus merger has traditionally been getting wireless through the Competition Bureau but over the next year, there are three to five new wireless carriers launching service," Allen wrote. "The more disruptive the new entrants are, the better the merger odds will be."

A combined Bell-Telus would hold more than 60 per cent market share of the wireless business in six provinces, with the highest concentrations in the Atlantic provinces and Alberta. However, Allen said, the Competition Bureau tends to look at market power rather thanjust share. With competitionset to increase, a merged company willsee its ability to control prices lessen.

"The rule of thumb is usually whether the combined company can implement a five-per-cent price [increase] and sustain [it] for more than a two-year period without suffering market share loss," he said. "In the current market environment and over the next 12 months, we believe Bell and Telus will have a strong argument that the combined company will not have significant market power in most of its markets."

At least four companies have said they are launching new wireless services either by the end of this year or in early 2010. Globalive Wireless, which this week announced it would provide service under the Wind brand, plans to launch in Toronto and Vancouver by the end of this year, providing it passes a CRTC review of its ownership structure next month, and then nationally except for Quebec next year.

Public Mobileand DAVE Wireless arealso planning Toronto launches this year with further expansion to follow. In Quebec, Videotron is planning its own service by spring 2010. Bragg Communications in the East and Shaw in the West also purchased airwaves in last year's government auction and could launch services, though neither has announced any plans to do so.

Would take 85% of business market

A combined Bell-Telus would also have a significant share ofbusinesstelecommunications, controlling about 85 to 90 per cent of the market. RBC believes this would be less of a concern for the Competition Bureau, because competition and pricing in the market is fierce, and there are still other companies offering services, including MTS Allstream and cable providers.

Telus made a bid for Bell in 2007 but quickly withdrew after it realized the Competition Bureau would likely force the combined company to sell off some of its highly prized wireless assets. The government and Bureau were already concerned with the state of competition in wireless and were unlikely to allow the winnowing of three national providers to two.

A union between the two companies would now bea merger of equals, Allen said, and would not load up Telus with extra debt. The duo has already embarked on cost-savings programs together, including a joint HSPA wireless network that will help it compete better with market leader Rogers, and a recent agreement that will see Telus resell Bell's satellite TV service.

A combined company would be two-thirds controlled by Bell and one-third by Telus and save approximately $1.2 billion annually, Allen said. As the icing on the cake, Bell chief executive officer George Cope also spent time as an executive at Telus and is familiar with the culture of both companies.

The merger would also be good for Rogers, Canada's biggest wireless provider, because it would result in less downward pressure on cellphone prices, Allen said.

Spokesmen for both Bell and Telus declined to comment.

Both Bell and Telus stocks were up in mid-day trading on Wednesday on the Toronto Stock Exchange.