Investors should now be market wieght on telecom.
Canadian telecom stocks have historically outperformed in the first half of the economy cycle (along with other “defensive” sectors), but thenunderperformed in the subsequent 52 weeks of the recovery phase. Using March 2009 as the market trough for the current cycle, we note telecom shares outperformed 20%-25% in the year leading up to March 2009 and then underperformed more than 20% in the subsequent nine months.

Underperformance historically ends around the time time that the bank of canada starts increasing
rates (June 2010?). Consequently, based on historical performance, RBC CM believes investors should now be market weight telecom.

But Stock Selection Is Critical: Rogers, Quebecor, BCE Our Best Ideas:
Given slowing subscriber/EBITDA growth rates for the large Canadian telecoms, RBC CM believes investors should focus on stocks with above average return of capital and/or superior operating growth prospects
Over the next few years, RBC CM believes Rogers and BCE will provide the greatest expected capital returns (dividends/buybacks). In the near term, RBC CM believes Rogers has the most upside to quarterly earnings. Meanwhile, cost cutting and a lower wireless exposure should help BCE shares. RBC CM likes QBR shares for superior growth prospects: 1) QBR shares have historically reacted well to subscriber momentum; 2) core margins are improving due to mix shifts; and 3) it believes QBR will generate significant value over time from its wireless business.

Downgrading TELUS, MBT, and BA S
RBC CM revised some of its rankings for 2010 based on implied returns and operating momentum and has lowered TELUS and Bell Aliant from Outperform to Sector Perform and Manitoba Tel (MBT) from Sector Perform to Underperform. For TELUS, the stock’s low valuation could provide upside over time, but the stock lacks momentum as wireless operations remain under pressure and cost cutting does not appear sufficient to offset margin pressures from TV and wireless. For MBT, RBC CM expects Allstream (and business markets in general) to lag the recovery and MBT’s low/negative FCF in 2010-2011 provide limited flexibility for capital returns. Finally, for Bell Aliant, RBC CM continues to favour the stock but the low implied returntarget and the headline risk about dividend cuts at the May 2010 AGM are mitigating factors.

In 2010, Incumbent Wireless Carriers Facing Various Head-WINDs.
RBC CM expects wireless competition to dominate headlines in 2010 as carriers roll out. So far, WIND Mobile (Globalive) has been the only carrier to launch. Expect another four launches this year: Public Mobile in Toronto any day now; DAVE sometime in the first half of the year (Toronto plus various cities in the West); Videotron after July 1; and Shaw just before year-end (or early 2011).

RBC CM believes that the frequent newspaper headlines about wireless launches and competition will be a major headwind to investor perceptions and will likely cap valuation upside for the whole sector. If the impact of new wireless entranis still a year away, then ARPU may see a modest recovery from the broader economy. All of this leads RBC CM to believe that RCI estimates will be moving higher in 2010, especially for investors/analysts that have been expecting an immediate negative impact on RCI results.

Source: CIBC World Markets Inc.

Shaw announced an agreement to acquire Mountain Cablevision in
Hamilton, Ontario. This system, one of the larger independent cable
systems left after a decade of consolidation, has about 41,000 cable
subscribers, 28,000 Internet subscribers, and 27,000 telephone customers.

Although no purchase price was released, the speculation is that the price
paid came to about $300 million in cash and Shaw non-voting shares. This
works out to be around 12x EV/EBITDA and $7,300 per subscriber, which is
not cheap, even from a cable heyday perspective, and dilutive to NAV.

That said, Mountain Cablevision is a well-fibred plant, requiring limited
upgrade capex, which should lead to higher FCF generation in the future.
We also note that Shaw’s Big Pipe fibre network passes through Hamilton,
which will service the system and bring cost savings.

Given Shaw’s focused move out West years ago, this determined foray into
S. Ontario is quite peculiar. It is a very good asset, but Shaw clearly outbid
two more synergistic players (Cogeco Cable / Rogers). While the rich price
is not that big a deal, given it’s size, Shaw’s full motivation raises questions.

On Monday, the CRTC bolstered support for the struggling broadcasting
industry by increasing available funding, largely at the expense of the
broadcasting distribution undertakings (BDU) – mainly cable and satellite TV
distributors like Rogers, Shaw, Bell Canada, and Cogeco Cable.

Firstly, the CRTC raised the levy it collects from BDUs to support
conventional TV stations in smaller markets – to 1.5% of TV revenues from
1.0%. While this is shy of the Heritage Committee’s proposal of 2.5%, it still
increases subsidies to over $100 MM from $68 MM paid currently.

More importantly, the CRTC also reversed its stand on fee-for-carriage. The
CRTC will now allow negotiated agreements, and will impose binding
arbitration if needed. Given the Heritage Committee had argued against
this, the fact that the CRTC has approved FFC may be a surprise to some.

In summary, the CRTC policy reversal on fee-for-carriage had been hinted
at and has now been confirmed. Although the direct effect on the cablecos
and satellite TV players should be small (if additional fees can be passed
through), the issue will continue to create uncertainty for the BDUs.