The Government of Canada stated in the recent Throne Speech it would “open Canada’s doors further to venture capital and to foreign investment in key sectors, including the satellite and telecommunications industries”. In the budget address delivered the next day, the Minister of Finance announced that the first step in this liberalization process would be limited to removing the existing foreign ownership restrictions on Canadian satellite communication companies, with broader telecom liberalization to unfold over a much longer time frame.

Canada’s satellite communications market has been fully open to foreign operators for over a decade. However, Canadian satellite communications companies remain subject to foreign ownership limitations on telecom companies at the operating and holding company level, as well as a prohibition against “foreign control in fact”. For example, these restrictions caused the American company, Loral Space and Communications, to take a 33.33% voting and 64% economic interest when it acquired Telesat from Bell Canada in 2007, (with Loral’s Canadian pension fund partner taking a 66.7% voting interest). Removing the current restrictions will not only remove these arbitrary constraints on Telesat’s existing shareholders, it will create room for the participation of institutional investors in a potential Telesat IPO.

On the terrestrial telecommunications side, it appears that the Government will be following the recommendation of the 2008 Competition Policy Review Panel chaired by Lynton “Red” Wilson to first remove existing restrictions on new “greenfield” entrants (over a number of years), and only then to consider liberalizing the ownership rules for the “incumbents”. A phase-out of foreign ownership restrictions on new entrants/small players would end the need for convoluted share structures and shareholder agreements that test the limit of the law. It may cause major American firms (like AT&T and Verizon) to take a greater interest in expanding their network coverage over the border into adjacent Canadian regional markets. In addition, Mexico’s Carlos Slim, Bell Canada’s former partner in Latin America and owner of the pan-American telecom company, América M?vil, may wish to expand his pre-paid cellular service provider, Tracfone, beyond the US into Canada. Removing the foreign ownership restrictions will create two potential routes into the Canadian market for these major players: taking-over a company that entered the market through the recent Advanced Wireless Service (AWS) auction; or acquiring spectrum in the 700 MHz block in the next auction.

Bell Canada and Telus are already pooling resources to roll out their GSM 3G HSPA network. The advent of increased competition in the Canadian market, particularly the creation of “Rogers-like” bundled service providers in the West (Shaw) and Quebec (Quebecor’s Videotron), combined with the potential entrance of heavily marketed American wireless brands like Verizon and AT&T, may allow for the creation of a Canadian champion that could then become a major player in the North American market through a subsequent American transaction.