Bell Canada Inc. ( BCE - Analyst Report ) , the largest telecom company in Canada, and its subsidiary Bell Aliant Inc. have threatened to trim down their unprofitable payphone business if industry regulators refuse to accept their request for rate hike.

The telecom company, which faces stiff competition from Rogers Communication Inc. ( RCI - Analyst Report ) had asked for a 100 percent rate hike, which could raise the local call charges from 50 cents to $1 and non-cash local call from $1 to $2. They have given an ultimatum to Radio-Television and Telecommunication Commission (CRTC) to accept their rate hike request failing which will force them to remove almost 25 per cent of their pay telephones.

Consumer advocates suggest that payphones still remain an essential communication means for the poor, who cannot afford cell phones or home phones. They believe that these public phones will also help in unwanted situations like disruptions in wireless services or low battery scenarios. However, Canadian telecom companies argue that if they can get the desired price flexibility it will help them to sustain their ailing payphone business and will provide them with the money needed to upgrade their much older payphones.

The rate dispute comes at a time when most of the telecom companies are trying to increase their more lucrative wireless subscriber base. Increased adaptation of smartphones and other wireless devices have resulted in reduction in payphone revenue for the carriers.

We believe if CRTC increases the rate it may handicap low income Canadians. On the contrary, if they don’t provide the price rise it may put payphones on the verge of extinction.

The current Zacks Consensus Estimate for Bell Canada Inc. is pegged at 76 cents for the third quarter of 2012 with a growth rate estimate of (16.12%.) For 2012, the Zacks Consensus Estimate stands at $3.22 with a growth rate of 2.12% while for 2013, the Zacks Consensus Estimate stands at $3.29 with a growth rate of 2.34%.

Recommendation:

We retain our long-term Neutral recommendation on Bell Canada Inc. Currently, it has a Zacks #3 Rank, implying a short-term Hold rating.