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Canadian Competition Bureau – an independent law enforcement agency, announced that it is suing the three big wireless carriers of Canada and an industry association for about US$31.79 million because of misleading advertisements of text messaging services.

According to the Competition Bureau, Rogers Communication Inc. (RCI - Analyst Report), Bell Canada Inc. (BCE - Analyst Report) and Telus Corporation (TU - Analyst Report), the three telecom giants have aired some deceptive advertisements indicating that some texts and applications were free. However, these services are chargeable and customers only got aware of it after receiving hefty mobile phone bills.

The Bureau points out that the companies in association with the industry body sell premium rate services to their customers like trivia questions and ringtones, parking fees payment, voting their favorite contestants and costs as much as $10.25 per transactions.  In addition to the financial penalties they want the telecom companies to make full refunds to their customers and stop those misleading advertisements. 

Furthermore, the federal body is also seeking $1.3 million from the Canadian Wireless Telecommunication Association (CWTA) against the allegation, which is yet to be proven in the court. The main industry body has argued that the wireless carriers do not have any control over this premium rate services, developed by third parties, but manage the billing on their behalf.      

We believe if the telecom carriers are forced to postpone this service then it will face a serious blow to their value added service segment which generates a considerable part of their wireless revenue. On the contrary, the third party carriers, who are unfairly charging their customers, will escape unhurt and the root cause of the problem will remain unresolved.

The current Zacks Consensus Estimate for Rogers Communication Inc. is pegged at 87 cents for the third quarter with a growth rate estimate of (0.95%). For 2012, the Zacks Consensus Estimate stands at $3.09 with a growth rate of (3.81%) but for 2013, the Zacks Consensus Estimate stands at $3.30 with a growth rate of 6.73%.

Recommendation:

We retain our long-term Neutral recommendation on Rogers Communication. Currently, Rogers has a Zacks #3 Rank, implying a short-term Hold rating.

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