After failing to acquire Cogeco Communications in September 2020, Rogers turned its eyes to Western Canada and announced the acquisition of Shaw Communications on Monday morning for $26 billion ($40.50 per share). Shaw’s legacy business is its wireline footprint in Western Canada with 5.1m consumer and small business subscribers in B.C, Alberta, Manitoba, and Saskatchewan. Rogers has no cable footprint in these provinces and does not directly compete with Shaw for wireline subscribers.

Unlike Cogeco however, Shaw is the 4th largest wireless provider in Canada, operating under the Freedom Mobile and Shaw Mobile banners. Shaw entered the wireless industry in 2015 through the acquisition of Wind Mobile and subsequently rebranded it to Freedom Mobile. Shaw considered itself to be the T-Mobile of the Canadian wireless industry (T-Mobile CEO Mike Sievert is on Shaw’s Board of Directors), disrupting sleepy incumbents by providing large and cheap data plans with minimal overage fees. Over the years, the wireless industry has routinely complained about Freedom/Shaw as being uncooperative in schemes to reduce handset subsidies and maintain prices.

I think it’s being able to absorb some of the, what I would describe, a short-term success that Freedom is having. It’s not a surprise to anyone here their value proposition continues to be centered around discount pricing and at the same time heavy subsidy that it’s more than 2x the industry norm. (These are not) sustainable economics.”

Rogers at the Desjardins Industrial, TMT, Communications Conference

Rogers’s motivation in acquiring Shaw is simple. Despite its leverage expecting to go up to 5x, Rogers is clearly thrilled to get a high-quality wireline footprint in Western Canada while removing a thorn in Freedom Mobile. By adding the wireline footprint to their wireless network, Rogers will be able to create a “Quad-Play” bundle to more adequately compete against TELUS in Western Canada.

Shaw’s motivation for the deal is more interesting, particularly since it appears Shaw initiated the discussions. My view is that it was largely Shaw’s lack of scale relative to the Big 3 that led to the decision to sell.

First, Shaw had been losing share to TELUS in Western Canada who had been aggressive in marketing their fast Fiber-To-The-Home (FTTH) internet speeds. This was further compounded by Shaw’s heavy reliance on retail stores to sell their cable products, and the inability to bundle home internet with wireless. Shaw did not even offer wireless service to existing Shaw customers as a bundle until July 2020 when it saw declines in internet subscribers, and this will be particularly important as wireless and home internet networks continues to converge.

In addition, Shaw’s wireless business is especially subscale in Ontario which represents 70% of Freedom Mobile’s business with no cable footprint. It lacks any ability to manage churn and pricing through bundles, and has a much smaller store distribution footprint, making pricing the only marketable value proposition against Rogers and Bell.

Secondly, despite the Canadian government reserving spectrum specifically for smaller regional companies like Shaw, it is still extremely expensive to build out a wireless network and obtain the necessary spectrum to build out 5G. Shaw’s existing spectrum position is small, and there has long been speculation that Shaw and Rogers could share networks like TELUS and Bell, a suggestion that Rogers had rejected due to the relative size of Shaw to itself. Shaw had openly bristled at the need to invest incremental capital into 5G without the prospect of higher prices to provide a return on investment:

“The comment about 5G monetization was more a reflection that I was hoping that the industry didn’t simply absorb the incremental costs of that 5G spectrum and build out into a declining pricing environment…The risk is that we spend billions of dollars on spectrum and buildout and simply just absorb it all”

Shaw Communications Q4 2020 Conference Call

Lastly, there remains the specter of the mandated wholesale MVNO access, which would disproportionately and negatively affect Shaw given their position as the affordable alternative.

With the upcoming 3500 MHz spectrum auction in June 2021, the Shaw family assessed its competitive positioning and decided to go into 5G as part of Rogers (the Shaw family will be receiving Rogers stock) rather than spend the required money to become a full competitor.

 

Will the deal be approved?

There are clearly competition concerns as the deal will remove a key low-cost wireless competitor from the market, and the large gap between Shaw’s stock price after the deal announcement of $33 and the deal price of $40.50 reflects this. Rogers sought to assuage these concerns by promising not to raise Freedom Mobile prices for 3 years and offering to invest $2.5 billion in 5G networks and an additional $1 billion for rural, remote, and Indigenous internet connectivity.

Consumer advocates are going to howl at the deal, but the reality is that Canada’s population density and large geography makes it nearly impossible for even a decent sized company like Shaw to achieve national scale. I don’t have any unique insights into whether the deal will be approved, although I wonder if the deal is a sign that mandated MVNO access will soon be upon us. The Big 3 had routinely threatened to withhold investment in wireless networks under an “unfriendly” regulatory regime and it is plausible that the CRTC approves the deal with Rogers’s investment commitment before allowing wholesale access to their wireless networks.