Canada objects to Rogers' $20.1B marriage to Shaw

As a kilt-wearing Mel Gibson once almost said, they may take our lines, but they'll never take our Freedom Mobile. Canadian authorities have blocked Rogers Communications' C$26 billion (US$20.1 billion) bid for Shaw Communications, a cable operator that previously swallowed Freedom Mobile. The deal for cable lines seems acceptable. But allowing Rogers to capture what is Canada's fourth-biggest mobile operator would badly hurt competition, regulators fear.

The answer would be the sale of Freedom Mobile to a third party. Rogers seemed prepared to live with this, even though it was not in the original plan and somewhat undermined the rationale. Rogers was said to be in talks about selling Freedom Mobile to Xplornet Communications, but watchdogs apparently disapproved. With only about a million telecom subscribers in total, the privately owned Xplornet looked too weak to be classed as a "robust" mobile operator after a deal.

So what's next? Determined to consummate their arrangement, Rogers and Shaw say they have extended the "outside date" of the transaction to July 31 while they try to find an acceptable buyer for the mobile part of Shaw. Canada's newspapers have identified Quebecor as a likely suitor. With its 1.8 million Internet customers and mobile business of about 1.6 million subscribers, it seems an entirely different proposition from Xplornet.

Figure 1: Playing William Wallace in Braveheart, Mel Gibson (right) knew all about the importance of defending freedom.
(Source: Scott Neeson via Creative Commons)

A deal with Quebecor would therefore stand more chance of passing regulatory muster. Adding Freedom Mobile's roughly 2 million customers to its existing base would give Quebecor about 3.6 million mobile subscribers. It would still look relatively small alongside Canada's "big three" of Telus (with about 11.4 million mobile customers), Rogers (10.1 million) and Bell Canada (9.5 million). But it would not be a runt in the litter.

Importantly, it last year made an $830 million investment in a swath of 3.5GHz spectrum licenses covering several Canadian provinces, giving it the airwaves it needs to support additional customers and compete effectively. It has fixed-line assets that could aid its ongoing mobile rollout and made about C$4.6 billion ($3.6 billion) in total revenues last year, just C$900 million ($695 million) less than Shaw managed.

Freedom fighters

For all these reasons, though, it is not the buyer Rogers would prefer. Fortified by a takeover of Freedom Mobile, Quebecor would be in a much stronger position to attack Rogers and Canada's other big mobile operators. In the worst case, the downsides of a mobile sale to Quebecor could outweigh the benefits of a cable-only takeover of Shaw.

True, the wireline market is still where Shaw generates the vast bulk of its revenues. Last year, sales to consumer and business customers in this market generated about C$4.2 billion ($3.3 billion) in sales. And wireline's contribution to profitability looks even greater. Of Shaw's C$2.5 billion ($1.9 billion) in adjusted earnings (before interest, tax, depreciation and amortization) last year, about 84% came from its wireline business, the company's last annual report shows.

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But a mobile divestment would clearly alter the scope of Rogers' deal. When it first made an offer, the argument was mainly about 5G and how a combined company would be able to "more quickly and more efficiently" deliver 5G than either company could do alone, thanks partly to Shaw's "existing cable, fiber-to-home and wireless networks." A big chunk of that is now out of the equation.

Regardless, Rogers continues to insist on the same benefits, including the ability to invest C$2.5 billion in 5G rollout over the next five years. Nor has it indicated it may have to lower an estimate it can generate "synergies" of more than C$1 billion ($770 billion) annually within two years of closing the deal. This figure would sound very optimistic if – as now seems likely – Rogers were forced to sell a wireless unit with about 2 million customers.

Could the whole transaction eventually collapse? That would be an expensive disaster for Tony Staffieri, named CEO of Rogers at the start of the year following a boardroom bust-up between members of the Rogers family. Failure, conversely, might be welcomed by staff at both Rogers and Shaw, given the usual implications of takeover activity for jobs. Combined headcount at the two companies has already fallen by 9,600 since 2013, meaning more than one in five roles has disappeared. And all that talk of synergies is enough to make any surviving employee feel nervous.

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— Iain Morris, International Editor, Light Reading