Rogers rises after agreeing to C$2.85B Freedom sale to Quebecor

Anthony Lacavera beams white-teethed and smartly dressed from his Twitter photo, but the Canadian founder of Globalive Capital sounded like one of the unhappiest, down-at-heel men in telecom.

Posted on June 18, his last tweet complains bitterly that Rogers Communications, one of Canada's "big three" telcos, is proposing a CAD$2.85 billion (US$2.2 billion) sale of Freedom Mobile to Videotron, a much smaller rival. Today, Freedom Mobile is owned by Shaw Communications, a cable operator Rogers has offered to buy for about C$26 billion ($20 billion). The Freedom sale is designed to win over regulators worried about Rogers' growing mobile power.

But the deal is going nowhere if authorities share Lacavera's concerns. "Through an anti-competitive process, Rogers is accepting $900M less than Globalive's offer for Freedom Mobile for the simple reason that Globalive is a real independent and pure-play national long-term competitor, and Videotron is a regional cable company that cannot risk a retaliatory strike from the big three against its legacy businesses," wrote Lacavera.

The suggestion Rogers rejected a C$3.75 billion ($2.9 billion) offer from Globalive, instead settling for a C$2.85 billion sale to Videotron, is enough to make any doubtful regulator pause. It might not help Rogers' case that Pierre Karl Péladeau, the CEO of Videotron's Quebecor parent, said his company and Rogers "have always had a strong relationship" in the published statement on the deal. "This trilateral arrangement with Shaw is yet another example," Péladeau continued. These companies look too close for comfort, critics will insist.

Much in the way T-Mobile justified its takeover of Sprint in the US, Rogers had argued that merging with Shaw would allow it to speed up 5G rollout and create jobs, ultimately benefiting ordinary Canadians. But Shaw's ownership of Freedom was always a potential obstacle. Serving about 31 million mobile subscriptions, Bell Canada, Rogers and Telus already dwarf their rivals. A Rogers takeover of Shaw that includes Freedom Mobile and its 2 million customers would skew the market even more.

Judging by Canadian press reports, authorities have been pernickety about Freedom Mobile's prospective suitors, as well. Rogers is said to have previously identified Xplornet, a rural operator with only about 400,000 subscribers, as a preferred buyer. That was before Canada's Competition Bureau blocked Rogers' bid for Shaw last month, when it argued that "eliminating Shaw would significantly increase Rogers' national market share – already the largest among the big three – and would significantly increase its market power."

Badly weakened

The fear could have been that ripping Freedom out of Shaw and selling it to a much smaller company would leave it badly weakened. Quebecor, however, had been named in earlier press stories as a buyer that might be satisfactory to Canadian authorities. It is certainly much bigger than Xplornet, with around 1.6 million mobile subscribers at the end of March, overall quarterly revenues of about C$1.1 billion ($850 million) and C$117 million ($90 million) in net income.

That does not necessarily invalidate Lacavera's comments, self-serving as they are, and Quebecor already carries more debt than many industry peers, reporting a ratio of net debt to adjusted annual EBITDA (earnings before interest, tax, depreciation and amortization) of 3.18 in March. There is another potential regulatory worry because the deal reportedly does not include the Freedom business in Alberta and British Columbia due to lack of interest from Quebecor or other prospective buyers. This would mean Rogers holds onto about 450,000 of Freedom's 2 million subscribers.

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Several analysts cited by the Canadian media regard the deal as a bargain for Quebecor, which hardly sounds like a positive for Rogers. The family-controlled operator has clung to its original guidance for "synergies," despite the growing likelihood a transaction would not include Shaw's mobile assets. Some investors may need persuading that a takeover minus those assets makes sense in a 5G context.

That said, Rogers' share price was trading up 7.5% in Toronto at lunchtime on June 20, implying shareholders are hopeful a Shaw deal will now proceed. The stock has had a bumpy ride so far this year, rising to more than C$76 in April before dropping to less than C$58 last week. After today's morning gains, it was worth about C$63.40. The reaction of competition watchdogs to the latest deal will determine whether it continues to move up.

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— Iain Morris, International Editor, Light Reading

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