Rogers, Videotron reach network deal for capex savings, more competition in Quebec

Rogers Communications Inc. will be better positioned to compete against rival incumbent wireless carriers BCE Inc. and Telus Corp. in the Quebec market under a new network-sharing agreement with Quebecor Media Inc. subsidiary Videotron Ltd., Ken Engelhart, Roger’s senior vice-president of regulatory services, said in an interview. “The market very competitive, but we’ll be going into that fight with a kick-ass network,” Engelhart said Thursday. “We’ve always done very well in Quebec, and we have good share in Quebec. We think this will help it get better.” In a deal announced late Wednesday, Rogers and Quebecor subsidiary Videotron Ltd. will enter a 20-year network-sharing agreement in which the companies will pool resources to build a fourth-generation LTE wireless network in Quebec and Ottawa. According to the deal, Rogers would have use of Videotron’s fibre backhaul network in Quebec to support the transport of data signals. Videotron also has an option to sell to Rogers' 10 MHz unused wireless spectrum licence in Toronto for $180 million. That part of the deal would be effective at the start of 2014. Videotron could also move wireless traffic onto Rogers’ older network running on GSM wireless technology when necessary, Engelhart said. He said that aspect of the agreement will allow Videotron to carry popular cellphones that require a GSM configuration, such as Apple Inc.’s iPhones. Under the terms of the agreement, Rogers will pay Videotron $93 million over 10 years for use of its services, the companies said, while Videotron will pay $200 million for Rogers’ services. Engelhart said that, through the deal, Rogers and Videotron will build a fourth-generation LTE network in Quebec (and Ottawa, which is on the border with Quebec) using Rogers’ and Videotron's AWS spectrum. He noted that Bell and Telus, which also have a network-sharing agreement, combined their AWS spectrum for a joint LTE network. “This will give us a big improvement in coverage, as well as in speed and reliability,” Engelhart said. “Quebec will actually have probably one of the best LTE networks in the world by combining our spectrum with Videotron’s.” Canaccord Genuity analyst Dvai Ghose said in a research note Thursday that Rogers’ LTE footprint now covers 5.8 million people in Quebec and Ottawa, including the cities of Montreal, Quebec City, Sherbrooke, and Trois Rivieres. He said Videotron, which has a third-generation HPSA wireless footprint covering 9.1 million people, will not have access to Rogers’ LTE network “until it builds out and expands its own core LTE network, which is not expected until mid-2014.” Engelhart said Rogers entered the deal to “double down” on the Quebec market, which he characterized as highly competitive. “This will make us way more competitive in the Quebec market,” he said. “It’s a huge market. Bell does quite well there. We have historically done quite well there.” According to 2011 data in the CRTC’s Communications Monitoring Report released last year, Bell, Telus and Rogers had similar shares of Quebec’s wireless market. Bell had a 34 per cent share, Rogers 31 per cent, and Telus 28 per cent, as of Dec. 31, 2011. The data showed that Quebec was the only market in the country where all three carriers' market shares are separated by less than 10 percentage points, and the only market where all three hold at least a 25 per cent share. Videotron, which launched its own wireless network in Quebec in September 2010, had a wireless subscriber base of 420,900 customers as of March 31, 2013, the company said in a financial statement this month. Videotron, and other new entrant carriers combined, had a seven per cent share of Quebec’s wireless market in 2011, the CRTC data said. Carriers collected an average of $50.36 in monthly revenues per user in Quebec in 2011, nearly $2 per month per customer less than in any other province, the CRTC data said. Under the deal, Videotron would have an option to sell its 10 MHz of unused, “set aside” wireless spectrum in Toronto, which was set aside for new entrants in the 2008 wireless auction. According to the licence rules for that auction, the set aside spectrum cannot be sold or transferred to an incumbent telco during the first five years of the licence. In Videotron’s case, that moratorium expires Dec. 23, 2013. Industry Canada, which held a consultation this spring on new rules to govern the transfer of spectrum licences, would have to approve of that aspect of the deal if Videotron wants to take advantage of the spectrum sale to Rogers, an incumbent. The department will also have to apply any new spectrum transfer rules to Telus’ deal to acquire new entrant carrier Dave Wireless Inc. (branded as Mobilicity), including Mobilicity's set aside spectrum, and Rogers’ option deal to acquire unused, set aside spectrum from Shaw Communications Inc. Jean-Francois Pruneau, Quebecor’s senior vice-president and chief financial officer, said in an interview on BNN Thursday that the company discussed the deal with Industry Canada before releasing the details. When asked if he is confident the deal will receive regulatory approval, he said: “That I cannot say. We’ve met them, we’ve explained the transaction to them.” Macquarie Capital analyst Greg MacDonald, as well as Ghose, in research notes Thursday expressed some scepticism about whether the deal for the spectrum will be approved. “Industry Canada is currently reviewing spectrum ownership transfers and clearly does not see a mass sale of new entrant set-aside spectrum to the incumbents as an ideal outcome,” Ghose said. Maher Yaghi, a telecom analyst with Desjardins Securities, said on BNN Thursday that he believes Industry Canada would be more likely to approve a transfer of Videotron’s spectrum to Rogers than either of the other two spectrum transfer deals already on the table, mostly because Quebecor would remain as a viable fourth carrier in its market after the deal is completed. Yaghi said the deal could help support Industry Canada’s goal of ensuring four carriers in each region of the country, whereas the Telus-Mobilicity deal has been criticized as one that would remove a competitor from the market. ‘“I do believe this transaction has a higher success rate, potentially, because it allows Videotron to become more competitive in the province of Quebec,” Yaghi said. At $180 million for 10 MHz of spectrum in Toronto, Ghose said, Rogers would be paying a premium. He said Videotron paid $96 million for the spectrum in 2008, equivalent to $1.71 per megahertz per capita, compared to the $3.19 per megahertz per capita that Rogers would pay for it. Engelhart said Rogers is pursuing other wireless partnerships with carriers that use AWS spectrum, and that the company will look for other deals for access to more fibre backhaul in other parts of the country. “Bell and Telus have always had a lot more fibre backhaul than Rogers because they’re the phone company, and the phone company has fibre everywhere,” he said. Under Industry Canada’s rules for the 700 MHz auction, scheduled to take place in November, carriers that have network-sharing agreements could be considered “associated entities” and possibly prohibited from bidding separately. Engelhart said that even if Industry Canada classifies Rogers and Videotron as associated entities, they should be permitted to bid separately because they will compete with one another within Videotron’s footprint. “As long as you’re competitors, you’re each allowed to buy your own spectrum. We are very clearly competitors with Videotron,” he said. “So even if we are deemed to be associated it’s not a big deal.” Engelhart said the network-sharing agreement will allow the two companies to split the cost of building out their Quebec and Ottawa LTE networks, much in the way Bell and Telus split the cost of their nationwide LTE networks under their own sharing agreement. The Wire Report reported this month that Bell and Telus have been chipping away at Rogers' lead in the lucrative postpaid wireless market. Ghose said Bell and Telus have saved "billions of dollars" in capital expenditures under a series of network-sharing deals dating back to 2002. Rogers' and Videotron's deal will help offset that advantage, he said. —With reporting by Nicholas Kyonka at nkyonka@thewirereport.ca and editing by Simon Doyle at sdoyle@thewirereport.ca

Rogers, Videotron reach network deal for capex savings, more competition in Quebec

News | May 30, 2013

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