Rogers-Shaw merger seen as making ‘complete sense’

A merger between Rogers Communications Inc. and Shaw Communications Inc. has been the subject of speculation for years. As the various industries these companies participate in — broadcasting, TV distribution, landline phone services, Internet and, in Rogers' case, mobile — change rapidly, at least one industry watcher sees such a combination as inevitable, while others can at least see the business logic behind such an arrangement. Scotia Capital telecom analyst Jeff Fan said it's just a matter of time before the two telecom/media giants become one company, adding that the case for a merger becomes stronger as time goes on. "As the industry requires more scale, I think the industrial rationale for the merger becomes greater," Fan said. Fan cited the media businesses of these companies as especially needing this power of scale. "You need scale in content and you need scale in technology to really compete in the television world," Fan said. "And when we say compete, we're not talking about competing against the telcos and cable companies or satellite; we're talking about competition against Netflix and Google and really large global players." Rogers and Shaw recently proved they are willing to combine in a show of strength against an over-the-top (OTT) giant like Netflix Inc. by announcing their own online streaming service, Shomi, to be launched next month. "Doesn't that tell you that in order to compete in the streaming world that, inevitably, the combination makes sense?" Fan asked. "They're combining on how they purchase content, how they contribute content to the joint venture, and in time I think there'll be more assets being contributed to the joint venture, if they haven't already.” “For instance, the infrastructure that's required — the CDNs , the servers, the data centres, all of the technology pieces that are required to offer that service. ... That tells me in order for the service to be competitive against an offering like Netflix, they have to combine their efforts." In a report Fan released in January, he said a Rogers-Shaw merger would benefit the companies’ bottom lines, after taxes, by almost $400 million annually within three years. Although Shaw doesn't currently offer mobile service, the report said Rogers could leverage the Shaw brand and use bundling deals to grow its wireless market share in Western provinces and create as much as $300 million in extra business a year. It also predicted hundreds of millions of dollars in savings, before tax, on operating and capital expenditures. David Heger, a telecom analyst with Edward Jones, said there would be definite advantages gained should the two companies become one. "From a strategic point of view, I think it would make complete sense from the points of view of the two companies in potential costs savings and operating synergies they could realize," he said in a phone interview. Desmond Lau, a telecom analyst with Veritas Investment Research, also said there's a strong business case to be made for a merger between Rogers and Shaw, though it might be a hard negotiation between the founding families, which continue to hold a controlling stake in the companies. "The economic argument makes sense, if you look at the Comcast and Time Warner transaction and the tie-ups that are going on in the U.S.," he said in a phone interview. "You can get some more synergies. You have the cable networks of Shaw in the West, Rogers in the East; you could get some synergies from that. Rogers might also be able to offer a more complete bundle in Alberta and B.C. if they do proceed with a combination." He added: "It also depends on the family dynamics as well. It really depends on whether the Shaw family wants to sell out at this point." Most analysts see Rogers, the bigger of the two entities, as being the buyer in any merger with Shaw. Fan said he sees the ball as being mostly in Shaw's court in terms when a deal gets done. "I think the timing will be dictated by how well Rogers executes over the next one to two to three years," Fan said. "I think, if the transaction were to occur, the Shaw shareholders, including the family, would probably have to take back a lot of shares of the combined company, so you're leaving it in the hands of someone else running it, and you want to make sure that combined company is on a good footing and it's heading in the right direction." Lau said Rogers might be waiting to see how well it can grow the company organically in the coming years before deciding whether such an acquisition is necessary. He added that, given Rogers CEO Guy Laurence's current focus on improving the company from an internal-operations perspective, a mega-merger with Shaw is probably not a high priority now. "As a new CEO, he might not want to do a major acquisition right off the bat," Lau said, adding that it's "pretty unlikely" that such merger would happen within two years. He said there's about a 25 per cent chance of it happening in three to five years. Iain Grant, telecom analyst with the SeaBoard Group, said in email: "There are arguments, of course, on both sides. What is needed first and foremost is a willing seller and a willing buyer. The buyer, of course, would be all about strategic fit and possible savings. The seller is all about the cash, whether the seller needs cash, or if the offer was just too good to be true." Grant said the price required might be too steep for Rogers. He noted Shaw currently has a market cap of about $12 billion and that Rogers would probably have to offer a healthy premium, likely pushing the price to more than $20 billion, in order to lure the company from its "firm family grip." He speculated that if the company's late founder Ted Rogers "were still around, that might happen. One suspects that the current leadership of Rogers will be more conservative." In terms of the regulatory issues the might come up in response to a proposed merger, Fan noted that there is no overlap between the companies' cable, Internet or phone services. Shaw's cable network is in the West, while Rogers' is in the East. There are, however, areas where Shaw's satellite-TV service competes with Rogers' cable TV. Fan, however, said this would not be a "deal breaker" from a regulatory point of view. He added there would likely be requirements for some divestments of the companies' media holdings, which do compete with each other. Still, Fan predicted the extent of such conditions would be "manageable." Shaw owns conventional broadcaster Global Television, and specialty channels such as Food Network Canada, HGTV Canada, History, Slice and Showcase. Rogers' TV brands include over-the-air networks City and OMNI, and specialty services such as Sportsnet, The Shopping Channel, Bio, FX Canada and OLN. Heger agreed that the media side of the two businesses would be the biggest focus of regulators in a proposed merger. "There definitely would have to be divestitures of media properties because I'm sure you'd start to see too much concentration," he said. Even though the cable operations of Shaw and Rogers do not overlap, Heger said "they may still have a problem with this because it would make a fairly large nationwide cable operator, and I'm not sure how the Canadian government would feel about that." A combined Rogers-Shaw would become the runaway leader in the areas of TV and Internet subscribers. Based on the most recent year-end figures, the combined company would have about five million television subscribers and four million Internet subscribers, approximately double that of their closest rival, BCE Inc., in both categories. Rogers already is the leading provider of wireless service in Canada. Lau said a mitigating factor in a possible combination of the two companies is whether continued cord-cutting and possible future rules that require the provision of pick-and-pay TV packages would make the television-distribution business less lucrative. "Shaw is still primarily a cable business," Lau said. "If you're acquiring that company, and the majority of the business is going to be in decline from customers cutting the cord or downsizing their packages, it might give Rogers a bit more second thought." Ben Klass, a telecom blogger and master's student who is participating in the Canadian Media Concentration Research Project, said it's unclear whether a merger this big would be good or bad for Canadians overall. He does have concerns about what it would mean for smaller players in the video-distribution business. "Considering that that these are both vertically integrated companies and it would be increasing the extent of vertical integration in Canada, one would worry that this would create a situation in which two entities are in control of the substantial amount of Canadian programming," he said in a phone interview. "Independent broadcast distributors could potentially be facing a bit greater of a disadvantage when it comes to accessing this content." Klass noted that the CRTC has rules in place meant to ensure regulated broadcasting distributors get access to channels available in Canada. However, he said those using the Internet as a means of distribution could face a tougher time, and he noted the recent ruling that left would-be OTT provider Leiacomm unable to access content from Bell Media. Fan, however, argued that consumers and those in the industry would be better served by the kind of company a merger between Rogers and Shaw would create. "I don't think there's a lot of negatives for the industry," Fan said. "I think it actually strengthens the industry to allow them to invest and come out with products that are going to be better for consumers. "Who wouldn't want another Netflix alternative with better content, better user interface?" — With reporting by Derek Abma at dabma@thewirereport.ca and editing by Anja Karadeglija at akarad@thewirereport.ca

Rogers-Shaw merger seen as making ‘complete sense’

Broadcast | October 9, 2014

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