Are stars aligning for Shaw sale to Rogers?

The idea of a merger between Canada's two biggest cable providers — Shaw Communications Inc. and Rogers Communications Inc. — is on the radar again, with at least two market analysts saying the conditions are right for such a move. Barclays Capital analyst Phillip Huang said in a research note Monday that Shaw's stock is down 14 per cent from highs it hit at the beginning of this year. Reasons for the drop include: the weak economy in Shaw's home base of Alberta; the anticipated effect of the coming pick-and-pay television regime on the company's TV stations (representing 20 per cent of its revenue) and its TV distribution (44 per cent of revenue); as well as the market challenges posed by Telus Corp.'s rapid expansion of its fibre-to-the-home (FTTH) network. "We believe the conditions are becoming more for to maximize the value of its assets if the family is considering a sale," Huang said. "If waits a few years, it may lose significant pricing power as would have covered a very significant portion of its footprint with FTTH." Huang also noted that Shaw might be an attractive asset for a foreign buyer, given that valuations of U.S. cable companies have been rising and Canadian companies have been, in effect, discounted due to a Canadian dollar that's down more than 30 per cent from highs seen in 2007. He said that while federal regulations would prevent a foreign company from buying Shaw's TV channels, such restrictions would not apply to its most valuable asset, its cable network — if it’s used for providing Internet services. Huang later clarified in an email: "My understanding is that as long as you’re not using the assets for broadcast TV/BDU service, the government is open to considering approval of foreign ownership of the cable pipe itself. Obviously, national security is always a consideration, and so I think the probability of approval would be greater for US/western EU-based buyers." The Telecommunication Act allows foreign-control of telecom-service providers only if they represent less than 10 per cent of national telecommunications revenue, as determined by the CRTC. Shaw’s cable revenue in its 2014 fiscal year was $3.37 billion, which amounts to a little more than seven per cent of the $45.9 billion in telecommunications revenue the CRTC said was realized in 2014. And that’s before Shaw’s TV-service revenue is excluded, which the CRTC considers broadcasting, not telecommunications, revenue. As well, under the Canada Investment Act, the federal government reviews foreign investments worth $600 million or more to determine if they are of "net benefit" to Canada. There’s been speculation about the possible sale of Shaw to Rogers for years, Huang said in the research note, adding that there's a history of co-operation between the two companies. Rogers has an incentive to move on Shaw now, Huang said, to avoid being left out if a foreign buyer ends up making the acquisition. Advantages for Rogers, he said, include the cost savings a combined company would bring, being able to use Shaw's network as backhaul for Rogers' wireless network, and being able offer "quad-play bundling” with mobile service, television, Internet and home-phone service in Western Canada. Huang said that "if a foreign player bought and Wind , would end up renting backhaul from a wireless competitor. As such, when is ready to sell, we believe will stand ready to buy." Desjardins Securities analyst Maher Yaghi said in a research note on Friday that the difference in valuation between Rogers and Shaw "has not been this wide in recent years, helping an equity swap deal." The TMX Money website, operated by TSX owner TMX Group Ltd., showed on Monday that Rogers' overall market capitalization is about $20 billion, compared to around $12 billion for Shaw. Yaghi added that the incoming Liberal government might be more inclined to leave the approval process for a Rogers-Shaw merger to bodies such as the CRTC and the Competition Bureau, rather than intervene directly as the Conservatives might have done, given their pro-consumer stance in telecom matters. Yaghi also cited the appeal of being able to create a quadruple bundle for Western Canada as a likely incentive for Rogers. He said a combined Rogers-Shaw organization could realize more than $300 million in annual savings. Scotia Capital analyst Jeff Fan has said such a combination could save the companies almost $400 million a year. In terms of the regulatory hurdles Rogers’ purchase of Shaw would face, Yaghi said one of the companies' conventional TV networks would have to be divested. He said a combined company would be better off keeping Shaw's Global, which has a higher national viewership than Rogers' City. Corus Entertainment Inc. might be a buyer in a network sale, he added. Regarding discretionary TV channels, Yaghi said he didn't foresee a problem since the two companies combined have a smaller viewing share than BCE Inc. alone. Yaghi said certain assets, such as the Shaw Direct satellite-TV service, Rogers' cable operations in the Maritimes or its small Ontario unit, Compton Cable TV, might be divesture candidates in the event of a merger proposal. Getting rid of these assets, he said, would help bring the companies' combined TV-distribution and Internet-service market shares closer to 30 per cent, from 39 and 35 per cent, respectively. While there are no explicit share limits for TV distribution or Internet in Canada, he noted that the U.S. Federal Communications Commission (FCC) has used 30 per cent as a threshold for the TV-distribution market. Yaghi said Bell might also be interested in taking over Shaw for some of the same reasons Rogers would be, but Bell's existing market position means it would be tougher for Bell to get such a transaction approved by regulators. SeaBoard Group telecom analyst Iain Grant discounted the likelihood of a Rogers-Shaw merger, citing "family ego" as the main obstacle. " Shaws consider themselves a more prominent family firm with longer pedigree than Rogers upstarts," he said in an email. Any deal would have to come with some "unusual adds" for Shaw to accept it, Grant said, such as that the merged company be called Shaw. When asked about the speculation on a potential takeover of Shaw, officials from Shaw, Rogers and Bell declined comment. — With reporting by Derek Abma at dabma@thewirereport.ca and editing by Anja Karadeglija at akarad@thewirereport.ca

Are stars aligning for Shaw sale to Rogers?

Broadcast | November 2, 2015

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Are stars aligning for Shaw sale to Rogers?

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