Shaw-Wind deal means no Rogers merger on horizon: analysts

Financial analysts said Thursday that the surprising move by Shaw Communications Inc. to buy Wind Mobile means any potential merger between Shaw and Rogers Communications Inc. won’t happen any time soon, though some maintained it’s possible in the longer term if the government is on board. Shaw announced Wednesday that it plans to enter the wireless market by buying Wind for $1.6 billion, with executives arguing that strategy was a better bet than if it had bought and deployed spectrum by itself at an earlier date. Canaccord Genuity analyst Aravinda Galappatthige said in a note Thursday that the acquisition signals the Shaw family has no plans to sell the company in the medium term. Such a move would be more complicated now, he said, given that a Rogers acquisition of Shaw with Wind’s wireless assets would “would seem to present significant regulatory hurdles.” 3Macs telecom analyst Troy Crandall said in a phone interview that the acquisition “throws a wrench” into the idea of a possible Rogers acquisition of Shaw and lowers the probability of it happening. “While the regulators probably would have been OK with Rogers buying Shaw for the most part for the cable operations and the wireline operations, I don’t think the regulators will be very OK with them taking over the wireless operations,” he said. “They wouldn’t look too highly on basically Rogers taking over Wind.” Barclays Capital analyst Phillip Huang said he doesn’t believe the deal rules out a Rogers-Shaw merger — which has long been the subject of speculation — in the long term, though the probability of that happening in the near term is now lower. Still, he added that a four-player wireless market in Canada is not seen as sustainable. “As such, we do not see this deal impacting Rogers' widely discussed interest in Shaw,” should the government allow the fourth player to be consolidated, he said. He added the deal actually benefits Rogers, BCE Inc. and Telus Corp. “by keeping Wind off the market, away from potentially more threatening foreign strategic players.” Scotia Capital analyst Jeff Fan said in a note that the acquisition is a “poison pill” for a potential Rogers-Shaw merger, at least until the government “relaxes” its fourth-carrier policy, something Fan doesn’t see happening within the next 12 to 18 months. Some analysts have indicated they expect the Liberal government to be less aggressive in pushing for a fourth national wireless carrier, a goal the previous Conservative government had pursued through policies such as spectrum caps and set-asides in spectrum auctions. Fan added that in the future, “there will be more operating-cost synergy opportunities between” Rogers and Shaw and that at “a minimum” there could be potential network-sharing partners. RBC Capital Markets analyst Drew McReynolds said that in the long term, the Wind acquisition “should make Shaw much more attractive to the larger consolidators if and when the Shaw family wishes to sell the company, and if and when wireless concentration rules are relaxed.” He added the deal also means “the door should now be closed on a large (and potentially more disruptive) foreign strategic player entering the Canadian wireless market.” Analysts also agreed that Telus stands to be the most affected by the move. Rogers is the second-most affected, given that three-quarters of Wind’s subscriber base is in Ontario, where Rogers has a 45 per cent market share, while Bell is the least affected because of its low market share in the West, Galappatthige said. However, he said that since Wind is unlikely to compete in an “irrational” way, “we wonder how realistic it is to assume that would see material share loss in wireless as a result of this transaction.” Galappatthige said another note later on Thursday that “given Shaw’s obligations in terms of dividends, balance sheet, an investment grade debt rating, etc., we do not expect an overly aggressive approach” from the company. Crandall said there is a question about how much demand there will be for Wind’s wireless product. “Right now, Wind in its current form isn’t that much of a competitor against any of the Big Three,” he said. “There’s numerous complaints about spotty coverage, and they are on an older technology… They haven’t upgraded to LTE yet. Data speeds are slower than the Big Three” and Wind doesn’t have a national network. “So Telus doesn’t necessarily have to compete on price there. They can just compete on a service basis,” he added. At the same time, Crandall said Wind will become a stronger competitor over time and “it’ll get closer and closer to the service that Telus and Bell and Rogers can provide currently.” Fan said the real impact of the merger won’t be felt for another 12 to 18 months, since Wind must upgrade its network to LTE in order to compete in the long term. OpenSignal Inc., a U.K.-based company that analyzes mobile performance, said Thursday that with its purchase of Wind, Shaw has a major speed gap to close with its future competitors in the mobile market. OpenSignal analyst Kevin Fitchard said in an emailed statement that an analysis of Wind's 3G HSPA+ network between October and November found it has an average download speed of 2.4 Mbps. It said Bell’s comparable 3G speeds averaged 4 Mbps, with Telus at 3.4 Mbps and Rogers at 3.1 Mbps. It noted that Canada's main mobile providers provide average download speeds of 18 Mbps on their LTE networks. The week before the Shaw acquisition was revealed, Wind said it had secured $425 million in financing to help it build an LTE network. Brian O'Shaughnessy, executive vice-president of technology services at Wind, told The Wire Report some customers would get LTE service by the end of next year. Huang noted that of the Big Three, Telus had been the least affected by new entrants such as Wind because they focused on Toronto. “Shaw will undoubtedly change this in the coming years, driving a stronger presence for Wind” in B.C. and Alberta,” he said. “However, we believe it will take time for Wind to sufficiently improve its offering to compete in the segment of postpaid customers that the Big 3 currently dominate,” he said, noting it took Quebecor Inc.’s Videotron four years of “aggressive investment” before it was able to attract customers willing to pay as much as $70 a month. The main driver of competition in the market in the near term, he said, is how Bell, Telus and Rogers react through pricing and promos, he added. Galappatthige said the Wind acquisition is a “sensible strategic” move for Shaw, and agreed with Shaw executives’ assertions that acquiring Wind was a less risky move than trying to launch wireless service as a new entrant. “More importantly, gives Shaw much needed exposure to wireless growth” at a time when 63 per cent of Shaw’s revenues come from services that are declining — legacy cable and satellite TV, home phone and media, he said. “Moreover, we believe that wireless opens up synergistic opportunities for bundling and cross-selling,” he said. McReynolds said the acquisition is “a strategic game changer for Shaw.” It will enable Shaw to better compete against Telus across its wireline footprint, and “capture incremental growth in the Ontario wireless market,” he said. He added that should “household demand in Canada grow for a bundled wireless-wireline offering, Shaw should be better positioned now to defend its core wireline business.” Huang questioned why the company didn’t make the move earlier, arguing that it would have “made even more sense merely 15 months ago, when Wind was a fraction of the price.” In 2014, a consortium led by Anthony Lacavera's Globalive Capital purchased Amsterdam-based VimpelCom Ltd.'s 65 per cent stake in Wind Mobile for $135 million in cash and the assumption of about $150 million in debt. He added that given Shaw’s decisions to stay out of recent spectrum auctions and to sell spectrum to Rogers, “we are surprised that Shaw is now buying those assets back” six months later, and doing so at a premium. — With reporting by Anja Karadeglija at akarad@thewirereport.ca and editing by Derek Abma at dabma@thewirereport.ca

Shaw-Wind deal means no Rogers merger on horizon: analysts

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