Spectrum buy to improve Shaw network, but benefits will take time: analysts

Shaw Communications Inc. announced Tuesday that it has purchased 700MHz and 2500MHz spectrum from Quebecor Inc. for $430 million, in what Shaw described as “a significant milestone towards improving network coverage and quality across Alberta, British Columbia and Ontario.” The deal gives the company’s Freedom Mobile access to the low-band spectrum it has lacked until now. Iain Grant, an analyst at the Seaboard Group, said in an email that the deal will make Shaw’s challenge to the incumbents, and its customer proposition, stronger. He noted that because Shaw’s network isn’t ubiquitous across Canada, it needs a roaming partner, and that the new spectrum will either make such negotiations more equal, or give the company “far more flexibility” when it comes up upgrading its network offering to 5G. Grant said that low-frequency spectrum is valuable for both rural coverage, because it travels longer distances, and for urban markets because it penetrates buildings better than higher frequencies, like the AWS spectrum Shaw is using to build out Freedom Mobile’s LTE network. Barclays Capital analyst Phillip Huang said in a research note that buying the spectrum “lifted a significant barrier … to Shaw's wireless growth ambitions, and undoubtedly strengthened its long-term competitive positioning.” But that doesn’t mean Shaw is likely to disrupt Canada’s wireless market, he added. To do so, the company will need a network-sharing deal, and Huang predicted Rogers Communications Inc. is unlikely to agree to one. “As such, we believe Shaw will continue to find some success in the low-to-mid tier segments, but unlikely to emerge as a disruptor in the next couple of years,” Huang said. Canaccord Genuity analyst Aravinda Galappatthige said in a research note that the biggest industry implication of the deal, as well as the accompanying sale of Shaw’s ViaWest division, “is that they encourage Shaw to re-set its wireless ambitions at a higher level. With the 700MHz spectrum and greater balance sheet space to increase investments, Shaw likely sees a path to a greater market position in wireless longer term.” However, those benefits will take time to materialize, he added in a Wednesday note. “Freedom’s net adds have trended lighter than expectations recently and one should not expect a meaningful upswing until well into” fiscal 2018, he said. Other hurdles include “building its brand, expanding distribution, enhancing internal operations including customer service.” Galappatthige predicted Freedom would likely “be met with targeted competitive counter moves by the incumbents, particularly early on as they start to gain traction.” RBC Capital Markets analyst Drew McReynolds said in a note that “the transaction significantly bolsters Shaw’s wireless capability and lowers Shaw’s risk profile.” He added in a follow-up that the acquisition is “a significant strategic step forward, reflecting what was lingering uncertainty around the timing and ultimate cost of acquiring low band spectrum. In our view, the deployment of this spectrum through represents a major piece to Shaw's wireless puzzle and sets the stage for a more compelling wireless offering.” Until that happens, Shaw’s impact on incumbent providers is expected to be minimal, he noted, adding that beginning “in earnest in 2018, however, we do expect Shaw to take a larger share of the growth within the industry, resulting in a potential step-down in growth for the incumbents.” The licences include 10MHz of 700MHz spectrum in each of British Columbia, Alberta and southern Ontario, and 20MHz of 2500MHz spectrum in each of Vancouver, Edmonton, Calgary, and Toronto, Shaw said in a press release. “We believe this incremental investment in our wireless business, particularly with the addition of the 700 MHz spectrum, will materially improve our long-term wireless customer experience, and will further enable our ability to offer converged network solutions to our customers,” CEO Brad Shaw said in the press release. Desjardins Capital Markets analyst Maher Yaghi said in a research note Tuesday that Shaw “required additional spectrum to continue its wireless deployment — especially in the low-band (700MHz) range — and we view today’s price tag as reasonable for the company.” The deal still requires regulatory approval under the Competition Act and from Innovation Canada, the company said. Yaghi noted this isn’t likely to be a barrier to the deal, since regulators likely preferred Shaw, rather than an incumbent, buy the spectrum. He added the $430 million sale price was slightly lower than expected, while Galappatthige said that price was significantly lower than the $647 million he had estimated for both the 700MHz and 2500MHz blocks. Shaw added in the press release that it estimates capital expenditures to deploy the new spectrum to be $350 million. Galappatthige said he “fully expect additional investments to be announced as Shaw continues to build out its wireless network.” Freedom Mobile is currently in the process of rolling out LTE across its territory, which it expects will be finished by the end of the year. Thus far, Canada’s big three have viewed Shaw’s entry into wireless as a “manageable event,” pointing to its network coverage as an area for the company to improve, Huang reported earlier this year. When Shaw rebranded its wireless division to Freedom Mobile, Huang said Shaw likely didn’t use its own name because its network quality lagged behind the incumbents and it didn’t want to dilute the Shaw brand. Tuesday’s announcement follows a sale last week of AWS-1 spectrum in the Greater Toronto Area to Rogers Communications Inc. for $184 million. In a research note following that deal, Galappatthige noted that Shaw lacks low-band spectrum, and the sale of Quebecor’s 700MHz to an incumbent could have put Shaw at a disadvantage. Also on Tuesday, Shaw announced it is selling its ViaWest data centre division to U.S. private equity company GI Parters for $2.3 billion, nearly double what it paid for ViaWest when it acquired the company in 2013. It added that after repaying ViaWest’s debt, money it borrowed for the original investment, and other expenses, it expects to net $900 million from the sale. The deal, which still needs U.S. regulatory approval, is expected to close “by the end of fiscal 2017.” There had been recent reports that Shaw wanted to sell ViaWest. Yaghi noted the sale didn’t come as a surprise to analysts, and said it “makes sense for Shaw since synergies with ViaWest were limited given the latter’s footprint is mainly in the US. We believe this transaction should allow Shaw to redeploy cash where it is needed: wireless.” — With reporting by Anja Karadeglija at akarad@thewirereport.ca and editing by Charelle Evelyn at cevelyn@thewirereport.ca

Spectrum buy to improve Shaw network, but benefits will take time: analysts

News | June 13, 2017

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