By Lindsay Dempsey, Adil Amlaiky, Anish Umasuthan, Greta Horn, Ève Bouffard, Blake Dal Santo (McGill University), Ho Hai Ivan Chung, Kevin Lee, Harson Lin (Hong Kong University of Science and Technology)
Photo: Mario Caruso (Unsplash)
Overview of the deal
Acquirer: Rogers Communications Inc
Target: Shaw Communications Inc
Implied Equity Value: US$16.0 billion
Total Transaction Size: US$21.4 billion
Acquirer advisor: Bank of America and Barclays
Target Advisor: TD Securities
The mega-deal marks the combination of the two largest cellular and cable operators in Canada and the speed-up of 5G rollout in the country, yet under regulatory review and approval.
Currently, Rogers is one of the top 3 mobile service providers in Canada, which concentrates its business in the urban centres of Ontario. Shaw ranks fourth in the industry and is strong in Western Canada. By combining the two providers, Rogers can surpass Telus Corp and take on Bell in the intensified telecommunication market. On top of that, it can also pay the wave for its expansion under 5G rollout. In fact, as part of the transaction, the combined company will invest US$2billion in 5G networks and US$800 million to improve internet access in rural areas.
It is still too early to say whether the deal can be closed since regulatory scrutiny is the biggest obstacle. The telecommunication industry in Canada is a highly competitive yet concentrated market, with the top 3 providers sharing around 90% of the market revenue. The proposed deal will eliminate the fourth-largest player in the industry and further consolidate the leading role of the top 3. Under this situation, the deal will be reviewed by three government agencies, including the competition bureau, the Canadian telecommunications regulator and the department of industry.
“We’re at a critical inflexion point where generational investments are needed to make Canada-wide 5G a reality… Fundamentally, this combination of two great companies will create more jobs and investment in Western Canada.” - Joe Natale, President and CEO (Rogers Communications)
Company Details: (Acquirer - Rogers Communications)
Rogers Communications is a Canadian telecom and media company, operating primarily in Wireless (61% of revenue), Cable (28% of revenue; Internet, television, telephony, etc.) and Media (11% of revenue; Sports and entertainment, television and radio broadcasting, etc.). Almost all of its operations and sales are based in Canada. As of 2020, Rogers had 10.9 million wireless subscribers, 2.6 million internet subscribers and was the largest wireless telecom by revenue in Canada with 32.4% market share, followed by Bell Canada (29.2%) and Telus (28.9%). It also competes with Shaw Communications for television service.
Founded in 1960, headquartered in Toronto, Canada
President & CEO: Joe Natale
Number of employees: 23,500
Market Cap: $25.7B (as of 07/05/2021)
EV: $41.3B
LTM Revenue: $11.5B
LTM EBITDA: $4.7B
LTM EV/Revenue: 3.6x
LTM EV/EBITDA: 8.6x
Company Details: (Target - Shaw Communications)
Shaw Communications is a telecommunications corporation in Canada that offers mobile, internet, and TV services. Shaw delivers these services primarily in Alberta and British Columbia.
Shaw developed one of the most innovative hybrid fibre-coaxial networks with its Fibre+ network in North America. As of 2013, Shaw has devoted approximately $30 billion to construct, improve, and enlarge its extensive Fibre+ network as well as its Fast LTE network.
Founded in 1966, headquartered in Calgary, Alberta, Canada
CEO: Bradley Shaw
Number of employees: 15,000
Market Cap: $14.733B (as of 09/05/2021)
EV: $20.69B
LTM Revenue: $5.42B
LTM EBITDA: $2.14B
LTM EV/Revenue: 3.82x
LTM EV/EBITDA: 9.67x
Projections and Assumptions
Short-term consequences
In the short term, with the elimination of Shaw as the fourth-largest wireless provider in Canada, the merger will result in less competition in Canada’s telecom industry. Some parts of Canada would go from having four providers to three. Critics have expressed concerns on the competitive landscape, emphasizing that Canada needs more competitors, and fewer options in telecom providers would be bad for consumers. However, both Rogers and Shaw argued the $26-billion transaction will help Canadians by allowing the companies to concentrate on building a new generation of networks. Shaw has expressed that it is not big enough on its own to make the billions of dollars in future investments that will be necessary for it to build a competitive 5G wireless network.
Despite less competition, prices are not expected to grow anytime soon. Rogers has stated that it will not increase wireless prices for Freedom Mobile customers for at least three years following the close of the transaction, which would essentially benefit the consumers.
From a balance sheet perspective, the merger would materially increase the combined entity’s pro forma leverage to more than 5x. Hence, management is fully intended to prioritize the generation of cash flow, which is expected to ramp materially as synergies are realized to strengthen Rogers' post-close leverage profile. Synergies are expected to exceed C$1 billion annually within two years of closing, and the transaction will be significantly accretive to earnings and cash flow per share as of the first year after closing.
Long-term Upsides
By acquiring Shaw, Rogers will benefit greatly in a variety of areas. Firstly, considering that Shaw is the fourth-largest player in the Canadian telecommunications industry, Rogers will be able to seize substantial market share to outpace its two toughest rivals, Bell Canada and Telus Corp. A large portion of this share will be captured in Western Canada, a region where Rogers lacked visibility and Shaw was a dominant player. Rogers’ primary target was initially urban areas across the country, while Shaw provided services in more sparsely populated regions of Saskatchewan, Alberta, and British Columbia. Leveraging Shaw, Rogers plans to continue to develop its presence in the region by investing CAD$2.5B in 5G networks over the next five years. Furthermore, Shaw also owns Freedom Mobile, a significant brand in Ontario, which will provide even deeper market penetration in the province. By eliminating a major player in the Canadian telecommunications landscape, Rogers, Telus, and Bell will be able to keep prices high due to reduced competition. Most importantly, Rogers will hold the biggest market share in the country once the acquisition is complete.
Due to the limited geographical overlap between the current services offered by Rogers and Shaw respectively, Rogers will be able to combine these separate networks into one, which will provide greater benefits in the long term, including economies of scale and an increased ability to test new initiatives in one region before rolling out the project across the country. By combining various mobile systems and efforts to build 5G networks, as well as investing billions in faster networks and superior service in remote and rural areas, it is possible that Rogers can redefine the Canadian telecommunications industry.
Risks and Uncertainties
The deal between Rogers and Shaw brings forth a plethora of regulatory risks. Rogers’ acquisition of Shaw, the fourth-largest player in the Canadian telecommunications industry, will be the second-largest deal in this industry after the BCE and Nortel Networks deal of C$88.7 billion back in 2000.
Given the deal size, the Canadian government will have to alter its guideline of supporting more competition in the wireless services industry. The risk being that the government doesn’t decide to make an exception for Rogers, which will likely result in an incredibly complicated acquisition.
Joe Natale, Rogers’ CEO, is confident that a particular factor will help this deal go through the need to reduce costs in the industry. He argues that scale is needed to expand 5G, which reduces per-unit cost throughout Canada. This is a strong argument, given that in 2020 the Trudeau government forced the top three telecommunications firms in Canada to reduce their pricing on service plans by 25% within two years.
On the other hand, BCE (the parent company of Bell Canada) attempted to outbid Rogers for Shaw but withdrew after the regulatory risks that Shaw mentioned in a disclosure to shareholders. More specifically, the hell or high water clause, which forces Rogers to go through with the deal, no matter the divestments required by regulators.