Analysts give thumbs up to Rogers’ all-stock acquisition of Call-Net

Analysts are calling Rogers Communications Inc.’s all-stock acquisition of Call-Net Enterprises a good move for both companies. Under the agreement, which has been approved by both boards but still needs the regulator’s greenlight, Call-Net common and Class B shareholders will receive a fixed exchange ratio of one Rogers Class B non-voting share for each 4.25 outstanding shares of Call-Net, representing an equity value of about $330 million. A Merrill Lynch report notes that the transaction accelerates the expansion and the scope and scale of Rogers’ business, while eliminating a competitor, and particularly strengthening its position against Bell Canada in the Ontario market. The Yankee Group notes that with the deal Rogers gains residential and business phone service, Internet, long-distance and wireless service of about 600,000 customers in Canada, and that the majority of them are in the Rogers Cable footprint. "Rogers immediately becomes a real telco that can couple Sprint Canada with its existing access facilities and customer relationships and directly challenge Bell Canada in core telephony for the Ontario market," states the Yankee Group. "…The opportunity to use Call-Net’s network – and pair it with a strong consumer brand – will create a formidable and enticing alternative to Bell Canada." Analysts also note that in gaining Call-Net’s network, including the infrastructure and customer base in Eastern Canada of 360networks Corp., Rogers will be able to bundle wireless phone, wireline phone service, broadband and cable TV offerings to customers in a move that is predicted to reduce customer churn. "Roger’s VoIP is still embryonic. But with Call-Net subsidiary Sprint Canada, it has a full-blown phone company that has long-distance assets, has experience in offering phone service to consumers and very significantly to the enterprise market, the business market," Yankee Group analyst Keith Mallinson tells Network Letter. "It rounds out Rogers capability in terms of the new converged communications era. It actually puts Rogers in a position that is in many respects ahead of North America or anywhere really…in that not only can they do a triple play but also a quadruple play." The Merrill Lynch report notes some potential downsides for Rogers such as integration costs, which have not yet been quantified, and the costs of extending discounts on cable TV and Internet service to existing Call-Net customers. "If each of Call-Net’s 200K in-market customers saves (say) $75/year (15% on an average of one product), the annual cost would be $15mn (offset by churn reduction)," the Merrill Lynch report notes. SeaBoard Group analyst Brian Sharwood, however, says overall the transaction will benefit both companies. Rogers will benefit from Call-Net’s expertise in selling and servicing the phone industry, and Call-Net could gain from Rogers experience in rolling out the Internet as the former moves ahead with its DSL offering. "One of the things is that Sprint has a whole set of accounts. They may not be quite at the right level and some of them are just long-distance, but some of them are good data accounts and it gets you people that know how to sell to business markets," notes Sharwood. "It also gets you call centre reps, who are in the local phone market. Dealing with moving phones over is not necessarily particularly easy…and training guys to do that is a long, arduous process. When Rogers releases its VoIP product, there will be guys that know how to answer the phone, and can port numbers over, and they have people who know how to deal with Bell and TELUS." He also notes that Call-Net has been held back in rolling out its DSL service, in part, because it hasn’t been able to deal with customer service. "Rogers has been doing this for the cable modems for quite some time, so they have people with skill sets. All they will have to do is learn some DSL technology and that’s a one-day course for a bunch of call centre reps," he says. "It will allow them to roll out DSL faster. Obviously, they want to move people onto the Rogers network as fast as they can because it’s much cheaper that way, but up until that point they can roll out DSL." Sharwood notes that the cost of acquiring telephony customers through the Call-Net takeover isn’t any cheaper than by picking them up on their own, but he adds that the speed of gaining the subscribers is much quicker. "Rogers is getting these customers quickly and they’re getting money from them. Sprint was actually making money because it wasn’t really taking any risks and it wasn’t pushing the company too far," he notes. He theorizes that Call-Net will gain from the more entrepreneurial spirit of a company like Rogers. "Call-Net hasn’t rolled out any interesting products in quite some time. They rolled out Voice over IP product, but you had to dig through four levels of the web site before you found out where it was, and the product didn’t work very well," notes the SeaBoard Group analyst. "I think that (with Rogers involvement), it will now charge up some of these products. Bill Linton was a very conservative manager, who was known sort of as a Dr. No. (His attitude) was the local phone market is good. We can still make money doing old traditional phone services; anything new and innovative, he was we’ll think about it and we’ll consider it. Ted Rogers isn’t afraid to move into the latest technology. He likes taking risks and being on the edge." The Merrill Lynch report also notes that Rogers has the potential for loop rental cost savings from the migration of 200,000 residential subscribers within the Rogers Cable footprint from loop resale to VoIP. The report estimates that savings could amount to $200 per customer that transfers over.

Analysts give thumbs up to Rogers’ all-stock acquisition of Call-Net

News | 05/25/2005 4:00 am EDT

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