Shaw-Rogers deal will test new entrant rules on spectrum transfers, analysts say

A $700 million deal between Rogers Communications Inc. and Shaw Communications Inc. brings the cable companies into “uncharted regulatory territory” as spectrum earmarked for new entrants goes to an incumbent telco, industry analysts said. In the deal announced Monday, Rogers said it would purchase Shaw’s Hamilton, Ont.-based cableco subsidiary Mountain Cablevision Ltd. for $400 million, and agreed to pay $50 million for an option to purchase Shaw’s unused AWS mobile spectrum in Western Canada and Northern Ontario for $275 million to $300 million. Shaw will take full ownership of specialty channel TVtropolis for $59 million, buying out Rogers’ one-third share. Scotia Capital analyst Jeff Fan said in a research note Tuesday that Rogers’ option to buy Shaw’s AWS spectrum takes the deal into “uncharted regulatory territory” as “there is no precedent case for approval of a spectrum sale based on an option agreement.” Several analysts noted that the spectrum transfer will require approval from Industry Canada and the Competition Bureau. UBS Securities analyst Phillip Huang wrote in a research note that the deal is “not without risks” due to the need for regulatory approval. He said Shaw purchased its AWS licences from spectrum blocks that were set aside for new entrant carriers during the 2008 auction, and that the government barred new entrants from selling their spectrum to incumbent carriers, such as Rogers, for five years until September 2014. Rogers’ option for the spectrum would not be effective until 2014. “Upon completion of this deal, roughly half of the AWS spectrum previously earmarked for new entrants in Western Canada would belong to Rogers, an incumbent,” Huang wrote. “As such, we currently see some regulatory risk with this deal.” Huang said Industry Canada’s commitment to “sustaining competition by supporting a fourth wireless player” and the likelihood that the general public will take a “significant interest” in the deal could lead to “heighten” scrutiny by regulators. “This deal may also lead other wireless players to explore the possibility of trading set-aside spectrum through the use of similar option agreements prior to the expiry of the 5-year restriction period, which may further draw Industry Canada’s attention,” he wrote. Canaccord Genuity analyst Dvai Ghose said in a research note Rogers has the ability to find a third-party buyer for the spectrum if regulators stop the company from acquiring it directly. Ghose added that the deal could be good news for other carriers if it’s permitted to go through. “If Rogers is allowed to buy Shaw’s spectrum, could Bell , TELUS or Rogers be allowed to buy Mobilicity, WIND or Public Mobile?” he wrote. “Consequently, if Rogers’ assumptions are correct, this could be very positive for wireless incumbents.” Each of the analysts suggested Shaw will receive a good return for its spectrum, which it purchased for $190 million in the 2008 auction and includes 20 MHz in B.C., Alberta and Manitoba, and 10 MHz in parts of B.C., Alberta, Saskatchewan and Northern Ontario. They said Shaw paid $1.01 per megahertz per capita for the spectrum, and projected it will sell for between $1.72 and $2.13 per megahertz per capita. Huang said the deal would help new entrants by establishing a higher market value for their own AWS spectrum. He said new wireless entrants that have AWS holdings outside their core market, such as Quebecor Media Inc.’s Videotron subsidiary, could cash in on the higher valuation, and that the deal “should also establish a higher break up valuation for less-established new entrants (e.g. Mobilicity), which may in turn help them raise capital.” The deal contains a $50 million “provision of services” requirement for Shaw, which “will be further defined over coming months but is expected to include network backhaul and transport services” for Rogers in Western Canada, National Bank analyst Adam Shine added in a research note Monday night. The general consensus among analysts Tuesday suggested that both Rogers and Shaw appear to benefit from the deal. It will give Rogers more spectrum to compete with Telus for wireless customers in the West, as well as an entry into a new cable market in Southern Ontario. The deal gives Shaw an injection of cash to accelerate priority projects such as the completion of its Calgary data centre, the digitization of its network, an expansion of its WiFi network, and its Shaw Go video streaming application, as Shaw competes with Telus in the Western Canadian television market. Shaw will also gain a healthy return on its Mountain Cable subsidiary, which it outbid Rogers to purchase for $300 million in 2009 and which earned $65 million in revenues last year. TVtropolis’ profits dropped more than 50 per cent between the 2008 and 2011 broadcasting years, with the channel earning $7.5 million in pre-tax profits in 2011, down from $15.5 million in 2008, according to CRTC data released in May. —With reporting by Nicholas Kyonka at nkyonka@thewirereport.ca and editing by Simon Doyle at sdoyle@thewirereport.ca.

Shaw-Rogers deal will test new entrant rules on spectrum transfers, analysts say

News | January 15, 2013

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