Investment Insights for a Telecom Sector in Flux

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Chase Bethel, CFA

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Chase Bethel, portfolio manager and analyst covering consumer and telecom at Portfolio Management and Research, CIBC.

There’s a lot to unpack in terms of what’s going on in the wireless sector in Canada, including the recent CRTC decision and Rogers’ bid for Shaw. As far as the transaction goes, it was the most likely industry consolidation transaction and has been speculated about for many years. In fact, the proposed new entity is affectionately referred to as Shawgers by investors. Such a portmanteau is normally reserved for Hollywood celebrities, but I think it speaks to the many years of anticipation that this transaction might eventually occur.

So, how does it affect the sector? We can’t discuss that without taking into account the outcome of the CRTC’s recent wireless review. It paved the way for new entry, because it provides a seven-year period in which a new mobile operator can use what is known as a facilities-based MVNO [mobile virtual network operator] agreement to piggyback off of the existing wireless networks of national operators and SaskTel in the province of Saskatchewan.

Therefore, a company that purchases level-four spectrum or higher and invests in network infrastructure in a given geography can now begin to offer wireless services, even if they don’t have a fully built network of their own.

Within the next 90 days, each of Telus, Rogers, Bell and SaskTel must submit to the regulator the commercial terms by which they are willing to offer wholesale wireless access to these new entrants.

The positive for incumbents, however, is that the regulator did not unilaterally set the wholesale rates.

So, now let’s go back to the Rogers-Shaw transaction. Prior to this transaction, Shaw had received quite a bit of success in being a fourth operator and in gaining wireless market share through its Freedom wireless brand, particularly in central Canada. If Rogers were to acquire Shaw’s wireless assets, it would likely give the company dominant market share in Ontario and also in certain provinces in Western Canada, like British Columbia for instance.

Therefore, our base case assumption is that Rogers will be permitted to only acquire Shaw’s wireline assets and that it will have to divest of Shaw’s wireless assets.

With the combination of the CRTC’s decision on MVNOs and the prospect of the sale of Shaw’s wireless assets to another player, I find it difficult to see how the wireless industry won’t at least be as competitive as in the past, if not more competitive.

So, what do investors need to consider? Well, first of all, investors need to be prepared for a very lengthy review of the transaction, which is expected to stretch into the first half of 2022. We don’t yet have a date for the next federal election, but one can’t rule out that this deal might become a federal election issue at some point.

Then, three federal entities will need to approve various aspects of the transaction, including the CRTC, the Competition Bureau, and Innovation Science and Economic Development Canada, or ISED.

Moreover, investors need to consider the particulars of the transaction and the extent to which provisions favour Rogers or Shaw. As a possible avenue to help fund this transaction, investors should also be open to the possibility that Rogers might divest its stake into Cogeco. And finally, investors, particularly Rogers shareholders, need to consider dynamics post-transaction. This includes Rogers building out its 5G network, and also having the ability to bundle wireline and wireless offerings in all geographies.

And it also includes an assessment of the probability that Rogers will obtain the $1 billion of synergies that it is targeting from this transaction.

So, in summary, there are quite a few considerations, and these considerations depend on the investor’s position or holdings.