Rogers Communications Inc. agreed to buy rival Shaw Communications Inc. in a $16 billion deal that shakes up Canada’s communications sector and sets up a tough decision for regulators and Justin Trudeau’s government.
The proposed merger of companies controlled by two of Canada’s most powerful business families would be one of the biggest deals ever in the Canadian telecom industry. It would have Rogers, the country’s No. 1 wireless provider with 10.9 million subscribers, swallow Shaw’s Freedom Mobile division, the fourth-largest provider in some markets.
Toronto-based Rogers is offering C$40.50 per share in cash to public shareholders of Shaw, but the Shaw family will take most of its payment in Rogers stock.
The two companies are hoping the government bends on its policy of promoting greater competition for wireless services. For more than a decade, Canada has tried to assist the emergence of a strong fourth player to compete with Rogers, BCE Inc. and Telus Corp. by setting aside spectrum for new competitors to purchase.
Rogers Chief Executive Officer Joe Natale said the companies are making the argument that scale is needed for 5G investments, especially across a vast country like Canada, and that data prices for consumers are falling and would continue to do so after the merger.
“The government is focused on affordability and how do we bridge the digital divide, and we’re solving for those problems collectively,” Natale said in an interview. “5G connectivity is all about better unit-cost economics.”
Shaw Communications was up 37% to C$32.78 at 1:17 p.m. in Toronto. Rogers rose 1.9% to C$60.66.
The elimination of a wireless competitor is the biggest obstacle to the deal, but it’s not an insurmountable one, said RBC Capital Markets analyst Drew McReynolds.
“While we believe wireless concentration and the reduction from four to three wireless players in Western Canada and Ontario represents the highest hurdle for the current deal as structured, we do see a number of potential remedies should one be required,” McReynolds said in a note to investors.
In Ottawa, Industry Minister Francois-Philippe Champagne said the government review would focus on “affordability, competition and innovation in the Canadian telecommunications sector.”
“These goals will be front and center in analyzing the implications of today’s news,” Champagne said in an emailed statement.
The deal represents a sharp reversal for Shaw, a company that has prided itself on its independence but has struggled to find growth in recent years amid pressures in the cable sector from Netflix Inc. and other streaming services.
Shaw Chief Executive Officer Brad Shaw said the company explored numerous options as it prepared for a coming auction of 5G spectrum this year.
“We really took the time over the last three or four months here to really make sure we understood where things were at,” Shaw said in an interview. “I’m not saying this was 911 and everything was exploding.”
In the end, the Rogers offer — a 69% premium over Shaw’s closing price on Friday — proved to be the most attractive one. If the deal closes, the Shaw family would become one of Rogers’ largest shareholders and get two seats on the board.
A competition review could take a year; Rogers and Shaw said they expect the transaction to close in the first half of 2022.
Rogers and Shaw have carved up, and sometimes traded, rival cable territories — with Shaw focused on Canada’s western provinces and Rogers dominating Ontario. But Rogers has pulled far ahead of Shaw on the strength of its wireless business.
Rogers said that the deal would add to earnings and cash flow per share in the first year after closing and that cost savings would top C$1 billion annually within two years. Including debt, the transaction is worth about C$26 billion.
Rogers has been trying to expand by acquisition recently, teaming up with Altice USA Inc. to launch a hostile bid last August for Quebec-based Cogeco Inc. and its subsidiary Cogeco Communications Inc. Cogeco’s controlling Audet family repeatedly rebuffed the bid, and it collapsed in November.
In November, Toronto-Dominion Bank analyst Vince Valentini said Shaw might have the most upside potential over the ensuing 18 months if it were to merge with Rogers.
The combined company would spend C$2.5 billion to build a 5G network in western Canada and C$3 billion on investments in network, service and technology, the companies said in a statement. Rogers’ western Canadian headquarters would be at Shaw’s current head office in Calgary.
“I believe this will be one of the most complex antitrust cases in Canadian history,” said Julian Klymochko, who manages an arbitrage exchange-traded-fund as chief investment officer at Calgary-based Accelerate Financial Technologies.
“It will test the government’s appetite to accept more consolidation in a highly concentrated industry and one in which there has been much regulatory pressure to reduce prices. The outcome is highly uncertain,” he said.
