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May 9, 2022

Competition Bureau confirms bid to block $20B Rogers-Shaw deal

Divestiture of wireless assets ought to resolve the concerns: Competition lawyer Michael Osborne

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Canada’s Competition Bureau confirmed Monday that it is seeking to block Rogers Communications Inc.’s $20-billion takeover of Shaw Communications Inc., saying the deal “threatens to undo the significant progress it has made introducing more competition into an already concentrated wireless services market.”

The watchdog said it will seek an order from the Competition Tribunal to block the transaction and will also request an injunction to prevent the deal from closing until the matter is heard before the tribunal.

“Eliminating Shaw would remove a strong, independent competitor in Canada’s wireless market – one that has driven down prices, made data more accessible, and offered innovative services to its customers. We are taking action to block this merger to preserve competition and choice for an essential service that Canadians expect to be affordable and high quality,” said Competition Commissioner Matthew Boswell in a release.

Rogers and Shaw earlier acknowledged the Competition Bureau’s opposition in a statement on Saturday and said they remain committed to completing their transaction. However, the rationale behind the opposition was not known until Monday with the release of the Bureau’s statement.

In a release, the Competition Bureau said it determined during its investigation of the transaction that competition between Rogers and Shaw has already declined, and it concluded “that harm will continue and may worsen” if the deal is allowed to go ahead.

“The Bureau contends that Shaw, which provides wireless services to over two million customers in Ontario, Alberta and B.C., is Rogers’ closest competitor. It has consistently challenged the Big Three (Bell, Telus, Rogers) by improving the quality of its network and attracting customers through its aggressive pricing, bigger data allowances and service innovations,” it said in the release.

Specifically, the watchdog said its case to the Tribunal will allege the transaction would hurt competition by eliminating “an established, independent and low-priced competitor from the market;” prevent future wireless competition; prevent wireless services competition for business customers in Ontario, Alberta, and British Columbia; and increase the risk of coordination between the Big Three.

Rogers and Shaw have 45 days to submit a response to the Tribunal, after which time the Bureau will have 14 days to reply.

 

'MERGER NOISE' DRAGS ON

After the takeover was thrown into doubt Saturday, multiple analysts said the deal can still get done, and it's not just Quebecor Inc. that's being singled out as a potential solution to Rogers' regulatory headache.

"Some immediately wondered if this was the final nail in the coffin of the merger," wrote National Bank of Canada Financial Markets Analyst Adam Shine in a report to clients Sunday evening, referring to the Competition Bureau's opposition. "It is not."

Shine said he believes the odds are still more than 50 per cent that the takeover will get done, though he cautioned that Rogers shareholders should be prepared for "merger noise to perpetuate for more months" as the regulatory review process stretches out.

"The predecessor to Freedom, Wind, was sold twice. Freedom will likely be sold again. Shaw doesn’t want it and Rogers can’t own it. It’s great for a government to strive for facilities-based competition among at least four operators, but the United States is down to three wireless players and everybody must know that the road ahead for Freedom isn’t going to be easy regardless of who buys it."

One of the suitors that's seeking to take Freedom Mobile off Rogers and Shaw's hands is Anthony Lacavera's Globalive. It would be familiar territory for him; Lacavera previously ran the predecessor company to Freedom Mobile, Wind Mobile, which he sold to Shaw in 2016.

Lacavera said via email Monday that Globalive's $3.75-billion offer to buy Freedom Mobile "stands" and that he views the Competition Bureau's opposition as a "positive step."

 

DOOR OPENS FOR PKP

While Lacavera has put up his hand, Quebecor has been the subject of speculation as a potential buyer for Freedom Mobile that could satisfy regulatory concerns and help catapult it as a fourth national wireless service provider. In an interview with BNN Bloomberg last June, Quebecor President and Chief Executive Pierre Karl Péladeau confirmed his interest in buying Freedom, stating it would be an "interesting possibility."

"Is Quebecor truly the magical buyer being sought all along by the Competition Bureau? We'll now wait and see," Shine stated in his report.

Shine said Quebecor shares already look cheap and are likely already facing a discount as investors anticipate a potential purchase of Freedom. Quebecor's Class B shares shed 13 per cent of their value over the last year, through the close of trading Friday. By comparison, the TSX's communication services subgroup rallied 14.4 per cent over the same period.

Similar to Shine, Drew McReynolds at RBC Capital Markets said in a report to clients Sunday that the prospect of Quebecor taking a run at Freedom "will rekindle investor concerns" about how much it would cost the company to expand beyond its home province of Quebec.

McReynolds noted however that Quebecor could be "opportunistic" with an offer for Freedom if it's among a "limited pool" of buyers that would satisfy the Competition Bureau.

McReynolds added that Cogeco can't be ruled as potential bidder for some of Shaw's wireless assets.

"In a scenario whereby Quebecor becomes either Rogers’ remedy partner or ultimately an acquirer of Shaw’s wireless business from that remedy partner (or a partner therein), we believe ownership of Shaw’s wireless business by Quebecor notably increases the industrial logic behind an eventual combination of Quebecor and Cogeco’s Canadian assets (particularly in Ontario)," he wrote.

 

'BETTER OFF WITHOUT SHAW'

McReynolds called the Competition Bureau’s opposition “the first unexpected ‘twist’” for Rogers and Shaw as they seek to close their transaction, but he still anticipates the transaction will ultimately be allowed to proceed.

Rogers' Class B shares have shed almost 12 per cent of their value since their recent peak on April 20, and closed Friday at $66.96 on the Toronto Stock Exchange. Shine estimated that after taking a potential $1.2-billion break fee into account (in the event that the Shaw takeover falls apart), the stock could "perhaps" fall to $64.50, but he sees $65.75 as the "likely first stop this week."

As for Shaw, Shine acknowledged that a drop from Friday's close of $37.56 is "inevitable"; though he said "material" selling pressure would be "premature" and he expects there will be buying support below $30 per share.

Shaw's shares haven't once hit the proposed takeover price of $40.50 since the transaction was announced in March 2021, suggesting there's skepticism in the market about whether the deal will proceed as planned.

At least one analyst suggested the best possible outcome for Rogers would be for the deal to break down.

“To me, the future for Rogers without Shaw is bright and I am often torn — I think Rogers may be better off without Shaw. I believe they agreed to pay a big premium for Shaw — more than I thought Shaw was worth,” said Matthew Dolgin, who covers Canadian telecom stocks at Morningstar.

Despite the setback, Rogers and Shaw said they remain committed to the transaction, and extended the outside date for closing the deal to July 31. They previously stated they were aiming to close by the end of June.

In addition to the Competition Bureau, the takeover of Shaw also requires approval from the Ministry of Innovation, Science and Economic Development. It has already received the blessing of the Canadian Radio-television and Telecommunications Commission.

BNN Bloomberg is owned by Bell Media, which is a division of BCE Inc.