Canadian competition body looks to block Rogers, Shaw merger

The proposed tie-up between Rogers Communications and rival Shaw is under threat, with Canada’s Commissioner of Competition having indicated he intends to block the deal.

Nonetheless, the two companies remain bullish about their prospects of getting the deal over the line and have extended their completion deadline to the end of July to give them time to plead their case with regulators. Meanwhile, rumours over who will acquire Shaw’s Freedom Mobile business – a key issue from a competition point of view – continue to swirl.

When they announced their C$26 billion deal well over a year ago, Rogers and Shaw said they aimed to complete it in the first half of this year. While the deal was always going to be a tricky sell on the regulatory front, the process is perhaps turning out to be thornier than they had hoped.

The deal, should it go ahead, will see Rogers pay C$40.50 per share in cash for Shaw, which amounts to around C$20 billion and as of last March represented a hefty premium on the target’s share price. Shaw’s shares ticked up on news of the deal, peaking at just over the C$39 mark last month. The transaction also includes C$6 billion n Shaw debt, raising the value of the deal to C$26 billion, or US$21 billion.

Both companies are big, legacy players in the Canadian TV and Internet markets, therefore regulatory concerns were a given. But last month the Canadian Radio-television and Telecommunications Commission (CRTC) gave the go-ahead for Shaw’s broadcasting licences to be transferred to Rogers, subject to a series of conditions, and the focus of the deal switched back to the telecoms space.

Despite the fact that Shaw is a relative minnow in the mobile market – it is Canada’s fourth mobile player, but lags the big three, Rogers, Telus and incumbent Bell, by some margin – that appears to be the source of the Competition Bureau’s concern. When Rogers and Shaw issued a joint statement over the weekend to confirm that the Commissioner of Competition intends to oppose their merger it was pretty clear that they believe that hiving off mobile assets will help push the deal through.

“The companies have offered to address concerns regarding the possible impact of the Transaction on Canada’s competitive wireless market by proposing the full divesture of Shaw’s wireless business, Freedom Mobile,” the companies said. “Rogers and Shaw are engaged in a process to sell Freedom Mobile, with a view to addressing concerns raised by the Commissioner of Competition and ISED.”

ISED, or Innovation, Science and Economic Development Canada, is the third regulatory alongside the CRTC and Competition Bureau whose approval the deal requires.

The future of Freedom Mobile has been the subject of speculation for much of the past year. Shaw acquired Wind Mobile – one of a handful on new mobile operators that picked up spectrum in Canada in 2008 as part of a government push to boost competition – six years ago and subsequently rebranded it. Last weekthe Globe and Mail reported that Rogers has been in touch with telecoms, media and sports group Quebecor about the possibility of it acquiring Freedom Mobile, but naturally none of the parties concerned had any official comment to make.

The paper had previously named private equity firm Stonepeak Infrastructure Partners, owner of ISP Xplornet, and the Aquilini family, owner of the Vancouver Canucks NHL team, as holding talks with Rogers. The paper’s sources also claim that  Anthony Lacavera’s Globalive, the company that founded and then sold Freedom Mobile under its former identity, has offered C$3.75 billion to buy the company back, but it appears its overtures have not been well received.

The bottom line is that Rogers and Shaw will have to sell off Freedom Mobile to have any hope of finalising their deal, but they are clearly not lacking in offers. You could argue that the regulators’ insistence on preserving a fourth player in the mobile market is merely playing lip service to competition, given the strength of the big three, but perhaps it’s better than nothing.

It’s not wholly clear whether there are other antitrust issues at play. As you would expect, Rogers and Shaw have pledged to work with the regulators to iron out any issues, whilst simultaneously extolling the virtues of the deal, which they claim will boost 5G availability, help bridge the digital divide, create jobs, and other benefits designed to strike the right note for consumers and the relevant authorities.

The operators’ bullishness on the deal’s prospects may not be misplaced. Canada has a history of acting in the best interest of its big telecoms and media players, so there’s a good chance Rogers and Shaw will get way, one way or another.