Investment insights for a telecom sector in flux

A CRTC ruling promoting wireless competition and Rogers Communications’ bid to acquire Shaw Communications have created uncertainty in the Canadian telecom space, a favourite for dividend investors.

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Chase Bethel, senior analyst and portfolio manager with CIBC Asset Management, said telecom investors face a long period of wait-and-see. Reviews of the $26-billion Rogers-Shaw deal will stretch into the first half of 2022, he said, with approval needed from the CRTC, the Competition Bureau and the innovation minister.

“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,” he said.

The agreement has already received a rough ride from MPs during parliamentary hearings, and a number of witnesses have opposed the merger in committee testimony. The companies have said the deal would lead to $1 billion of synergies.

The “Shawgers” merger, as some investors have called the deal, had long been a favourite speculative topic among industry insiders. “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,” Bethel said.

But that doesn’t mean the deal will go through without qualifications. The CRTC’s decision this month to make it less expensive for emerging wireless operators to access national networks on a wholesale basis sends a message about the commission’s intent on consumer prices and competition.

“We can’t discuss [the Rogers-Shaw deal] without taking into account the outcome of the CRTC’s recent wireless review,” Bethel said.

The CRTC ruling means new and regional mobile operators will be able to pay wholesale rates for access to the national networks operated by Rogers, Telus and Bell (and by SaskTel in Saskatchewan).

“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,” Bethel said.

“The positive for incumbents, however, is that the regulator did not unilaterally set the wholesale rates.” The four established carriers have to submit proposed rates within 90 days.

Bethel said the CRTC decision is a significant factor in assessing the proposed Rogers-Shaw deal. Shaw had been a successful fourth wireless operator with its Freedom Mobile brand. “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,” he said.

“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.”

The prospect of Shaw’s wireless business going to another player, combined with the wholesale wireless decision, likely means more competition in Canada’s wireless industry, Bethel said.

Investors need to consider a number of factors, such as whether Rogers will divest its stake in Cogeco to fund the Shaw transaction, he said. They should also consider the impact on Rogers’ 5G rollout and its ability to bundle wireless and internet services across the country.

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