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Analysts have predicted that Rogers will be forced to divest Shaw’s wireless businesses, Shaw Mobile and Freedom Mobile, in order for the proposed takeover to gain regulatory approval.Todd Korol/The Globe and Mail

The prospective buyer of Shaw Communications Inc.’s wireless business may have to invest an additional $1.5-billion by 2025 to compete with Canada’s Big Three telecoms, who are spending billions to deploy 5G technology, according to a new analyst report.

The research note from Scotiabank analyst Jeff Fan comes as regulators review the proposed takeover of Shaw by Rogers Communications Inc., a deal valued at $26-billion including debt. Some analysts have predicted that Rogers will be forced to divest Shaw’s wireless businesses, Shaw Mobile and Freedom Mobile, in order to gain regulatory approval and prevent a lessening of competition.

The proposed deal would combine two of the country’s largest cable operations and would reduce the number of wireless players from four to three in Ontario, Alberta and British Columbia. It requires approval from the Competition Bureau, the Canadian Radio-television and Telecommunications Commission (CRTC) and Innovation, Science and Economic Development Canada.

Mr. Fan said in a note to clients that the prospective buyer of Shaw’s wireless brands will likely have to make between $300-million and $1.5-billion in incremental investments to roll out fifth-generation wireless services and compete with Rogers, BCE Inc.’s Bell Canada and Telus Corp. The investments needed would be on top of Shaw’s usual network spending of about $300-million a year.

“A frequent question we receive from investors regarding potential acquirers of Freedom (if Rogers is required to divest as a merger remedy) is, ‘How much network investment will be required for Freedom to catch up?’ We believe this question has been one of the overhangs on Quebecor Inc. shares since the announcement of the Shaw-Rogers merger in March 2021,” Mr. Fan wrote.

Hugues Simard, Quebecor’s chief financial officer, said it’s difficult to predict the level of investment that would be required for a number of reasons, including a lack of available information about the current state of Shaw’s wireless network. Additionally, technological advancements are reducing network costs and a recent ruling from Canada’s telecom regulator has opened up new opportunities for Quebecor that could affect the level of investment needed, Mr. Simard added.

Despite all the unknowns, Mr. Simard said he’s confident that Quebecor can afford to buy Freedom. “We have the balance sheet to support this acquisition,” he said in an interview Tuesday.

Quebecor president and CEO Pierre Karl Péladeau has expressed interest in acquiring Shaw’s wireless business. During a recent conference call, Mr. Péladeau said Quebecor and its subsidiary Videotron Ltd. are planning to expand outside of Quebec either by acquiring Freedom or by becoming a mobile virtual network operator, or MVNO. (The Canadian Radio-television and Telecommunications Commission recently issued a ruling forcing the Big Three national wireless carriers and SaskTel to open up their networks to eligible regional players who wish to become MVNOs.)

In a note to clients published Monday, Mr. Fan noted that it would be less expensive for Quebecor to buy Shaw’s wireless business and pursue a national expansion if it were able to strike a network-sharing agreement with another telecom. “While the devil is in the details of any network-sharing agreement, we assume network sharing would reduce the network investment burden,” Mr. Fan wrote.

The least capital-intensive option for its expansion would be for the Montreal-based telecom to become an MVNO without acquiring Freedom, Mr. Fan wrote. However, such a strategy has more long-term uncertainty and would likely not lead to Quebecor becoming a fourth national carrier, he added.

The telecom, which shelled out nearly $830-million for 294 wireless licences across the country in the most recent federal auction, could also decide to sell those airwaves at a later date and stay on its home turf, Mr. Fan wrote. “This scenario is consistent with the last two instances when [Quebecor] acquired licences outside Quebec,” Mr. Fan said.

Quebecor’s current valuation already reflects the maximum investment that would be required should it acquire Freedom, as investors have already “priced in $1.2-billion of potential value destruction,” Mr. Fan said. The company’s share price has tumbled roughly 12 per cent from its March 17 high and closed at $31.55 on Tuesday, up 1.5 per cent or 48 cents.

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