Private equity funds are lining up for a shot at the cellphone business Rogers Communications Inc. RCI-B-T could be forced to sell to win Ottawa’s approval of its Shaw Communications Inc. SJR-B-T takeover.
Before federal regulators kick off an auction – a decision on asset sales may come as early as March – the policy makers and politicians need to ask what problem they’ve solved if the two million customers on Shaw’s wireless platform, which includes Freedom Mobile, end up in the hands of a purely financial player.
In broad terms, Rogers and Shaw face three possible outcomes as they try to win approval for their marriage from the Competition Bureau and Minister of Innovation, Science and Industry.
Door No. 1 would see the regulators accept the two telecom companies’ argument that a merger makes their operations far more efficient, with a resulting benefit to all Canadians, and therefore, no divestitures are required.
The concept of encouraging efficiency is part of the Competition Bureau’s mandate. Rogers and Shaw say that uniting their wireless businesses while investing in 5G networks will best serve customers and preserve competition with Bell and Telus. This outcome is possible but unlikely, given the federal government’s long-standing view that having four players in the cellphone market is the key to bringing down prices.
Door No. 2 sees Rogers forced to sell Freedom Mobile to a regional telecom player with national aspirations. Quebecor Inc.’s Pierre Karl Péladeau has been hopping up and down, shouting “pick me,” since the Shaw deal was announced. Cogeco Inc. and privately owned Xplornet would also be candidates.
The third option is to require Rogers to sell to a private equity buyer. Chatter on Bay Street is that the major Canadian players such as Canada Pension Plan Investment Board and Brookfield Asset Management Inc. have an active interest in the Shaw approval process, along with U.S. fund managers such as Blackstone Inc., Carlyle Group and TPG Capital.
If the federal government and the competition watchdog end up with a private equity fund owning Freedom Mobile, what exactly have they accomplished?
First off, private equity fund managers use a significant amount of leverage on their investments to juice returns. Servicing that debt load means the new owners would have little incentive to cut cellphone rates – slashing prices would hurt cash flow. In a recent report, RBC Capital Markets analyst Drew McReynolds said from the point of view of Rogers, Bell and Telus, any financial buyer would be a “more manageable competitor in Ontario, B.C. and Alberta as the fourth facilities-based wireless operator.”
Selling Freedom Mobile, or any of Shaw’s wireless business, to private equity would also just kick the cellphone competition issue down the road. These fund managers must exit a holding, typically within a decade, to pay back their investors. The logical buyer would be one of the three incumbent telecom companies.
From Rogers’s point of view, selling to a private equity buyer is also likely the worst of the three most probable outcomes. Mr. McReynolds said to win approval for the sale, “Rogers would likely have to divest more wireless assets” to create a viable new standalone competitor.
There’s a reason Canadians spend so much time complaining about their monthly cellphone bills – mobile devices are an essential part of our daily lives. Add in the economic importance of rolling out multibillion-dollar 5G networks – the challenge that drove Shaw into the arms of Rogers – and regulators really only have two choices when it comes to this historic telecom takeover.
The federal government can either approve Rogers’s marriage to Shaw without conditions, to create three national telecom champions, or force the sale of Freedom Mobile to a regional player that is committed to building a wireless platform from Atlantic to Pacific, and won’t be flipped to the highest bidder in a few years’ time.
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