What’s your take on the Rogers-Shaw merger? Nearly everyone has an opinion on the transaction – but love it or hate it, and for better or worse, the deal is done. In March, Industry Minister François-Philippe Champagne approved the Rogers Communications purchase of Shaw Communications, concluding one of the biggest takeovers in Canada’s history. His decision ended a protracted two-year wrangle and a divisive debate over telecommunication regulation and competition in this country.
Here at Contra the Heard Investment Newsletter, we owned Shaw SJR-B-T from 2010 through to the completion of the merger. Our purchase price was $20.38, which generated a capital gain of 98.7 per cent – plus dividends – along the way. Our history with Shaw highlights many features of our investment strategy. We originally purchased the name because of its valuations, yield and potential upside. We had no expectations on how long we would own it, did not purchase it banking on a buyout and were happy to hold the shares as opposed to trading in and out based on the latest news. Some investors may consider this approach boring or simplistic, but we have found the combination of practising patience and ignoring headlines to be tax-efficient, profitable and cheap, as it reduces trading costs.
Buying and holding a stock is one thing, but investing in a proposed buyout is another. Once a deal is announced, the focus of the game shifts from answering the question of “What is the appropriate valuation?” to “What are the consequences for owners if the deal fails, and what are the odds it closes?”
In the case of Shaw, we thought there was substantial downside risk if the transaction was blocked because of the 70-per-cent premium Rogers was paying. Shaw’s competitive position was weakening as well. The latest results, for example, saw the top line decline 1.2 per cent, the bottom line drop 14.3 per cent, and CEO Bradley Shaw said he did not see a viable path forward as a standalone company. Though this statement may have been aimed at regulators and government officials, it is reasonable to assume Shaw’s stock would have tanked had the merger failed.
We thought the odds of the proposal closing were high, as both companies appeared motivated to get the deal done. When politicians and regulators raised objections, each organization made concessions. The biggest compromise came in early 2022, with the divestment of Shaw’s Freedom Mobile division to Quebecor. This decision illustrated Rogers/Shaw’s determination, and it was a game-changer, as the government appeared ready to block the acquisition without it.
Nevertheless, even with this disposition, the Rogers-Shaw deal remained divisive and litigious. The Competition Bureau pressed ahead to block it and argued the Competition Tribunal should rule on the original terms of the deal (i.e. the deal before the Freedom Mobile divestiture); they also argued Quebecor would not be able to operate in Alberta and B.C. without Shaw’s infrastructure.
The tribunal refused to rule on deal based on the original terms, given they were no longer on the table. Moreover, they disagreed with the bureau regarding the Alberta and B.C. arguments, as Freedom had operated effectively in Ontario where Shaw did not own the network infrastructure. This tussle ultimately landed at the Federal Court of Appeal, where judges sided with the Competition Tribunal. These decisions basically sealed the deal. At that point, the Industry Minister’s blessing was almost a formality, as it would have been hard for an elected official to contradict the Competition Tribunal and Federal Court of Appeal.
So where does this leave Canada’s telecom sector now? There is no question the Rogers-Shaw deal and Quebecor’s acquisition of Freedom Mobile has changed the telecom landscape. Rogers RCI-B-T is now even bigger, and Quebecor has become Canada’s fourth national telecom provider. Though the original proposal would have reduced competition and hurt consumers, regulators have long wanted a fourth national carrier; now that Quebecor has assumed this position, it should improve customer options.
Owners of Rogers or Quebecor stock may experience turbulence over the next few quarters. The integration of Shaw into Rogers and Freedom Mobile into Quebecor QBR-B-T will be complex, time-consuming and potentially costly. There could be writedowns, unexpected integration issues and lumpy earnings ahead.
For our part here at Contra the Heard Investment Newsletter, we will take our winnings and invest them in new opportunities – where we can continue to work on ignoring the headlines, practising patience and hopefully picking winners.
Philip MacKellar is a writer for the Contra the Heard Investment Letter.