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Pedestrians walk past a Wind Mobile location in Toronto on Tuesday, May 5, 2015.Darren Calabrese/The Globe and Mail

Shares in Canada's largest wireless providers tumbled Thursday, erasing billions of dollars of value, as Shaw Communications Inc.'s $1.6-billion deal to buy startup carrier Wind Mobile Corp. triggered worries of increased competition in the industry.

It was the biggest hit to Canadian telecom stocks since the summer of 2013, when U.S. carrier Verizon Communications Inc. was considering buying Wind and upending the cozy market, which is dominated by Rogers Communications Inc., BCE Inc. and Telus Corp.

All told, the Big Three shed almost $4-billion in market capitalization on Thursday on news that Wind could soon be owned by a strategic telecom operator, rather than a coalition of private equity and other financial players. (The deal still requires regulatory and government approvals and is expected to close within the first half of 2016.)

Telus stock fell 6.7 per cent on speculation that its western rival Shaw will pose a greater competitive threat in British Columbia and Alberta, where Wind offers wireless services. Shares of Rogers were also down sharply – dropping 5.6 per cent – as it could face heightened competition in Wind's other market, Ontario, while BCE's stock was not hit as hard.

Bay Street analysts generally lauded the strategy behind Shaw's move, but warned that the stock would suffer from concerns about free cash flow and would lose any valuation premium investors assigned to the prospect that it could be sold to Rogers, a long-discussed possibility that now seems unlikely to come to pass any time soon.

"Strategically we believe this is the right move for Shaw," Scotia Capital's Jeff Fan said. "The acquisition of Wind will improve Shaw's competitive position against Telus over time."

"We believe a traditional cellular network would be a complement to Shaw's WiFi service," Mr. Fan added, referencing Shaw's network of 75,000 WiFi hotspots across Western Canada, its substitute for a true wireless strategy up until this point.

Shaw's stock dropped 7.7 per cent on Thursday and ratings agency DBRS Ltd. placed the company's credit rating under review "with negative implications," highlighting concerns about increased debt only a year after making a billion-dollar investment in a U.S. data-centre business.

Despite the market reaction, Wind will not pose an overnight threat to the Big Three, even in Shaw's hands. It currently operates an often unreliable 3G network and is preparing to undertake a costly and time-consuming upgrade to LTE (long-term evolution or 4G). Plus, while it has valuable spectrum holdings, it lacks low-band airwaves, which provide superior in-building penetration and carry signals over longer distances.

A day earlier, hundreds of cheering Shaw employees filled the atrium of the company's head office in Calgary after chief executive officer Brad Shaw revealed his plan to finally get into the wireless game. The cable operator abandoned plans to build its own cellular network from scratch in 2011, but executives said during a conference call that they spent the past 18 months examining various options for an entry into the mobile market and then "pro-actively" approached Wind Mobile.

"It's never too late to do the right thing," Desjardins Securities analyst Maher Yaghi remarked on the call.

With cable television subscribers slowly dropping off and consumers increasingly turning to the Internet for content, Mr. Shaw said he recognized the importance of participating in the growth of data consumption. "It's clear that we need to be in the wireless space," he told analysts.

In an earlier interview with The Globe and Mail, Mr. Shaw said the company would act like a new entrant in the wireless game.

"We're no longer the incumbent that's going to sit here and try to protect his margin and his revenue and free cash flow. We're going to be the small guy, come in, guerrilla, tactical, and just do it a little differently. I kind of look at it as similar to what Telus did to us," he said, referencing Telus's entry into the television market in Alberta and British Columbia through its IPTV (Internet protocol television) offering about five years ago.

Alek Krstajic, the CEO of Wind, who will remain with Shaw and run the mobile business, compared the deal to Telus's own purchase of Clearnet Communications Inc. in 2001, noting that Clearnet had fewer than 900,000 subscribers at the time while Wind has 940,000 customers now. "[Telus CEO] Darren Entwistle paid $6.6-billion. Brad Shaw paid $1.6-billion. I'd say that's a bargain."

In an interview Thursday, Mr. Krstajic said Wind will be able to integrate Shaw's WiFi hotspots with its cellular network. He said Wind selected Nokia as its exclusive network supplier – which it announced last week along with up to $425-million in new financing – with the Shaw combination in mind, explaining that he expects Nokia's technology will allow for the seamless transition of calls between the wireless and WiFi networks.

Telus chief financial officer John Gossling responded to the news Thursday with an e-mailed statement, saying the company is not worried. "Telus has always welcomed increased competition and we look forward to competing with Shaw in the wireless market. We are confident that our national LTE network combined with our highly differentiated customer service experience will continue to position us well with existing and future wireless and wireline customers."

Canaccord Genuity analyst Aravinda Galappatthige suggested the market overreacted to the news, and said he did not expect Wind to offer aggressively low prices under Shaw's ownership.

Shaw acquired licences for wireless airwaves in a 2008 spectrum auction for $189-million but only completed the sale of that asset to Rogers this summer. The Calgary-based company also sat out three spectrum auctions in recent years.

When asked why they finally decided to move into wireless after just selling spectrum and passing on the auctions, Shaw executives said the Rogers option deal was struck in 2013 but just closed this year due in part to regulatory uncertainty. And in this year's auction for AWS-3 (advanced wireless services) spectrum, Shaw did not qualify to bid under the attractive rules for new entrants because it did not have an operating wireless business.

Mr. Shaw said they did not want to "go greenfield," meaning build a network from the ground up, and viewed buying Wind as a way to "accelerate our opportunity in wireless and de-risk it."


Canada's wireless landscape


  • Subscribers: 940,000
  • Blended ARPU: $35.81


  • Subscribers: 8.2 million
  • Blended ARPU: $65.34


  • Subscribers: 9.8 million
  • Blended ARPU: $61.02


  • Subscribers: 8.4 million
  • Blended ARPU: $64.22


  • Subscribers: 742,500
  • Blended ARPU: $49.08

*Blended ARPU is average revenue per user for all prepaid and postpaid wireless customers.

Source: Most recent company reports

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