Rogers Communication
Edward S. Rogers is the inventor of world’s first alternating current heater filament for a radio tube. Unfortunately, he died when he was working on an experiment at the age of just 38. His son, Ted, at the time was only 5 years old.
In 1960, when he was still a student, Ted wanted to carry on his father legacy therefore he purchased his first radio station (CHFI). The company under Ted Management rapidly grew, acquiring Canadian Cable Systems in 1979, and it became listed on the Toronto Stock exchange in the same year. Its growth by acquisition kept going, acquiring in 2000 Cable Atlantic and in the following years other strategic transactions were completed in order to become a leading technology and media company operating in wireless, residential, sports, and media to Canadians and Canadian businesses.
Headquartered in Toronto, Rogers Communications is a proud Canadian company, very active on social activities as well. Almost all the revenues and operations are in Canada, counting more than 23.000 employees.
In 2020 Rogers Communications registered 13.9 billion$ in revenues, divided in 3 segments:
Wireless (61%), Cable (28%) and Media (11%)
Shaw Communication
Shaw Communications was founded in 1966 by JR Shaw, originally under the name of Capital Cable Television Company Ltd. but in 1983 went public on the Toronto Stock exchange and change the name after his chairman and founder.
From 1980 the company saw and incredible growth through acquisitions, acquiring 3 cable companies and many televisions stations.
In the 2010s Shaw has invested 30+ billion $ to build one of the most advanced hybrid fiber-coaxial network in North America, thanks to its extensive Fibre+ and Fast LTE networks
Thank to Freedom mobile Shaw is disrupting the Canadian wireless industry, offering better and more affordable offers to its customers.
Nowadays, combining its strength in both the wireless industry and the Fibre+ networks is helping Canadians connect like never before, in fact it introduced the 5G into the country.
Headquartered in Calgary (Alberta), Shaw Communication registered 5.4 billion $ with an incredible 44,2% EBITDA margin in 2020. Its business is divided in wireless (22%) Wireline Consumer (68%) and Wireline Business (10%).
Industry Overview
The telecommunications industry ensures smooth communication globally in the telephone and Internet sector. In the last few years, the 5G networks (latest and most powerful wireless network) have been the centre of attention. This technological breakthrough has led to conflicts around the globe (e.g., China and the US regarding Huawei) as well as mega mergers (Sprint and T-Mobile for $26bn). The global market for 5G is expected to grow at a staggering pace of 122.3% CAGR (Compound Annual Growth Rate) in between 2021-2026, amounting to $667.8bn.
The Canadian telecommunications industry is dominated by 3 main players (Roger Communications, BCE Inc and Telus), generating revenues of more than $74.5bn in 2019. The implementation of 5G networks domestically will be very costly, 150,000 jobs are to be created in between 2020 and 2026 for the construction and engineering of 5G. These high costs have led to a consolidation of domestic markets as industry leaders join forces to face high capital expenditures (e.g., Vodafone Australia’s merger with TPG Telecom for $15bn).
Although costly, introducing 5G networks in Canada will reinforce the domestic economy to the tune of $40bn/year (1.6% of 2026 GDP) by 2026 as well as reduce carbon emissions by facilitating work from home for example.
Deal Structure
On March 15, 2021, the chief executives of Rogers Communication agreed to acquire all the shares of Shaw Communications in a $26bn transaction. The companies believe they will get regulatory and government approval by early 2022.
Under the terms of the deal, Rogers purchases all outstanding class A and B shares of Shaw for $40.50 each. This price represents a 70 per cent premium to Shaw’s class B shares and will be paid in both cash and shares. Rogers will pay 60 per cent of the Shaw’s family shares with its shares and the remaining part in cash. Rogers offered 23.6 million class B shares at an exchange ratio of 0.70 Rogers’ share for one Shaw’s share. The market price of the equity of Shaw is approximately $20bn and the total transaction is valued at $26bn considering the $6bn of Shaw’s debt.
The cash portion of the deal will be financed by a new bank loan that Rogers will receive, and by the money that Shaw will lend to the buyer, through the so-called vendor placing mechanism. The financial advisors to acquiror are Barclays and Bank of America, while the advisors of the target are the Canadian CIBC World Market and TD Securities. The deal values Shaw 10.7 times its latest consensus EBITDA, or 7.6 times EDITDA post synergies. Those are expected to exceed $1bn per year within two years of closing. The transaction would importantly be accretive to earnings from the first year after closing.
Deal rationale
Rogers Communications’ acquisition of Shaw Communications is the biggest deal in the Canadian telecommunications sector in two decades and will create a dominant player in the North American wireless and cable industry. In a merger that has been speculated about for years, Rogers would rise from being the third- to being the second biggest cable operator in Canada, surpassing Telus Corp. and challenging market leader Bell Canada Enterprises for the top spot. As Shaw Communications was the fourth biggest telecommunications operator in Canada, the transaction will consolidate the industry.
One of the key motives behind the combination is to use the resulting scale effects in order to drive infrastructure expansions and network renovations. This is particularly significant against the backdrop of the current, gradual worldwide introduction of the 5G network standard. Further synergies mainly concern technology adoption and customer base sharing, with Rogers gaining better access to Western Canada. Overall, these synergies are estimated to save the combined company roughly $1bn per year.
Shaw Communications CEO Brad Shaw recently alluded that without the combination, his company’s outlook might have been bleak. It would not have had the resources necessary to implement and sustain a competitive 5G wireless network on its own, most probably resulting in a gradual dilution of market share. Rogers Communications CEO Joe Natale labelled the deal a significant milestone in the evolution of Canada’s mobile network quality, stating that the country was “at a critical inflection point where generational investments are needed to make Canada-wide 5G a reality.”
In terms of market share, Shaw’s mobile network service “Freedom mobile” was Rogers’ main rival in Canada. Hence, critics are voicing concerns that the deal will restrict competitiveness in the industry and further increase cable costs across the country, which are already comparatively high. However, Rogers Communications has reacted by pledging that price for “Freedom Mobile” customers will remain unchanged for at least the next three years. While hearings with regulators, most importantly the Competition Bureau, are still ongoing, the deal is expected to receive the green light by early 2022.
Sources:
- Statista
- Factset
- Bloomberg
- Reuters
Authors:
Bocconi Students M&A Circle 