Tuesday, September 26

Quebecor seen as clear winner in Freedom Mobile deal as Rogers faces pressure

Rival could prove a fierce competitor but Rogers needs to get the deal done

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Quebecor Inc. is being viewed as a clear winner in an 11th-hour agreement by Rogers Communications Inc and merger partner Shaw Communications Inc. to sell Shaw’s Freedom Mobile wireless assets to the Montreal-based telecom in hopes of overturning Canada’s competition watchdog’s objections to their $26-billion combination.

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“While it appears the market was generally not in favour of QBR (Quebecor) buying Freedom, we believe there was a price at which the acquisition made sense — $2.85 billion is below that level, in our view,” Desjardins analyst Jerome Dubreuil said in a note to clients Sunday night.

The analyst had estimated a valuation as high as $4.1 billion on the Freedom assets before the sale to Quebecor was announced late Friday, but he noted that Rogers was facing pressure because a previous divestment “remedy” had been rejected and a hearing before the Competition Tribunal could keep the merger of Rogers and Shaw in limbo into 2023.

“Time constraints likely put QBR (Quebecor) in a good spot,” the analyst wrote. “We believe putting forward a very credible bidder (in terms of its potential impact on competition in wireless) was RCI’s (Rogers) best shot at trying to reach a negotiated agreement with the Competition Bureau, which accelerates the process.”

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The outcome will determine the next phase of wireless competition in Canada, with the federal government having long pushed for the establishment of a viable fourth national player to compete with Rogers, BCE Inc.’s Bell, and Telus communications Inc.

Dubreuil said Quebecor may prove to be a fierce wireless competitor to Rogers and the other incumbents in Freedom’s territories of British Columbia, Alberta, and Ontario, as it has been in its home market of Quebec. Quebecor’s chief executive Pierre Karl Péladeau has made it known that his intention is to expand nationally and bring down wireless prices. But Rogers faced more dire possibilities if it didn’t make a deal quickly, the analyst said.

“Freedom is being sold to a competitor which has shown strong operational capabilities in wireless over the last decade,” Dubreuil wrote. “However, we believe the impact of these considerations is dwarfed by the increased odds that the (Rogers-Shaw) deal will close.”

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The blockbuster merger agreement between the Toronto and Calgary-based telecom giants was forged last year, but it was delayed until the end of July once the Competition Bureau moved to block their marriage after concluding it would reduce wireless competition and raise prices for consumers.

The new plan to sell Freedom’s assets to Quebecor also requires approval from the Competition Bureau, as well as Innovation, Science and Economic Development Canada, the federal government body that has yet to formally weigh in on the Rogers-Shaw combination.

Over the weekend, the plan for Freedom Mobile came under fire from Globalive founder Anthony Lacavera, who called the sale process “anti-competitive,” and said his company bid $900 million more than the price Quebecor, Rogers and Shaw have agreed on for the Freedom assets.

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Lacavera, who has said he was excluded from the sale process — Quebecor was initially as well — contended that the Montreal-based cable and media company was eventually selected as the Freedom Mobile because it is not a pure-play wireless operator, so buyer it could not shake up wireless pricing the way Globalive could without risking a “retaliatory strike” from Rogers, Bell, and Telus against its “legacy” businesses that include cable, phone, and internet.

He questioned whether the federal government, which has made clear a desire to stimulate wireless competition and bring down prices nationally, would accept a proposal that he argues “maintains the oligopoly status quo” rather than ensuring a “true independent and well-capitalized competitor. ” Globalive previously owned Freedom mobile’s wireless assets, which were run under the WIND banner until Shaw bought them in 2015 and rebranded.

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Quebecor chief executive Pierre Karl Péladeau has been vocal about his desire to replicate the competition his company has brought to Quebec in other parts of Canada. To that end, Quebecor spent $830 million in the wireless spectrum auction last year, and challenged Telus Communications Inc. in court over the company’s eligibility to do so.

Dubreuil, the Desjardins analyst, said if Quebecor wins approval to buy Freedom, it would be well positioned to benefit from new regulatory policy that requires national wireless incumbens to negotiate network-sharing arrangements with regional players while they build their own — an advantage he previously attributed to Shaw.

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The analyst said he believes Quebecor will target a less capital-intensive mid-range wireless service, noting that Canadian wireless networks rank very high globally in terms of quality.

“Not everyone needs a Porsche,” Dubreuil wrote.

He said that while he expects Quebecor to run Freedom for some time, a purchase of spectrum at what appears to be a price below the $3 to 3.40 MHz per population that incumbents paid in the last auction will give the company some “downside protection” on its investment.

“In our view, while QBR did not need the Freedom acquisition,” the analyst wrote, “we believe it was at a crossroads between growing fast (which it chose) or ramping up shareholder distributions, which would have been a perfectly acceptable choice from our standpoint if the price for Freedom had been higher.”

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