The deal Rogers and Shaw have agreed to with Quebecor to spin off Freedom Mobile has some asking if it gives away too much.Dave Chan/The Globe and Mail
Dvai Ghose is principal at Ghose Investment Corp. His clients include Telus Communications Inc. He is the former head of global research and strategic development for Canaccord Genuity Group.
On Rogers’ recent fourth-quarter results call with analysts, David Barden from Bank of America Securities asked an excellent question about the company’s proposed takeover of its rival Shaw.
To alleviate the anticompetitive concerns about the deal, valued at $20-billion, not including debt, the two parties agreed to sell Shaw-owned wireless provider Freedom Mobile to Quebecor’s Videotron under favourable terms – but are those terms too favourable? Mr. Barden asked.
“You’re making the argument,” he said, “that Quebecor – and whatever you’ve done in your agreements with them – it’s going to make them a more effective competitor in the Canadian wireless market, which sounds like a terrible thing if you’re an equity investor in Rogers. I just need a refresher on how this all makes me excited about the Rogers transaction.”
How can a deal between two competitors be good for both?
Rogers chief executive Tony Staffieri answered Mr. Barden by saying that Rogers is not concerned about the competitive threat posed by Quebecor, apparently contradicting the testimony he provided a week earlier to the standing committee on industry and technology (INDU), when he said, “There is no company better placed than Videotron to extend and amplify Freedom’s competitive impact.”
So which is it?
Either Rogers is acquiescing to terms that will make Quebecor a major national wireless player in order to win approval for its obsession with buying Shaw’s cable assets – to Rogers’ own detriment – or Rogers thinks Quebecor will not succeed as a competitor despite its concessions and may eventually sell Freedom Mobile to a national carrier, as we’ve seen previously with Mobilicity and Public Mobile (and Microcell and Clearnet in an earlier generation).
Either scenario is plausible. Neither bodes well for consumers.
The past holds some lessons: In 2013, Rogers signed a wireless network-sharing deal with Quebecor to jointly build and maintain infrastructure for an LTE cellular network in Quebec, even though at the time Quebecor was a fledgling wireless provider and Rogers a dominant operator in Quebec and across Canada.
Rogers came to regret the deal, as it overly benefited Quebecor, allowing it to enjoy Rogers’ superior network coverage in Quebec. Perhaps unsurprisingly, the agreement ended badly, and Quebecor is suing Rogers for allegedly walking away from the deal and building a parallel network for its exclusive use. Quebecor claimed breach of contract and “bad faith” negotiations.
In Rogers’ obsession with Shaw, history may repeat itself. If Quebecor is successful in the West and Ontario with Freedom Mobile, it may drive lower pricing, as we have seen in Quebec. However, history suggests that Quebecor will only be successful if it spends very little on Freedom’s network and relies on Rogers’ instead.
This scenario could reduce overall telecommunications investment and would not provide Canadians with greater network choices – a pressing issue for Canadians and regulators since Rogers’ outage last July. It would also leave Canadians questioning why Quebecor has been allowed to repeat its track record of investing minimally while benefiting from spectrum subsidies, yet predicating its plan for Freedom on being able to access Rogers’ spectrum and networks.
These concerns, and the lack of transparency, were raised repeatedly at a recent INDU meeting. Quebecor refused to disclose how much undeployed spectrum it holds outside Quebec.
When pressed at committee about his commitment to follow through on his business plans, Pierre Karl Péladeau, the CEO of Quebecor, redirected his answer to the mobile virtual network operator (MVNO) or resale rules rather than agree to be bound by a business plan. This clearly seems to indicate that Quebecor is more interested in changing the resale rules to make it easier for Freedom to use Rogers’ (and Bell’s and Telus’) wireless networks rather than investing in Freedom’s networks.
But perhaps the most likely outcome is that, like its new entrant peers, Quebecor will fail. Despite collectively receiving billions in government spectrum subsidies and mandated roaming on incumbent networks, Mobilicity and Public Mobile failed as independents, as did Clearnet and Microcel before them. It’s noteworthy that one of Shaw’s justifications for the deal is that it has failed to make Freedom profitable and is ready to throw in the towel.
In conclusion, while Mr. Staffieri has presented the Rogers-Shaw deal as a “win-win” for both companies, that is a near-impossible situation. But it could be a “lose-lose” for Canadians, regardless of whether Quebecor succeeds in operating Freedom Mobile.