Rogers Communications Inc. (RCI), the largest cable operator in Canada has signed an agreement with Shaw Communications Inc. (SJR) to secure an option to purchase the latter’s AWS spectrum holding in 2014 along with acquiring Shaw’s Ontario-based cable business – Mountain Cablevision Limited. According to Rogers, the alliance apart from strengthening its wireless network will also bring synergies for its cable business.
Shaw, on the other hand, will acquire Rogers’ one third interest in specialty TV Network – TVtropolis -- and will negotiate with the largest cable operator for starting certain services in Western Canada. Shaw has to spend $59 million to get hold of TVtropolis and the transaction is expected to close in the first half of 2013, subject to regulatory approvals.
Shaw’s AWS spectrum covers 188 million MHz POPs (Point of Presence) including 20MHz across Alberta and Manitoba and 10MHz in Saskatchewan and Northern Ontario markets. The acquisition of Shaw’s unused spectrum is vital for Rogers as it will allow the company to maintain its network leadership position in western Canada where it has a significant share of the wireless market.
Additionally, integrating Mountain’s bundled cable, Internet and telephone service with itself will allow Rogers to expand its operations in the Southern Ontario and will provide cost synergies for the cable MSO (Multi Service Operator) in due course. Similar to TVtropolis, the Mountain transaction will also close in the first half of 2013, subject to regulatory approvals.
Rogers will initially invest $250 million to acquire Mountain and pay $50 million for the option to purchase Shaw’s spectrum. A final consideration of $400 million will be paid if Rogers exercises its option of acquiring the spectrum, and also takes into account the service agreement between Rogers and Shaw, which will bring the total consideration to $700 million. Rogers will be able to exercise its option in the period between receiving approval from Industry Canada and Competition Bureau and its expiry in March, 2015.
Shaw’s decision to offload its spectrum assets doesn’t come as a surprise as the company abandoned its plan to enter the Canadian wireless market on September 2011 and decided to sell its existing wireless spectrum. The company focused on building a cheaper Wi-Fi network, which will enable offloading 3G/4G wireless data traffic across a short distance.
We believe the money received from the spectrum sale will allow the company to build its Wi-Fi network and will enable its customers to connect smartphones, tablets, and other mobile devices to Internet in a cost effective manner. Acquiring Mountain will solidify Rogers’ position as a pure-play Canadian broadcaster as it had previously acquired a 100% stake in specialty TV business of Canwest Global Communications Corp.
Higher proliferation of smartphones and tablets along with increased games, HD-movie downloads are exerting huge pressure on networks, resulting in slower network speed. Rogers remains committed to invest in spectrum to meet this growing demand of mobile Internet services. We expect the company to exercise its option of acquiring Shaw’s unused spectrum as it will aid its customers in the form of increased network speed.
We maintain our long-term Neutral recommendation on Rogers Communication Inc. Currently, it holds a short-term Zacks Rank #3 (Hold).
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