Rogers, Shaw shares surge after Competition Tribunal approves merger
Competition Bureau is appealing the tribunal's decision
Shares in both Rogers Communications Inc. and Shaw Communications Inc. rose Friday after a challenge to the merger of the two telecom rivals was dismissed by the Competition Tribunal.
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The Competition Tribunal rejected the Commissioner of Competition’s attempt to block the $26-billion deal, saying that Rogers’ plan to sell Shaw’s Freedom Mobile assets to Quebecor Inc. would ensure there would be four strong players in major markets.
The only thing now standing in the way of one of the biggest corporate combinations in Canadian history is approval from Innovation, Science and Economic Development Canada (ISED), led by minister François-Philippe Champagne.
Shares in Rogers were trading more than 5 per cent higher at $64.10 on the TSX Friday after the tribunal’s decision was released late Thursday night. Shaw shares rose more than 9 per cent to $39.07.
In the decision, the three-member tribunal rejected arguments that combining the two telecom giants would substantially lessen wireless competition, particularly after the companies struck a side deal to sell Freedom to Quebecor’s Vidéotron Ltd., a major player in Quebec, but with little presence elsewhere.
On Friday, the Commissioner of Competition advised the companies that it is appealing the tribunal decision that would permit the merge and Quebecor’s acquisition of Freedom Mobile, and applying for an injunction to prevent the proposed transactions from closing pending disposition of an appeal.
“We remain committed to these pro-competitive transactions that will bring more choice, more affordability and more connectivity to Canadians,” Rogers and Shaw said in a joint statement.
“The Tribunal’s decision was the right one, and the Tribunal was clear in its summary that the transactions we have proposed are not likely to substantially lessen competition in Alberta and British Columbia. Instead, as the Tribunal found, the transactions will likely result in an intensifying of competition.”
The statement added that the companies “are deeply disappointed that the Commissioner continues to attempt to deny Canada and Canadians the advantages that will come from these proposed transactions.”
During four weeks of hearings, lawyers for the bureau argued that the sale of Freedom to Quebecor would not be enough to mount a serious challenge to a larger Rogers and the country’s two other big telecommunications companies, BCE Inc. and Telus Corp., and insisted that Freedom would be weaker outside Shaw.
But the tribunal rejected those arguments, saying the three-way arrangement stipulates that Shaw would first transfer Freedom to Vidéotron, and that Rogers would only then acquire the remainder of Shaw through an amalgamation arrangement.
“The tribunal has determined that the proposed transactions and ancillary agreements comprising the arrangement … are not likely to prevent or lessen competition substantially,” the decision said. “In other words, the merger and divestiture are not likely to result in materially higher prices, relative to those that would likely prevail in the absence of the arrangement.”
The tribunal also concluded that the merger and divestiture likely wouldn’t result in materially lower levels of non-price competition — namely service, quality, variety and innovation — relative to what would likely exist in the absence of the arrangement.
“We are pleased with the favourable decision from the Competition Tribunal and thank the tribunal members for their work in rendering a swift decision,” the two companies said in a joint statement. “This is an important milestone in the regulatory process and moves us one step closer to closing a series of transformative transactions proposed by Rogers, Shaw, and Quebecor. We look forward to reviewing the details of the decision and working with the Minister of Innovation, Science and Industry so we can clear the final regulatory hurdle to close these transactions.”
Rogers and Shaw have extended the outside date for the merger’s closing to Jan. 31, which automatically extends Quebecor’s acquisition of Freedom to the same date.
Rogers announced its plan to take over Shaw more than a year ago. The deal received a fairly easy pass through the Canadian Radio-television and Telecommunications Commission, albeit with more expensive conditions than initially envisioned. But it hit an unexpected snag when the Competition Bureau sought a “full block” of the acquisition.
Freedom emerged as a sticking point, because the brand’s success was seen in Ottawa as proof that a fourth player could keep BCE’s Bell, Rogers and Telus on their toes. Rogers turned to Quebecor, which analysts viewed as an obvious buyer of Freedom, because its assets would allow chief executive Pierre Karl Péladeau to expand wireless services outside his home province.
Quebecor had been left out of earlier talks due to contentious past dealings with Rogers. The $2.85-billion price tag on Freedom was lower than analyst estimates of its value and about $900 million less than Anthony Lacavera said his company, Globalive Capital Inc., was willing to pay.
Some said it would take an outsider such as Lacavera to disrupt the clubby telecommunications industry. However, the tribunal sided with those who said only an established company with lots of resources could realistically challenge companies as large and entrenched as the big three telcos.
“Vidéotron is an experienced market disrupter that has achieved substantial success in Quebec,” the tribunal said. “It has drawn upon that experience to develop very detailed and fully costed plans for its entry into and expansion within the relevant markets in Alberta and British Columbia, as well as in Ontario.”
Once Vidéotron buys Freedom, the tribunal concluded, a bundled offer with recently acquired VMedia Inc. will likely be priced the same as what bundled offerings of Shaw Mobile and Freedom would have cost in the absence of the merger.
The tribunal determined that the same is likely to be true for the “wireless only” offerings from Freedom and Vidéotron’s digital Fizz brand, relative to the corresponding offerings of Shaw Mobile and Freedom.
In addition, the tribunal said Vidéotron, which is in the process of rolling out 5G services in Quebec, will likely do the same in Alberta and B.C. within a timeframe that will ensure competition is not substantially prevented or lessened.
“It bears underscoring that there will continue to be four strong competitors in the wireless markets in Alberta and B.C., namely, Bell, Telus, Rogers and Vidéotron, just as there is today,” the ruling said. “Vidéotron’s entry into those markets will likely ensure that competition and innovation remain robust.”
Lacavera, who tried to buy Freedom — which was built on mobile assets he sold in 2015 — called on the government to stop the Rogers-Shaw merger and the sale of Freedom to Quebecor.
“It is no surprise that the Competition Act that has failed to protect Canadians every single time from anti-competitive mergers like this one for the past 40 years has failed us yet again,” he said in a statement Friday morning.
“It is obvious to anyone familiar with the Canadian telecom industry that allowing Rogers to acquire Shaw will lead to even greater industry concentration, even less competition and, of course, even higher prices for Canadians.”
W. Michael Osborne, chair of the Canadian Competition Practice at law firm Cozen O’Connor LLP, said the tribunal ruling is a win for the companies.
“This was not a narrow victory by Rogers. The commissioner’s case seems to have been comprehensively rejected,” he said. “The tribunal didn’t just find that the merger would not cause a substantial lessening or prevention of competition; it went further, finding that as modified by the divestiture would increase competition.”
As for ISED approval, Champagne signalled a willingness to approve the sale of Freedom to Quebecor/Vidéotron in October by laying out conditions he would find acceptable for the transfer of wireless spectrum.
Vidéotron would have to hold Freedom’s spectrum licences for at least 10 years, and bring competitive wireless offerings to Ontario and Western Canada that mirror Quebec, where prices were brought down by around 20 per cent.
On Oct. 25, Péladeau said in a statement that his company would accept Champagne’s conditions and incorporate them into the transaction with Rogers and Shaw.
Desjardins Group analyst Jérome Dubreuil said the tribunal decision means the merger is very likely to be completed, which should help the stock prices of the three companies involved.
“While hurdles remain (which creates some uncertainty on the timing of the close), we believe this is a major development which brings the odds that the deal will ultimately close to approximately 95 per cent,” he said in a note to clients Friday morning.
Maher Yaghi, a telecom analyst at Scotiabank, noted the Competition Bureau has 30 days to appeal the tribunal’s decision and could request an injunction stopping the transactions from closing until an appeal is heard.
“We would not be surprised if Rogers decides to wait to see if and on what grounds the bureau could lodge an appeal before closing, even with an ISED approval,” Yaghi said in a note to clients.
The Competition Tribunal’s dismissal and initial reasons appeared in an decision, posted on its website. The tribunal is “working towards issuing a public version of its full decision in both official languages within approximately 48 hours,” the filing said.
After the summary decision was posted Thursday, one competition expert said the antitrust tribunal — which included Federal Court Chief Justice Paul Crampton and lay members Wiktor Askanas and Ramaz Samrout — seemed to have rushed their decision.
“While disappointing, the decision really is a product of our outdated laws,” Keldon Bester, a consultant and researcher studying issues of competition and monopoly in Canada, said. “And what was interesting to me in particular was just the rushed nature of the decision and the 10 p.m. release of the decision summary is indicative of that.”
Bester, who used to work for the Competition Bureau, said the parties involved in the hearings had requested an expedited process, which aims for a decision between 10 and 30 days after a hearing. In a non-expedited process, the tribunal usually takes more than 200 days on average to reach a decision, he said.
Lawyers for Rogers stressed during the hearings that if a decision wasn’t reached before Jan. 31, the company would have to pay out an additional $250 million to bondholders.
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