Rogers Communications, Canada’s largest wireless carrier, today announced an agreement to acquire all of Shaw Communications’ Class A and Class B shares in a transaction valued at $26.2bn Canadian dollars ($21.0bn USD), inclusive of $5.8bn Canadian dollars ($4.6bn USD) of Shaw debt and preferred shares, in order to expand its 5G and fiber presence. Specifically, the offer price of $40.50 per share represents a 70% premium for Shaw Communications’ shareholders, giving the company an equity value of $20.4bn Canadian dollars ($16.4bn USD).

Overall, the long-awaited transaction values Shaw Communications at 10.7x 2021E EBITDA based on consensus estimates. Additionally, the valuation for Shaw Communications reduces to 7.6x EBITDA, post-synergies of $1.0bn Canadian dollars ($800m USD) annually.

Rogers expects to reap these synergies within two years of closing, which will occur in the first-half of 2022. Indeed, these synergies help to make the transaction significantly accretive to Rogers’ earnings and cash flow per share.

Shaw Communications – Overview

Shaw Communications, which primarily operates in Western Canada, is the country’s second-largest cable company. Additionally, the company is a ‘challenger’ wireless carrier under the brand Freedom Mobile (including Shaw Mobile), which was formerly known as WIND Mobile. Through Freedom Mobile, Shaw Communications offers wireless services in the provinces of Ontario, British Columbia, and Alberta. Finally, the company owns Shaw Direct, making it a direct satellite TV provider across Canada.

Overall, Shaw Communications has 2.1 million broadband internet subscribers, 1.9 million wireless subscribers, 1.4 million cable video subscribers, 1.0 million home phone customers, and 656k satellite video subscribers.

As competition in broadband internet has grown, particularly from TELUS, and the need to invest more for 5G, in both spectrum and digital infrastructure, Shaw Communications has become more open to pursuing strategic alternatives. Indeed, these factors helped bring forward the often-suggested combination between Rogers Communications and Shaw.

Transaction Rationale – Rogers Communications

Rogers Communications is the largest wireless carrier in Canada with 10.9 million wireless subscribers and is a leading broadband provider with 2.6 million broadband internet subscribers. For Rogers, the acquisition of Shaw is premised on the company’s significant fiber infrastructure.

Rogers Shaw Communications 5G Canada Fiber Transaction Map

Specifically, Shaw Communications has 7.5k+ fiber route miles (12k+ fiber route kilometers) throughout Canada. Indeed, this digital infrastructure is becoming increasingly important as 5G roll-outs occur in Canada and convergence occurs between wireless and wireline services. For example, Rogers requires significant fiber infrastructure to connect with its towers, for backhaul purposes, in a 5G environment.

Scaled 5G Network Investments

The Rogers and Shaw Communications transaction creates a nationwide wireline network and wholly-owned national wireless network. Additionally, Shaw brings valuable spectrum holdings, which will add to Rogers Communications’ network capacity for 5G services. Specifically, Shaw is using its 29 MHz of national average spectrum depth in the low-band, 600 MHz frequency range, as the foundation for its 5G network.

Furthermore, as part of the transaction, the combined company will invest $2.5bn in 5G networks, over the next five years, across Western Canada. This investment will supplement Shaw Communications’ significant cable and fiber infrastructure in the region.

Stronger Wireline Competitor

As a result of this deal, Rogers will gain access to Shaw Communications’ deep fiber network across Western Canada, which will enable it to grow both its consumer and enterprise fiber offerings. Importantly, 80% of Shaw’s revenues and 97% of its free cash flow are earned from its wireline business. Indeed, by Rogers Communications increasing the scale of its fiber network through Shaw, the company will also be a stronger competitor to Bell and TELUS for large enterprise and government customers across Canada.

Furthermore, Rogers and Shaw each ‘pass’ a similar number of households with broadband services, at 4.6 million homes passed. Importantly, these wireline networks are very complementary, given that they are largely built-out in different provinces of Canada. With greater scale, the combined business will be able to more efficiently upgrade its wireline network to offer fiber-to-the-home capabilities.

Fixed Wireless Access (FWA) Expansion

The acquisition of Shaw Communications and, in particular, its spectrum will enable Rogers to further expand its Fixed Wireless Access (FWA) offering, which is a broadband alternative to wired home broadband. Indeed, Fixed Wireless Access (FWA) is particularly relevant in suburban and rural Canadian markets. This is because these households often lack access to fiber and/or cable internet alternatives.

Rogers Communications will leverage its and Shaw’s low-band 5G spectrum, to bring Fixed Wireless Access (FWA) services to rural communities. Specifically, Fixed Wireless Access (FWA) allows Rogers to cost-effectively stretch its network and footprint capability into these less-densely populated areas. In turn, Rogers sees this as a higher return-on-investment format for providing broadband services at scale. Rogers notes that the alternative is trenching and extending its fiber networks to rural communities, which is not economically feasible.

Transaction Structure

Rogers Communications’ offer is a 100% cash deal, except for 60% of the shares held by the Shaw family, which will be exchanged for Class B shares of Rogers. The exchange ratio for these shares represents a conversion rate of 0.70x for each share of Shaw. In turn, this results in 23.6 million shares of Class B shares issued by Rogers to Shaw shareholders on closing. Following completion of the transaction, the Shaw family will be a 4.5% shareholder in Rogers.

Additionally, 100% cash consideration will be paid for shares not held by the Shaw family. Therefore, the cash component of this transaction will be $19bn Canadian dollars on closing.

Transaction Advisors

Bank of America and Barclays acted as financial advisors to Rogers Communications on the Shaw transaction. Additionally, Goodmans was the legal advisor to Rogers Communications.

TD Securities acted as financial advisor to Shaw Communications. Additionally, Davies Ward Phillips & Vineberg and Wachtell, Lipton Rosen & Katz acted as legal advisors to Shaw Communications.

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