As you know by now if you’re tuned into the Canadian business world, Shaw has agreed to be taken over by Rogers for a price of $40.50/share. And yet, Shaw’s share price stands at only ~$33/share. What’s the deal?
The deal is that there might never be a deal. The Competition Bureau (CB) ultimately has a big say in whether they will allow this deal to move forward. And the Bureau wants to ensure that there is a reasonable degree of competition in the Canadian telecoms market.
At least this is the main train of thought keeping the share price so much lower than the deal price of $40.50. In this post I will clarify as much as possible the state of the acquisition. The fate of Shaw hangs in the balance.
To the best of my understanding, there are at least three regulatory agencies which the deal must pass: the Competition Bureau, the ISED, and the CRTC. In this article I will only discuss the Competition Bureau and its proceedings. Information about the current proceedings of the other two is scarce to non-existent.
Possible Outcomes
As I said before, the Competition Bureau is the regulator which poses the greatest threat to this deal. It operates to enforce the Competition Act in Canada. Under their guiding principles, rule number one of the Competition Bureau is confidentiality. Obviously this makes it very hard to get up-to-date information on where they are in their proceedings! What I can say is that they have started their investigation into the matter, as they recognized it formally on March 15.
The Competition Bureau, at the end of their Merger Review, will give the deal one of four ratings: ARC, NAL, CA, or JD.
- ARC stands for Advanced Ruling Certificate, which is basically a “pass”. This rating means the deal has passed the CB, and can move forward according to the CB.
- NAL is short for “No Action Letter” meaning that the CB is not currently going to stop the deal, but reserves the right to stop the deal going forward. To the best of my knowledge, the CB has never taken action after the issuance of an NAL. Therefore, this is also a pass.
- CA stands for “Consent Agreement”. Alternatively, I like to think of it as “Conditional Approval”. This means that the competition bureau believes that the deal will lessen competition. In order for the deal to move forward, the parties must accept the terms of a CA agreement, which often includes selling certain assets to a third party (divesting). Once this is completed, the deal can go forward.
- JD stands for Judicial Decision which means that the Bureau is going to take the matter to the Competition Tribunal or the courts.
If you prefer the school grades system (A, B, C, D, F), I have made the following image.
When Will The Bureau Decide?
The competition bureau usually works pretty fast. For example, the highly publicized merger of Aphria and Tilray, two large Cannabis companies, took only about three months to receive a No Action Letter from the Bureau in March of this year.
Currently, we are in the 30-day waiting period since the announcement of the merger on March 15. After April 15, this deal will enter the second 30-day waiting period. As I said above, a normal Competition Bureau decision would only take a couple of months. But apparently this is not a normal case. And the Bureau reserves the right to take their time.
In this case, there seems to be an understanding that, because of the extremely complex and influential nature of this deal, it will take at least a year. To quote a recent Global News article:
“Rogers chief financial officer Tony Staffieri said that, with the regulatory approvals still at least a year away…
Decision Factors
Business Overlap?
These images show the wireless coverage maps of Rogers and Shaw.
If the companies are currently competing in certain areas of the country, then a merger would obviously lessen competition. To quote the same Global News article:
“There’s little overlap between the Shaw and Rogers cable and internet businesses, which are in western and Eastern Canada respectively, so Natale (Rogers CEO) said he thinks most of the focus will be on their wireless businesses.“
This is the consensus, more or less. Freedom Mobile is Shaw’s mobile carrier, and it competes directly with Rogers in Ontario. The image to the right (Freedom Mobile Coverage) is actually deceptive, as Freedom itself only covers the areas indicated in dark orange, not light orange. We can see that most of the overlap exists in Ontario, followed by Alberta.
In order to lessen this overlap factor, Rogers says they will not raise Freedom Mobile prices for three years. It waits to be seen if this is enough to persuade the Competition Bureau.
This competition issue is well illustrated in this image from Bloomberg.com. The Ontario figure is most alarming.
Public Opinion?
The initial public reaction to this deal is decidedly negative. Consumers feel that their prices will go up as a result – and all signs indicate this is truly the case. But, does the Competition Bureau take public opinion into account?
It seems that it does, at least to a limited extent. In studies conducted by the bureau, such as this study finding that Canadians benefit from more Internet competition, the Competition Bureau polls Canadians. Furthermore, in their strategic vision for 2020-2024, the Bureau says they will be:
“Taking timely action on matters that are important to Canadians using all the tools at our disposal”
Beyond this, they also accept complaints from the public. Something they are getting a lot of as of late.
Since they are apparently getting an “unprecedented amount of feedback” on this deal, I hope that the Bureau pays attention to the public. We are the ones who pay their salary after all, and who they apparently work to protect!
In Conclusion
In conclusion I hope that you understand a little bit more about the Competition Bureau, especially with regard to this case. It is unfortunate that I can’t find more information on the state of the merger review, but I am trying my very best. Let me know your opinions on the deal in the comments. Do you think the Rogers-Shaw merger can pass the competition bureau? As always,
Happy Investing.
