Cogeco could find a silver lining in the Rogers-Shaw tie-up

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Cogeco Inc. is looking isolated after turning down a multi-billion offer to sell to Rogers Communications Inc. last year, only to see Rogers and Shaw Communications Inc. agree Monday to a $26-billion merger of two of Canada’s largest cable and telecommunications companies.

But there could be a silver lining for the Montreal-based telecommunication company, which could finally land a coveted wireless business if competition concerns force the newly merged behemoth to sell Shaw’s Freedom Mobile.

Wireless concentration is the “big hurdle” to getting the blockbuster deal approved by competition authorities, said David McFadgen, a media and telecommunications analyst at Cormark Securities.

He said the combined entity may be forced to sell Freedom Mobile, which has seven per cent market share in Ontario, British Columbia and Alberta, the provinces in which it operates. And Cogeco, which has no wireless offering in its suite of telecommunication services, would be the most likely buyer.

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McFadgen said concerns that the Rogers-Shaw transaction cannot be completed without divesting wireless operations — together they would have roughly 40 per cent market share — caused Shaw shares to trade at a “big” discount to Rogers’ offer of $40.50 a share for much of the day on Monday. Shaw shares rose as high as $35 after the merger announcement and ended the day at $33.85, up from Friday’s close of $23.90.

It’s not a foregone conclusion that the wireless/mobile business will be up for grabs, with some precedent for negotiated accommodations with competition authorities in the telecommunications sector. But if the opportunity arises, Freedom Mobile would be a good fit for Cogeco, which has struggled to secure a wireless play for its suite of telecommunications services, analysts said.

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Wireless, or mobile, is seen as necessary component for cable and phone companies that secure customers by offering packages including television, internet and phone service. Cogeco has been trying to line up an arrangement that would allow it to become what’s called a mobile virtual network operator, essentially a wireless services provider that doesn’t own the network infrastructure that carries the service — but with no luck so far.

“They’ve wanted to do a MVNO with anyone but no one will give it to them,” McFadgen said.

A number of Bay Street lawyers who specialize in competition law are already involved in the Rogers-Shaw transaction — or think they soon will be — suggesting manoeuvres to keep the wireless assets within the combined company are being contemplated.

One industry observer suggested Rogers and Shaw could be looking to Bell Inc.’s successful acquisition of Manitoba Telecom Services Inc. (MTS) as a roadmap to make the case for continued combined ownership of Freedom Mobile.

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Competition authorities gave the green light to that $3.9 billion MTS acquisition in 2017 after Bell and MTS entered a consent agreement to transfer some wireless spectrum, customers, temporary network access, and six retail stores in Manitoba to another company, Xplornet Communications Inc. Bell had already agreed to divest of some MTS subscribers and retail locations, selling them to Telus Corp.

Wherever the wireless assets wind up in the Rogers-Shaw merger, the combined company will leave Cogeco a small player among Canadian telcos.

Nevertheless, the Audet family, which controls the company through voting stock, is not understood to be a seller, at least for now. Cogeco definitively turned down Rogers’ $5.2 billion for its Canadian assets — the second such offer — last fall. Another company, Altice USA Inc., had offered to buy international assets, bringing the sweetened bid to a total of $11.1 billion.

Despite its small size relative to telecommunication companies like Rogers, Cogeco has long stayed on the sidelines of large cable mergers in Canada. When Rogers offered to buy Quebec’s Vidéotron in 2000, for example, analysts said Cogeco was unlikely to allow itself to be swallowed up in what was expected to be a merger frenzy because the Audet family held a relatively small equity stake compared to other cable barons.

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In last year’s offer from Rogers and Altice, for example, the buyout of the family’s multiple and subordinate voting shares was calculated at $900 million of the sweetened $11.1 billion offer.

Still, analysts suggested that the Rogers-Shaw merger would not completely strand Cogeco if the Audet family decides to sell. Though competition concerns would probably prohibit another solicitation from Rogers, which still owns a large chunk of Cogeco shares, Vidéotron owner Quebecor could look to boost its scale and competitive clout through a purchase of, or merger with, Cogeco.

Officials at Cogeco declined to comment on the implications of the Rogers-Shaw combination. A spokesperson said the company is focused on its growth strategy, which includes investing in broadband and media platforms and “forging ahead with (a) plan to enter the mobile services market to provide more choice to Canadian customers.”

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