Why the Shaw Communications Inc and Rogers Communications Inc. Wireless Deal Is in Jeopardy

How Shaw Communications Inc (TSX:SJR.B)(NYSE:SJR) and Rogers Communications Inc. (TSX:RCI.B)(NYSE:RCI) could get hosed by the federal government.

The Motley Fool

In 2008, Shaw Communications Inc (TSX: SJR.B)(NYSE: SJR) spent $189.5 million purchasing wireless spectrum from the federal government, which covered Northern Ontario, Manitoba, Saskatchewan, Alberta, and B.C. At the time, the company’s plan was to use its brand strength out west to diversify into the world of wireless, taking on the incumbents.

For years, the company sat on its spectrum. After estimating in 2011 that it would take more than $1 billion just to roll out the network — not to mention the costs of setting up hundreds of retail locations to sell to consumers — Shaw quietly closed the book on its wireless story. It chose to focus its attention on setting up thousands of Wi-Fi locations across the west instead, trying to strengthen its internet service by giving customers access to fast, secure Wi-Fi on the go.

In 2012 Shaw made it official, entering into a deal with Rogers Communications Inc. (TSX: RCI.B)(NYSE: RCI) that gave Rogers the option to acquire Shaw’s spectrum. Financial details of the deal haven’t been announced, but it’s believed that Rogers would pay $300 million for it. Rogers has already given Shaw a non-refundable $50 million deposit as a show of good faith.

When Shaw bought the spectrum in 2008, the rules that the federal government had set out were relatively simple. If Shaw chose not to use it, it could sell the spectrum to any telecom player it chose, whether it was a new player or incumbent, provided five years had passed.

Now? Things aren’t quite so simple. The federal government has made it clear that it doesn’t want the so-called big three telecom companies further expanding their networks. Telus Corporation (TSX: T)(NYSE: TU) has tried three times to buy Mobilicity, each time getting blocked by the feds. Currently, Mobilicity is in creditor protection.

If the federal government blocks the sale of this spectrum to Rogers, what are Shaw’s options?

The most obvious solution is to enter into some sort of partnership with Quebecor Inc. (TSX: QBR.B), which already has a wireless presence in Quebec, and recently bought spectrum across the most populous parts of the rest of the country. But Shaw already balked once at building a network, so it’s likely not going to go down that path. Quebecor could buy Shaw’s spectrum, but it already has a stretched balance sheet, and that will just add to the cost of what’s already going to be an expensive rollout.

The Canadian government is all but rolling out the welcome mat for a foreign competitor to acquire spectrum from Mobilicity and Wind Mobile. If a foreign presence does enter the Canadian market, analysts think it’s likely that Shaw sells its spectrum to this new buyer. But is it as valuable to a new player? Probably not. The sale price in that situation could be 40-50% less than a sale to Rogers.

How much will this affect Shaw’s shareholders? Ultimately, not much. Shaw has a market cap of $12.6 billion. If the company ends up not getting a dime for its spectrum (which is possible if it doesn’t use it within 10 years of purchase), that’s only a loss of approximately 70 cents a share based on the $300 million Rogers is rumoured to be willing to pay.

Still, it matters. Many Shaw shareholders wouldn’t mind the sale being used as an excuse to increase the company’s dividend, which currently stands at 4.05%. I don’t care how big a company is, $300 million isn’t chump change.

Will Shaw be able to complete the sale of its wireless spectrum? At this point, all signs point to no. And in the short term, it will affect the stock. Investors looking to pick up or add to their Shaw holdings would be better off to wait, at least a little while.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Nelson Smith owns preferred shares of Shaw Communications.

More on Investing

Canadian dollars in a magnifying glass
Dividend Stocks

3 High-Yield Dividend Stocks That Are Screaming Buys Right Now

Are you looking for great income stocks? Here's a trio of high-yield dividend stocks that pay insane yields right now.

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Bank Stocks

Best Stock to Buy Right Now: TD Bank or Manulife Financial?

Manulife continues to see momentum in its business and stock price, while TD Bank stock remains down and out.

Read more »

cloud computing
Tech Stocks

3 No-Brainer Tech Stocks to Buy With $1,000 Right Now

These three Canadian tech stocks could be among the best growth opportunities in the market right now.

Read more »

Piggy bank with word TFSA for tax-free savings accounts.
Dividend Stocks

Transform a $5,000 TFSA Into a $50,000 Retirement Nest Egg

The TFSA is a powerful tool that can grow a small investment into a substantial retirement nest egg over time.

Read more »

Canadian Dollars bills
Metals and Mining Stocks

2 Cheap Canadian Stocks Under $20 to Buy This November

Cheap TSX stocks such as Endeavour Silver are trading at an attractive valuation in November 2024.

Read more »

happy woman throws cash
Tech Stocks

3 Growth Stocks That Could Be Long-Term Wealth Creators

These three growth stocks aim to grow their financials at a higher rate than the industry average, thus delivering superior…

Read more »

how to save money
Bank Stocks

This 5.9% Dividend Stock Pays Cash Every Month

First National Financial (TSX:FN) has a 5.9% yielding dividend that is paid out monthly.

Read more »

gift is bigger than the other
Investing

The Best Canadian Stocks to Buy With $5,000

These Canadian companies have solid growth prospects and the ability to deliver profitable growth even at a large scale.

Read more »