Initial reactions to the deal surrounding Quebecor’s purchase of Freedom Mobile are favorable to the Quebec telecommunications conglomerate. National Bank Financial is so enthusiastic that it changes its recommendation and henceforth suggests buying the shares from the owner of Videotron.
Posted at 6:00 am
Quebecor, Rogers and Shaw announced a settlement Friday night under which Quebecor agrees to pay $2.85 billion for Freedom Mobile, a wireless carrier active in Ontario, Alberta and British Columbia. The deal would add approximately 1.3 million subscribers to Quebecor’s customer base.
Not only is the transaction announced at a reasonable price, argues analyst Adam Shine of National Bank Financial, but it also doesn’t require a share issue or a financing partner to materialize.
The expert said in a note written Sunday that he expects Freedom to adopt the name of Fizz, Videotron’s low-cost cell phone and internet provider, and that Quebecor offers wireless and bundled (internet and wireless) services in Ontario, Alberta. and British Columbia through an agreement to resell Rogers Internet services purchased wholesale through an agreement.
Rogers and Shaw agreed to sell Freedom Mobile this spring to convince regulators to approve Rogers’ acquisition of Shaw, a deal valued at $26 billion (including debt).
Adam Shine says he disagrees with the Competition Bureau, which last week reiterated its opposition to Shaw’s marriage to Rogers, saying selling Freedom Mobile would not be an effective solution and would weaken Freedom as a competitor.
His colleague Jérôme Dubreuil, of Desjardins Securities, adds for his part that the Freedom agreement allows Quebecor to “harvest low-hanging fruit” and broaden its horizons at a “reasonable” price while increasing the probability of achieving the merger of Rogers with Shaw.
Quebecor’s track record, balance sheet, experience and assets are elements that make it increasingly difficult for the regulator to say that the competitive environment will be materially affected by a Rogers-Shaw merger.
“It is difficult to predict the next action that the Competition Office will take, but the regulator is encouraged to resolve the file quickly so that Quebecor can compete effectively as soon as possible,” it adds.
This analyst also expects a positive reaction from investors on Monday. “Although the market has so far seemed generally unfavorable to Quebecor’s acquisition of Freedom, the transaction made sense at a given price. And with $2.85 billion, Quebecor is making a deal at an attractive price, he says. Previously, it had valued Shaw’s wireless assets at more than $4 billion.
Jérôme Dubreuil specifies, however, that Quebecor’s leaders will need to provide more details on the financial strategy and expectations in order to reassure investors and allow Quebecor’s action to actually reduce the valuation discount currently being seen on the security.
Starting up wireless activities outside of Quebec entails, among other things, financial risks.
Jérôme Dubreuil in particular believes that Quebecor could slow the pace of its share buybacks and the growth of its dividend.
“Shaw has significantly decreased its capital expenditures since the announcement of its merger with Rogers, and Quebecor will have to catch up in terms of wireless investments. He estimates that Quebecor will have to invest $200 million simply in recovery expenses during the first three years after the transaction.
Jérôme Dubreuil also expects competitive intensity, ie price pressure, to increase in the wireless market once the merger is complete.
A settlement of the $850 million lawsuit filed last fall by Quebecor against Rogers is also not part of the Freedom Mobile settlement. Adam Shine points out, however, that the friendly negotiations that led to a settlement by Freedom could pave the way for Quebecor to drop legal action the company had brought by claiming that Rogers had “artificially caused an impasse” in a settlement made to create a common 4G LTE wireless network in Quebec and the Ottawa region.
Now there are 10 analysts out of 12 to recommend the purchase of the Quebecor share.