Canadian telecoms and media company Shaw Communications has agreed to buy Wind Mobile for an enterprise value of about C$1.6bn (US$1.16bn), making a surprise entry into the traditional wireless sector. The deal, described as a game-changer by analysts, is expected to have quad-play bundling benefits, improve Shaw’s growth profile and make it more attractive to larger consolidators.
Canadian telecoms and media company Shaw Communications (TSX:SJR.B) has agreed to buy Wind Mobile for an enterprise value of about C$1.6bn (US$1.16bn), making a surprise entry into the traditional wireless sector.
Shaw CEO Brad Shaw (pictured with Wind CEO Alek Krstajic) said the deal represents a “transformational” step in the company’s history, providing it with a “unique platform” in the wireless space which will enable it to offer a converged portfolio of services, adding mobile to its DTH, fibre, cable and WiFi offerings.
Shaw, which has a fibre network serving some 3.2 million customers, a DTH business serving 900,000 customers, and owns the Global Television network and speciality channels such as HGTV Canada, described the acquisition as the most efficient operating and financial entry point into wireless.
Wind is the country’s fourth largest mobile network operator with about 940,000 subscribers in Ontario, British Columbia and Alberta and 50 MHz of spectrum in each of these three regions. Shaw expects the target to generate C$485m (US$347m) in revenue and C$65m (US$47m) in EBITDA for FY 2015.
The deal, which will see Wind run as a separate entity and its management remain in place, has come as a surprise to analysts, who generally concur that it is a game-changer.
Barclays TMT analyst Phillip Huang said that, while the deal makes long-term strategic sense, it would have been even more sensible 15 months ago when Wind was a fraction of the price.
Wind chairman and co-founder Anthony Lacavera led a management buyout in 2014 which saw it pay C$135m (US$122.4m) and assume C$160m (US$145m) in debt for VimpelCom’s majority equity/minority voting stake in the company. Wind has, however, since bought additional spectrum at what Huang termed “bargain prices”.
Huang noted that Shaw had reinforced a preference for WiFi over traditional wireless this year by abstaining from the country’s three spectrum auctions, despite favourable conditions, and transferring its 16 AWS-1 licences to Wind as part of a deal with Canadian telco Rogers.
“That’s why we are surprised that Shaw is now buying those assets back six months later at a premium,” Huang said.
RBC Dominion Securities analyst Drew McReynolds said a growing presence in wireless should help Shaw better compete with Telus – one of the country’s big three MNOs – in wireline and capture incremental growth in the Ontario wireless market.
“Should household demand in Canada grow for a bundled wireless-wireline offering, Shaw should be better positioned now to defend its core wireline business,” he said.
“We believe this transaction highlights Shaw’s commitment to growing the company, and in the near term lessens the probability of Shaw being acquired by a larger consolidator given existing rules around wireless concentration.”
Deal specifics and financing
The agreement will see Shaw acquire 100% of the shares of Wind parent Mid-Bowline Group by plan of arrangement. The C$1.6bn enterprise value is based on its quarterly financial statements as of 30 September.
The purchase will be 100% financed with a fully committed bridge facility with the Toronto Dominion Bank and Canadian Imperial Bank of Commerce. The company stressed that it is committed to a financing plan which maintains its investment grade rating, thereby ensuring it has the flexibility to issue debt and equity and sell assets.
Mid-Bowline shareholders have approved the transaction and it is expected to close in Q3 2016, subject to relevant approvals, including from the Competition Bureau and Ministry of Innovation, Science and Economic Development (formerly Industry Canada).
Shaw’s financial advisers on the deal were CIBC World Markets and TD Securities, while Dentons Canada provided legal advice.
McReynolds said that, based on his team’s assumptions, he would expect Shaw’s net debt/EBITDA to increase from 2.3x in FY 2015 to 2.9x in FY 2016 and afterwards decrease by about 0.2x per annum. Shaw reported revenue of C$5.5bn (US$3.9bn) for the year ended 31 August.
Potential for further consolidation
Both Huang and McReynolds believe the deal could lead to further consolidation within the wireless market.
Huang noted that the industry continues to view the four-player structure as unsustainable in the long-term, while McReynolds said Shaw has made itself a much more attractive target to larger consolidators. However, McReynolds has not ruled out a competing bid for Wind.
Huang believes a long-rumoured tie-up between Shaw and Rogers, another of the big three, could still play out if and when the government allows such consolidation.
“In fact, we believe this deal in a way benefits Rogers/big three by keeping Wind off the market, away from potentially more threatening foreign strategic players,” he said, but noted that there is now much less likelihood of a Shaw-Rogers merger in the near term.
McReyonds said he thinks Shaw will have the firepower to remain a “disciplined fourth wireless player”. He too believes the deal effectively closes the door to large, potentially more disruptive foreign strategic players entering the wireless market.
