Shaw Communications Inc. announces a $1.6 billion (Enterprise Value) acquisition of Wind Mobile Corp., a privately held wireless carrier with subscribers and infrastructure in Ontario, Alberta & British Columbia. Wind has earned expected revenue of $485 million in 2015, implying Shaw is paying a multiple of 3.3x estimated revenue. With this purchase, Shaw acquires 924,000 wireless subscribers making it the fourth largest Canadian telecom carrier.
This acquisition allows Shaw to diversify its product portfolio adding wireless into its bundle (Already including WiFi internet, fibre broadband, and cable). Shaw previously owned wireless spectrum acquired from the Canadian government in the 2008 wireless spectrum auction for $189.5 million. Rather than building out a Wireless business at that time, Shaw decided to dispose the asset, selling the spectrum to Rogers for an estimated $350 million ($250 million to secure the option and $100 million to execute) yielding a holding period return of 85%.
Shaw is paying 3.3x revenue and 24.6x EBITDA for WIND which appears to be a steep price. Comparable EBITDA multiples for Canadian wireless companies range from 6.0x – 8.1x. However, revenue multiples are in line with Canadian wireless peers trading at 2.8x – 3.1x revenue. The exit multiple of 3.3x implies a premium of between 4% – 17% to secure controlling interest from the private equity consortium of West Face Capital, Tannenbaum Partners, and Globallive Capital, former Wind Founder Tony Lacavera’s investment fund. This deal is likely synergy rich since Shaw has access to Wind’s subscribers, infrastructure, and distribution network of storefronts. It likely also factors in Wind’s current trajectory to grow its subscriber base and ARPU, as subscribers have grown from 800k to 924k and ARPU from an estimated $31 to $43.74. Shaw will likely increase Wind’s monthly average revenue per user up to a figure in line with peers of $61 as the LTE network comes online by 2017.
The incremental EBITDA of $65 million will likely increase, assuming Shaw plans to decrease operating costs with their additional scale, normalizing margins upwards from 13% to 30%. One way this can occur is with better purchasing terms with handset suppliers. For the past year, Shaw’s share price has been a laggard relative to its peers. Year-to-date its share price has fallen 13.97%, compared to the broader S&PTSX composite down 10%. The risk of cord cutting (consumers cancelling their cable subscription to use more internet and mobile services to satisfy their specified utility) applies a greater degree to a firm like Shaw, whose revenue is predominantly cable generated and threatened by the increasing adoption of IPTV. This deal could be the stimulus investors are looking for to regain excitement about Shaw. Shaw insists that it will maintain its investment grade status with the ratings agencies (currently BBB- which is the lower limit for investment grade), and has $398 million of cash on its balance sheet (as of August 31st their last reported quarterly statement) an insufficient standalone amount. The company has secured bridge financing from a consortium of Canadian banks and is not ruling out issuing preferred stock or additional equity either to finance this purchase. This does present some dilution risk to current equity holders. However, this cannot be confirmed until further details are disclosed upon the transaction close.
This will likely apply some pricing pressure on the incumbent carriers BCE, Rogers, and TELUS, but likely not a material downward shift. TELUS may experience a higher Churn as a result in Western Canada as Shaw will offer a stronger product in this region, in which TELUS has a threatening presence. It is reasonable to speculate that Wind’s ARPUs will rise as Shaw continues to fulfill Wind’s current transition from 3G to an LTE network to offer a competitive suite of voice and data services to Canadians. Shaw CEO, Brad Shaw indicated this in an interview with the Globe and Mail.
As the quality of the wireless service offering improves, Shaw will likely charge a price in line with what their competitors offer (noting a possible discount), but employ a similar price differentiation strategy such as bundling with their current cable and WiFi customers. Shaw possesses scale, is a proven network operator, and has access to financial capital that WIND does not which is necessary to compete in this capital-intensive industry. (Wind did recently raise financing at below high yield rates, this is not the norm, and was likely done to recapitalize and make the firm more attractive for acquisition)
Shaw has all the ingredients of being a fourth incumbent and a welcome addition to the Canadian Telco Oligopoly. Shareholders rejoice while consumers prepare for the same old song and dance.
David A. Pickett is a former equity research associate from a large Canadian Broker Dealer and has over four years of telecommunications experience in both sales and analytical capacities. He studied his MBA at McMaster University with a focus in Finance and Business Valuation and his interests include history, business, baseball, and board games.
