Shaw makes wireless push with $2.3-billion ViaWest sale, spectrum purchases

 

Originally posted by the Globe and Mail

Author: Christine Dobby

Shaw Communications Inc. is making a bigger push into the wireless business, selling its U.S. data-centre operations, scooping up valuable airwaves and pledging to invest even more in its mobile networks.

Shaw said on Tuesday it has reached agreements to sell its ViaWest Inc. data-centre business for $1.675-billion (U.S.), or roughly $2.3-billion Canadian, and use some of the profit from that sale to acquire a swath of spectrum licences from Quebecor Inc. for $430-million.

The Calgary-based company said this will allow it to “significantly enhance its wireless network capabilities,” and committed to spending $350-million on capital expenditures necessary to deploy those new airwaves and improve coverage for customers.

 The moves are part of what Shaw has called its “pivot” toward being a Canadian connectivity company after getting out of the media business and focusing squarely on telecommunications services after acquiring startup carrier Wind Mobile in 2016. The Wind purchase thrust Shaw into a market dominated by a powerful trio of national carriers in Rogers Communications Inc., BCE Inc. and Telus Corp., but it was viewed by many as a necessary move into a growth industry as mobile-data usage skyrockets ever upward.

For months, some analysts have suggested the company could better seize the opportunity in wireless by doing just this: selling ViaWest, snapping up spectrum and investing more aggressively in its network.

“Today represents another important milestone regarding our commitment of becoming Canada’s leading connectivity provider. We believe that both transactions are optimizing the value and strategic positioning of our portfolio of assets and will generate long-term benefits,” chief executive officer Brad Shaw said in a statement. Company executives were not available for comment on Tuesday.

Shaw renamed its wireless business Freedom Mobile in November, at the same time launching LTE (fourth-generation) cellular service. But Freedom Mobile has never had any low-frequency airwaves, the type of spectrum that is crucial for travelling long distances and penetrating buildings.

In the deal with Quebecor, which still requires government approval, Shaw will pick up spectrum in the 700-megahertz frequency band that covers British Columbia, Alberta and Southern Ontario. It will also acquire licences in Vancouver, Edmonton, Calgary and Toronto for higher-band 2,500-MHz spectrum, which is useful because it can handle more wireless data.

The transactions will help Shaw reduce its debt leverage, freeing up more flexibility to invest in improving its wireless. The company’s stock was up 3.1 per cent or 88 cents (Canadian) to close at $29.42 on Tuesday. Shares in Rogers and BCE were down slightly while Telus stock closed up for the day.

Analysts had been calling for Shaw to sell Colorado-based ViaWest for some time, arguing it is not core to Shaw’s Canadian telecommunications business and that recent sales of similar operations in the United States – where the data-centre market is consolidating – suggested Shaw could get a good price for it.

“In our view, the sale makes sense for Shaw since synergies with ViaWest were limited, given the latter’s footprint is mainly in the U.S.,” said Desjardins Securities analyst Maher Yaghi. “We believe this transaction should allow Shaw to redeploy cash where it is needed: wireless.”

He said he sees the price Shaw will pay Quebecor for the spectrum as “reasonable” and expects government approval will not be a major hurdle as “regulators likely favoured Shaw as an acquirer of the spectrum versus an incumbent.”

Shaw is selling ViaWest Inc. to Peak 10 Holding Corp., a portfolio company of San Francisco-based private investment firm GI Partners. The deal needs U.S. regulatory approval and Shaw expects it to close by the end of its fiscal year in August. After repaying ViaWest’s debt and credit facilities associated with the original purchase, Shaw expects to see $900-million in cash proceeds from the transaction.

Shaw acquired ViaWest in 2014 for $1.2-billion (U.S.) and later made other related data-centre acquisitions. Taking those costs, as well as the business’s cumulative losses, into account, Citigroup Global Markets analyst Adam Ilkowitz estimates Shaw invested $1.4-billion in total, meaning the company saw a “a mid-single digit return” in U.S. dollar terms, which is “below Shaw’s cost of capital.”

Nonetheless, Mr. Ilkowitz said the spectrum investment “is an important development for Freedom Mobile because wireless coverage is set to materially improve for customers. This improvement will be felt both in urban areas [better in-building] and along highways connecting population centres.”