Andre Hardy:
Welcome to the Industries in Motion podcast from RBC Capital Markets, where we'll be exploring what's new and what's next in today's fast moving markets and industries to help you stay ahead of the curve. Please listen to the end of this podcast for important disclaimers.
My name is Andre Hardy and I'm Head of Canadian and Asia-Pacific Research. Let's get into today's episode. I'm very pleased to be joined by Drew McReynolds. Drew is a Managing Director at RBC Capital Markets and is responsible for our equity research coverage of the Canadian telecommunications and media sector. Drew has over two decades of experience in equity research and has consistently been among the top ranked analysts in investor surveys in both telecom and media.
Today we'll be discussing Drew's insights into the Canadian telecom sector, particularly the wireless industry. This sector is deeply embedded in our daily lives and has come into greater focus recently due to the recent merger of Rogers and Shaw, and the sale of Shaw's wireless business, Freedom Mobile, to Quebecor. The sale received Canadian government approval in late March, 2023, after a long competition bureau review process. In the wake of the Rogers-Shaw-Quebecor transactions, focus has turned to understanding the new competitive and regulatory landscape for the Canadian telecom companies and the related outlook for consumers in terms of wireless and internet options and pricing.
Drew, first of all, thank you for joining us. You've indicated that the Canadian telecom sector is approaching a major crossroad in 2023. Can you describe what that crossroad means to you?
Drew McReynolds:
Yeah, sure, Andre. Over the past two decades, we have frequently described the Canadian telecom sector as constructive, and it's been a place where investors have been able to generate compounded total returns. Now, driving this constructive environment has been a stable, competitive structure and regulatory environment, industry revenue growth of about 4% and reliable free cash flow generation and dividend growth in a low interest rate environment. While after all of these years, this constructive setup is easy to take for granted, the Canadian telecom sector over the past two decades has actually encountered several major crossroads that, for investors, has required some added attention.
And some of these include the kicking off of the government's fourth wireless player policy in 2008, the major 3G joint network build by BCE and Telus in the late 2000s, a fiber deployment by BC and Telus through the 2010s, and finally, Shaw's acquisition of what is now Freedom Mobile in 2016. Importantly, as we look ahead, we believe the Canadian telecom sector is at another major structural crossroad with the Rogers-Shaw-Quebecor transactions, 5G and higher interest rates all putting the longstanding dynamics around competitive structure, growth and valuation really to the test.
Andre Hardy:
Yeah, that's a great overview of the background. Let's drill down into the implications of the recent consolidation. The Canadian telecom sector looks to be entering a new era following the recent government approval of Rogers' acquisition of Shaw and the sale of Freedom Mobile to Quebecor. Can you explain to us the logic behind these transactions and what they mean for investors?
Drew McReynolds:
Sure. Looking through a lot of headline noise that everyone was exposed to over the past two years, in and around these transactions, the real crux boils down to Rogers needing Shaw's fiber and fixed infrastructure in Western Canada in order to support 5G and importantly, keep pace with BCE and TELUS as one of three national 5G providers, particularly in the IoT space. Prior to 5G, Rogers could easily meet its own wireless backhaul requirements in Western Canada, but the amount of fiber that 5G requires or will require is significantly greater than that of 4G and 3G, and that left Rogers with a buy versus build decision in sourcing its fiber. For a long-anticipated merger, that could have happened at any point, frankly, over the past few decades, it was really 5G that turned out to be the catalyst here that brought these two companies together.
Now, as for Freedom Mobile, the Canadian government's current policy around competition is to maintain four wireless players in every market across the country. And a Rogers-Shaw combination alone would've reduced the number of players to below that requirement. Prior to Rogers announcing the acquisition of Shaw, we had long thought Quebecor would be the most logical remedy partner for Rogers in terms of acquiring Shaw's Freedom Mobile wireless business in order to maintain at least four players in every Canadian market.
Despite some initial reluctance to bring Quebecor into the fold and after Rogers endured the grueling competition bureau approval process, we have a set of transactions that, in our view, carry a very high degree of industrial logic and for policy makers, tick almost all the boxes. And finally, in the wake of these transactions, we do expect the telecom industry to become increasingly competitive in the months and years ahead, as well as garner greater regulatory scrutiny along the way.
Andre Hardy:
On that, when you say that these transactions should translate to greater competitive intensity, what will that ultimately mean for consumers and wireless prices?
Drew McReynolds:
Yeah, it's a great question. As part of gaining government approval here, Quebecor has committed to ensuring that its wireless plans in BC, Alberta, Ontario are at least 20% lower than the equivalent plans offered by the big three wireless providers, those being Rogers, BC and Telus. While this is largely the case already with Freedom Mobile's existing wireless plans, we do expect Quebecor to do a number of things.
We do expect them to accelerate 5G deployment and be much more promotionally active in all three provinces, leveraging all of the work that Shaw has done, but also leveraging the benefits that Rogers is providing to Freedom Mobile in terms of additional network support. In addition, when you layer in a new wireless regime that the CRTC, which is the Canadian telecom regulator, is implementing across the country, that should benefit regional wireless players like Freedom Mobile, and we fully expect consumers over time to benefit from declining wireless prices and particularly for wireless plans in that mid portion of the wireless market.
Andre Hardy:
Well, I look forward to that on the pricing, but can you please expand a little bit on what you're talking about with the CRTC being in the process of implementing a new wireless regime in Canada? What is this regime and could we see new players enter the industry?
Drew McReynolds:
Sure. In 2021, the CRTC announced the new wireless regime that essentially grants the regional wireless operators access to the networks of the big three operators, while the regional operators expand their own networks. It's a complicated framework, but bottom line, this new wireless regime should provide additional growth tailwinds to these regional operators, such as Freedom Mobile and Eastlink, but could also entice new entrants into the wireless market. And we believe Cogeco Communications is fully intending to enter the wireless market, both in Quebec and in Ontario under this regime, and that could happen as soon as later this year. Once the dust settles, we should have a Canadian wireless market that is more competitive with wireless prices that are in fact, more affordable to consumers out there.
Andre Hardy:
You mentioned earlier 5G, so if we can go back to that, 5G has been a fairly hotly debated topic within the wireless industry for quite a few years. Where are we at in terms of the status of 5G in Canada and what should consumers get excited about over the next few years?
Drew McReynolds:
Sure. Well, with the completion of the 3800 megahertz spectrum auction later this year, Canadian operators will be finally on a path to fully deploy what is the most important spectrum for 5G that delivers on the longstanding promises of greater speed and capacity, as well as latency. So while we expect consumers to notice the improved network performance on top of what are very good 4G networks in Canada, we think the bigger prize here longer term for the industry and quite frankly, Canada, is in the Internet of Things and essentially wiring up a greater portion of the economy across all of the most important industries and verticals. We’d also be on the lookout for new mobile devices that deliver greater virtual reality or augmented reality experiences, all of which will require 5G and of course, eventually 6G and 7G networks.
Andre Hardy:
Maybe before we wrap up, we can shift gears to the internet, which obviously, has become essential for many Canadians or all Canadians. Canada has some of the best networks in the world, especially in urban areas, but there's certainly some significant price discrepancies across the country and still, if you live in rural areas, there are many that lack affordable broadband options. How do you see that unfolding for the Canadian internet market for the next five years?
Drew McReynolds:
Yeah, it is true that BCE and TELUS, as the incumbent telecom operators, have achieved some of the highest fiber coverage among telco incumbents globally, with these fiber builds expected to be largely completed in Canada by 2025. When you add in ongoing government funded rural internet deployment, you add in satellite broadband operators like Starlink and Xplornet, ongoing fiber investments from the cable companies, and then the forthcoming regulation that should attract, frankly, more internet resellers into the market, over the next five years, Canada should have a very competitive internet market. And if I was to tie this back to wireless, we now have, in both the wireless and internet markets, the realistic prospect of greater competition. And with this dynamic, in our view, we truly believe the Canadian telecom industry is embarking on a new era.
Andre Hardy:
Well Drew, thank you very much. This has provided great insight into the recent telecom developments, as well as how the sector and our experience as consumers may evolve over the coming years. I should add, as a housekeeping note, that RBC Capital Markets was an advisor to Quebecor on its purchase of Freedom Mobile. What else lies ahead in today's ever-evolving markets and industries? We'll be keeping track right here on Industries in Motion. Thank you for joining us on this episode recorded on April 20th, 2023. Please make sure you subscribe to Industries in Motion wherever you listen to your podcasts. And if you'd like to continue the conversation or if you're interested in more information, please contact your RBC representative directly, or visit our website at www.rbccm.com/industriesinmotion. Thank you for listening.
Speaker 3:
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