Everything you need to know about Shaw’s acquisition of Wind Mobile

Late yesterday, Calgary-based Shaw Communications, which offers cable- and fiber-based internet and television services in Western Canada and parts of Northern Ontario, announced it would purchase Toronto-based Wind Mobile for $1.6 billion.

The deal actually involves the purchase of Wind Mobile’s parent company, Mid-Bowline Group, which was formed when Globalive and several investment firms came together to buy out majority shareholder VimpelCom in September 2014.

The specifics of the deal are fairly straightforward, as Wind reportedly has “very little” debt on the books, according to sources. Shaw reported in an investor call this morning that Wind will earn $485 million in revenue this calendar year, and $65 million earnings before interest, taxes and amortization (EBITA), spending $250 million on building out an LTE network over the next two years.

But there are a number of outstanding questions we’ve been asked about the state of Wind’s business, and where this leaves its 940,000 customers. We’ll attempt to answer as many of them as possible.

Will this deal impact the Wind Mobile brand?

At the moment, no. Shaw announced that all of Wind’s employees, including its CEO Alek Krstajic, would remain at the company to operate its wireless business, at least for the short term. One can assume that, over time, as Wind integrates into the company, there will be some consolidation, but since Shaw doesn’t have an existing wireless infrastructure outside of its Western Canada-based public WiFi network (which we’ll touch on later), there isn’t a surfeit of overlap.

Brad Shaw, Shaw Communications’ CEO, did mention that down the road it may make sense to launch a unified Shaw Mobile brand, especially if the company means to compete with Telus for bundling customers. Telus has eaten into Shaw’s whole-home market share since its acquisition of Clearnet in 2000, providing wireless, wireline, television and internet service. One can’t overstate how important wireless is to the mindset of the Canadian consumer, and, according to Brad Shaw, “wireless was a missing piece.”

What happens to Wind Mobile’s current customers?

Even before Shaw’s acquisition of Wind, the upstart carrier was, unlike Mobilicity and Public Mobile, which were purchased by incumbent telcos Rogers and Telus respectively, in no danger of going out of business.

According to Globalive chairman and former Wind Mobile CEO, Anthony Lacavera, it was important that Wind entered into the market with a long-term partner that was “willing to go the distance.” Unlike Public and Mobilicity, both of which took on considerable private equity, Wind’s launch partner, Orascom, was not necessarily looking for what’s known as an “exit”, a payday that comes from an acquisition that values a company at multiples more than the initial investment.

Though that is exactly what happened with Wind at the end — the recapitalization partners, West Face Capital, Tenenbaum Capital and others, including Globalive, will reportedly earn a six-times return on their investment upon closing — Lacavera said his goal was to hold on to Wind’s spectrum assets indefinitely. “I got into Wind to build the business for 25 years and beyond,” he said in an interview. “Wireless is the future of the world.”

The reality for Wind, though, was that despite a recent injection of $425 million from three banks and Finland’s export credit agency, taking on the Big Three would have required more than just building the network and undercutting the competition. Having Shaw’s existing cable and fibre infrastructure, extensive customer base, and recognizable brand will be a boon to Wind’s expansion almost immediately.

In the short-term, though, nothing is likely to change. Wind had already begun upgrading its equipment in Vancouver to increase speed and reliability, and, along with an influx of spectrum, is poised to improve its current customer experience in the short-term.

Does that mean that prices will stay the same?

In the short-term, yes. In the long-term? Definitely not.

According to an interview Brad Shaw gave to The Globe and Mail, increasing Wind’s average revenue per user is vital to the long-term health of the business — which means prices will need to rise. “I see pricing somewhat discounted, but probably closer to the incumbents as we go forward.” But he also said that matching the incumbents’ prices out of the gate won’t work.

“Listen, growth is very important to us and that’s going to be a key driver, as well as making sure consumers feel there’s value,” he said. One merely needs to look at a company like Videotron for an example of what may happen with Wind’s pricing. While the former only operates in Quebec and Eastern Ontario, it spent rapidly to build up its capacity and network performance to meet the minimal viable product expected by customers of Rogers, Bell and Telus.

For every Wind customer claiming that its network is good enough, and that price is the only consideration, there is another decrying its worst-in-Canada speed and lack of in-home coverage.

OK, so Shaw bought Wind just to turn around and make it into an incumbent?

Not at all. Shaw — the company and the CEO — recognize that Wind’s brand is synonymous with value. But “value” isn’t a shareholder-friendly word, since Wind skews more prepaid than its competitors. Shaw has to make Wind into a wireless brand that anyone, especially in its home markets, would be eager to subscribe to, and not just for its low price.

If Shaw really wants to compete, doesn’t it need more spectrum?

It really, really does. There are a few ways things could go here, and none of them are yet certain, but let’s follow a few potential paths.

Wind currently owns between 20Mhz and 30Mhz of AWS-1 spectrum in British Columbia, Alberta, and Ontario, much of which is currently in use to supports it HSPA+ network. It also owns 30Mhz of AWS-3 spectrum that it picked up in March 2015 after Industry Canada set aside that amount for existing network providers with under 10 percent national market share. Mobilicity’s financial distress allowed Wind to pick up the entire package for just over $50 million.

AWS-3 has only recently been finalized by the 3GPP under Band 66, which includes the existing AWS-1 spectrum already in use today. While it will take a while for handsets to come to market supporting this new unified band, Shaw desperately needs to obtain low-band spectrum in the form of 700Mhz to penetrate into rural areas and older, concrete buildings.

There is only one company sitting on readily-available 700Mhz spectrum with no immediate plans to use it: Quebecor. When Wind Mobile (ironically) failed to raise the capital necessary to bid on the January 2014 spectrum auction, Videotron’s parent company spent $233 million to buy seven licenses across the country, including some in British Columbia, Alberta, Southern and Eastern Ontario, and all of Quebec. After publicly decrying the cost of wholesale roaming rates, Quebecor, Videotron’s owner, backed away from expanding its wireless service beyond its existing service area, leaving a block of unused paired spectrum in some of Canada’s most populated cities.

This morning, Brad Shaw refused to answer whether he would seek out these unused licenses from Quebecor, though he did acknowledge the importance of its acquisition. “As spectrum becomes available, it will be important for us to look at it.”

“We are comfortable with our spectrum position to further our business plan,” he continued, but there is no question Shaw has already had talks with Quebecor.

The other prospect is a network sharing agreement with Rogers. According to a network executive we spoke to, who wished to remain anonymous, Shaw and Rogers have always had a close business relationship, and the two could be looking to lower long-term capital expenditures by divvying up the country the way Telus and Bell have split up their territory along provincial lines.

Though Rogers already has an extensive network in Western Canada, it spends nearly $100 million more per year on building its network than Bell and Telus do independently, and with 5G on the horizon Rogers could be looking to share the load with a partner in the West the way it has with Videotron in Quebec and MTS in Manitoba.

A sale of 700Mhz spectrum to Shaw would once close the loop on Quebecor’s prospective wireless expansion, and create a situation where Rogers would, over time, spend less on wireless infrastructure in the west without sacrificing network reliability.

What about Shaw’s WiFi network? How does that play into this deal?

Shaw has an extensive network of 75,000 wireless access points across B.C., Alberta, the Prairies and small pockets of Northern Ontario. After deciding in 2011 it didn’t want to enter the wireless market, optioning the AWS-1 spectrum it bought in 2008 to Rogers, it quickened the buildout of its city-wide WiFi network, allowing customers to offload a significant amount of their smartphone, tablet and laptop traffic to its fibre and copper backhaul.

Once Wind is integrated into Shaw’s network, it’s easy to see situations where the WiFi network could help offload a significant amount of traffic. “This is a unique package we can bring to market,” said Brad Shaw during a conference call with investors. Eventually, once Wind has swapped out its older equipment with new LTE-capable Nokia hardware, calls and other IP traffic could be seamlessly transferred between the company’s cellular network and its WiFi network with no drops.

Furthermore, those WiFi hotspots could be used to push out LTE signals through Small-Cell radios, which are considerably less expensive to install and maintain, and help distribute wireless signals in areas where traditional cellular towers are not feasible.

I’ve heard that this deal was basically done to compete with Telus in the West. Is that true?

While no one at Shaw will admit that it was the sole reason for purchasing Wind Mobile, Telus has been a craw in Shaw’s side for many years.

Shaw is already a sizeable cable and fibre entity in Alberta and British Columbia, but Telus’s ability to offer the whole-home bundle, including wireless, has forced the cable company into a defensive position.

In that interview with The Globe, Brad Shaw admitted that “Now we’re on the same page, we’re at the same level … and we’ve improved our competitive position in Western Canada just by doing this deal, let alone the opportunity in the East.” Those opportunities in the East include Wind’s most sizeable user base of Toronto, where its network is not only fastest but, with an extra 10Mhz of spectrum, considerably more reliable than out West.

According to Tony Lacavera, Wind is in good hands with Shaw. “I wouldn’t have gone into the wireless business without a strategic partner [back in 2008], and Shaw was arguably the most strategic partner for this kind of deal.”