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Rogers Communications acquisition of Shaw to be put on hold?

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Rogers Communications [NYSE:RCI], the Canadian communications and media company, has an ever-expanding list of urgent things-to-do this summer. The recent failure of its network may not be the only collapse that the Toronto-based company needs to worry about.

Following its recent network outage, heightened regulatory scrutiny of Rogers’ planned acquisition of Shaw Communications [NYSE:SJR] has the investment community questioning whether the deal and the company’s stock price could both be poised to collapse as well.

Even before Rogers’ network collapse on 8th July left its customers without internet or wireless services for 19 hours, the company was facing opposition to its CAD20bn acquisition of Shaw. Despite getting the green light for the deal from the regulator, the Canadian Radio-television and Telecommunications Commission, as well as its shareholders, Rogers still needed to get the go-ahead from government agencies, Innovation, Science and Economic Development Canada and the Competition Bureau, the latter of which filed a lawsuit to stop the deal over antitrust concerns.

Anti-competitiveness

Rogers appeared to have circumvented such concerns by agreeing to sell its Freedom Mobile subsidiary to Quebecor [TSE:QBR.B], in the hope of lessening regulatory concerns about anti-competitiveness. But after its recent network outage left 12 million Canadians without access to key services – including the 911 emergency services, government offices and online payment capabilities – Rogers met with the regulatory ire of Canada’s Industry Minister, Francois-Philippe Champagne, who called the network issue “unacceptable” and ordered the country’s telecommunications providers to back one another up with emergency roaming and services in the event of future network collapses.

Though Tony Staffieri, Rogers’ CEO, has apologized for the outage and promised that the company will credit customers for the inconvenience, some analysts believe that may not be a big enough sticking plaster to cover the damage. As a result of the financial hit Rogers will take from refunding customers for the outage, analysts at Bank of Montreal, Nation Bank of Canada and Royal Bank of Canada have lowered their predictions for the company’s stock. Tim Casey, an analyst for BMO Capital Markets, predicts that the reimbursement will hurt Rogers’ revenue and EBITDA in the third quarter of 2022 by CAD70m.

“What is interesting with regard to the Rogers’ share price is that it had already dropped by over 20% from its CAD76 April high before the Canadian telecoms operator suffered a major 19-hour outage that paralyzed the country’s airports, banking and emergency services,” said Axel Rudolph, a senior financial analysts at IG Group.

Reputation Risks

But beyond additional regulatory pressure and the financial hit of reimbursing customers, he believes “the biggest impact the glitch is likely to have is on Roger Communications’ reputation.” Looking out longer-term, he believes there could be a greater impact. “With Canadian online payments service providers such as Interac considering adding another network provider to its systems as a backup, Rogers Communications may lose market share in the future,” said Rudolph.

Rogers closed its most recent day of trading on 18th July at USD46.34, down a shade from the previous week’s close of USD45.42, and 3.35% behind its closing price of USD47.95 on 7th July – the day before its outage. That is still above the stock’s 52-week low of USD44.19, which it hit on 30th November 2021, but it is 28.2% below the USD64.55 high over 52 weeks, that it reached on 20th April.

“The company’s response of giving customers a credit is simply not going to be enough, and there could be something to the class action lawsuit that’s already sprung up. Depending on the strength of the suit, the company’s valuation may see some bumps in the road, but, by and large, because phone and internet services are both necessary for business, as well as for matters of life-and-death –including emergency phone calls –I think the government is going to have to step in to create additional boundaries and guidelines for the industry,” said Richard Gardner, CEO of Modulus.

“For better or worse, the government will be called upon to ensure that companies like Rogers stay on the straight-and-narrow. That may mean some growing pains in the near-to-mid-term, but long-term, I think this incident won’t have a lasting effect on the company, though its future response may,” he said.

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

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