The cable wars increased rates?

Cable rivals drop gloves
Theresa Tedesco and Jamie Sturgeon, Financial Post
Published: Saturday, October 24, 2009
At a dinner meeting on March 21, 2000, cable magnates Ted Rogers and Jim Shaw agreed to swap most each other’s cable assets if those assets were on each other’s side of the country. (Dave Olecko/Bloomberg News)

When Owen Boris decided to sell Mountain Cablevision Ltd., a family-owned, full-service high-speed Internet, telephone and cable provider based in Hamilton, Ont., he offered Rogers Communications Inc. an exclusive opportunity to negotiate a deal. After all, the small company, with its 41,000 cable customers, was a natural to fit in with Rogers' cable TV services in nearby Brantford.

For almost six weeks, from late January 2009 to early March 2009, the two sides couldn't agree on a price.

Mountain Cablevision's shareholders and advisors believed Rogers was lowballing them. The country's largest cable company, which was now operating without late legendary founder Ted Rogers, felt the asking price was excessive and wouldn't budge on its offer. Instead, Rogers walked away from the bargaining table, leaving the coveted cable assets seemingly up for grabs.

Mountain Cablevision hired investment bankers a month later to organize an auction, which attracted five potential suitors, including Rogers.

By the time the bidding concluded in July, Calgary-based Shaw Communications Inc. emerged the victor with an offer of about $300-million, besting Rogers by a mere $10-million.

Sources say the folks at Canada's largest cable company were miffed. Rogers never expected to compete with Shaw for core cable assets in its own backyard.

A non-compete agreement signed by Ted Rogers and J.R. Shaw, controlling shareholder of Shaw, prohibited the Western cable company from encroaching on Rogers turf in the East and vice versa.

According to the restrictive covenant signed in 2000, the two companies divided Canada in half -- Rogers in Ontario, Quebec and the Maritimes, and Shaw in Manitoba, Saskatchewan, Alberta and British Columbia -- and agreed not to acquire or start a new broadband wireline cable business outside their territory for a period of 10 years. The purpose was to allow Rogers and Shaw to bid on a cable operations in their areas for the lowest possible price without competition from the other.

As far as Rogers is concerned, the non-compete agreement is effective at least until 2010 -- and thus, Shaw had no business bidding on Mountain Cable.

Rogers sought a legal injunction against the sale, which it failed to secure last month.

"Competition between Rogers and Shaw, Canada's two largest cable operators, for the purchase of a cable television business, is more than restrained under the covenants," wrote Ontario Superior Court Justice Frank Newbould in his Sept. 16, 2009 decision. "It is eliminated."

Justice Newbould ruled Rogers would not suffer irreparable harm if it was required to bid against Shaw for cable operations. More importantly, he openly questioned whether the non-compete agreement, which was not filed with the Canadian Radio-Television and Telecommunications Commission (CRTC) or the federal Competition Bureau, is contrary to the public interest.

That blunt wording has caught the attention of Canada's competition watchdog.

Ian Jack, a spokesman at the Competition Bureau in Ottawa, confirmed the federal agency is "aware" of the court's ruling, and is "examining whether the non-compete agreement raises issues under the Act." He would not comment further, citing the confidentiality provisions under which the bureau conducts its examinations.

For its part, the CRTC, which regulates the country's cable television industry, was also not aware of the nine-year-old non-compete covenant between Rogers and Shaw.

The acquisition of Mountain Cablevision allowed arch-rival Shaw to surpass Rogers in the size of its cable operations. "Never in a million years would Ted let cable assets go to market because they rarely come up for sale," observed an insider familiar with events.

"I think the gloves are off, that's for sure," said the insider who asked not to be named.

Added an analyst who asked not to be named: "Is this a question of Shaw now saying ‘I'm going to use this acquisition to send a message'? Which is what some guys on the Street were extrapolating."

Meanwhile, sources say that although Rogers maintains the non-compete with Shaw is still effective, the cable giant has decided not to pursue an appeal of Justice Newbould's decision.

Now, there are reports the company and Bragg Communications Inc. are considering swapping cable systems in southern British Columbia and Newfoundland. Bragg, a private company, is said to be in discussions with Rogers about possibly trading its Delta Cable and Coast Cable systems in British Columbia for Rogers' cable assets in St. John's, Corner Brook and Gander, Nfld. In other words, Rogers could land in Shaw's backyard.

A spokeswoman for Rogers said the company "always looks at any opportunity that arises," but it was not pursuing specific assets at the moment. "There's very little opportunity for that at this point," she said, adding that there are only a handful of options out there on the market to buy.

Indeed. As long suspected by millions of Canadian cable consumers, ownership of Canada's cable television industry is highly concentrated in the hands of four companies, each with controlling shareholders.

Rogers and Shaw account for nearly two-thirds of all cable subscribers in the country, while Vidéotron, a subsidiary of Quebecor Media Inc., dominates the Quebec market with 1.7 million cable television customers, as well as francophone communities in New Brunswick, and eastern Ontario. Cogeco Inc., Quebec's other cable TV provider, is the second-largest cable system operator in Ontario and Quebec.

Historically, cable regulation in Canada was based around the granting of exclusive rights to provide cable television to specific geographical areas. This provided incentives for cable providers to build the costly infrastructure. In return, the CRTC regulated most of the commercial terms upon which cable providers were permitted to offer service to subscribers, including channel availability and rates.

Shaw and Rogers carved up the country as a result of a swap agreement signed in March, 2000. Rogers agreed to trade the its existing cable television business in the Vancouver area in exchange for Shaw's cable business in the greater Toronto area, including Richmond Hill, Scarborough, Barrie, Orangeville, Orillia, as well as parts of New Brunswick.

In the cable business, it makes economic sense to have contiguous systems -- neighbouring cable networks that are physically linked -- as opposed to scattered operations.

Around the same time, the two companies also signed the non-compete agreement, in which they agreed not to compete in each other's territory. According to the court filings, the swap agreement was approved by the CRTC but no there are no references or discussion about the non-competition provisions.

"This was not a deal that said we're never going to compete with each other. This was a deal that said effectively they would carve up Canada with respect to how they consolidate," explains Greg MacDonald, equity analyst at National Bank Financial in Toronto. "Rogers effectively said, ‘I'm not going to go buy small cable companies in the West, and Shaw said I'm not going to do the same in the East so they could cost-effectively consolidate the business."

And while Shaw's acquisition of Mountain Cablevision could be construed as provocative, it's still not likely to incite a major offensive from Rogers into the West, he argues.

"I wouldn't expect a company like Rogers to go and buy something in Shaw's territory just because they think its an opportunity to cause Shaw some grief," Mr. MacDonald says.

While Canadian cable customers have little say in their choice of cable providers, when it comes to wireless service -- provided by many of the same companies -- the landscape is a little more open. As the much younger sibling to cable in Canada's telecom services industry, wireless has grown up without the same kinds of restrictive practices, analysts say. Despite the dominance of the country's three national providers in Rogers, BCE Inc. and Telus Corp., costumers at least have choice.

Better still, that choice is about to expand with the arrival of new entrants in the coming months.

Compounding the problem for Rogers, already feuding with Shaw, will be an escalation of competition with its cellphone rivals, both of whom have quashed Rogers' advantage in network technology that has given it a monopoly on popular devices like Apple's iPhone. Next week, BCE and Telus will introduce HSPA networks on par with Rogers, and begin offering the iconic iPhone handset.

In wireless, at least, the grip of the few is weakening.

With files from Giuseppe Valente in Montreal