Background
Rogers Communications Inc. announced on February 7, 2000 that it will acquire Groupe Videotron Ltée. This will result in the creation of Canada’s largest cable company and the seventh largest in North America, with Rogers providing service in Canada’s four largest cities (Toronto, Montreal, Vancouver and Ottawa) as well as two other top ten markets (London and Quebec City). Rogers becomes the main provider of cablevision services in Canada’s two most populous provinces, Ontario and Quebec – the home market of Bell Canada. Rogers plans to repurchase some of its outstanding shares using funds from the sale of so-called non-core assets. Such assets were said to include Rogers’ $2B holdings in AT&T Canada and Videotron’s $275M share of Microcell (a competitor to Rogers’ wireless unit). The deal, billed as creating “Canada’s largest broadband communications company” is expected to close in April subject to regulatory approvals.
Competing with Bell
Cable companies appear to be winning the battle to provide broadband residential access to the Internet. DSL has been rolled out much slower in Canada than in the US, largely due to delays in negotiating fair access for DSL collocation (a log-jam recently fixed in an industry wide settlement in late January). The consolidation of Videotron with Rogers will likely help cable maintain its lead through more consistent national branding and engineering.
Videotron is more advanced in its rollout of cable-based telephony products. It would appear that there is a regulatory loop-hole which permits long distance calls originating on an Internet Protocol integrated cable network to avoid costly local service subsidy charges – helping the economics of local phone service. Further, the residential lines provided by the cable companies will in certain cases be eligible to be on the receiving end of such subsidy payments from competing long distance companies – clearly bound to raise the ire of the incumbent Bell Canada.
Videotron represents a strong channel for Rogers AT&T Wireless services. Rogers offers a bundled VIP program in its other territories, enabling customers to benefit from subscribing to Rogers cable and wireless services. We expect Rogers AT&T Wireless to begin bundling with Videotron cable resulting in an increased share of the Quebec wireless market.
Rogers and AT&T
AT&T Canada sold its residential long distance base to Primus last year, in a move designed to shed its unprofitable business under the local subsidy scheme which saw large percentages of revenues being paid to the incumbent Bell Canada. Rogers’ close alignment to AT&T represents a new entry point to the residential market – with a very different set of economics. Rogers’ shedding its interest in AT&T Canada likely foreshadows AT&T Corp. increasing its direct holdings in Rogers. There is no need for Rogers to hold an interest in AT&T Canada when AT&T will be more closely aligned by its holdings in Rogers.