Shaw (NYSE:SJR) is the smallest of Canada's big four telecoms, yet it has the biggest plans. After years of indecisiveness surrounding a foray into the wireless business, Shaw bit the bullet. Shaw sold its highly profitable 'Shaw Media' operations to another Shaw family company, Corus Entertainment, for C$2.65 billion dollars. The money wasn't used to buy back stock or raise the dividend, instead it was used to shore up the balance sheet after a acquisition was made that should've been made a decade ago.
I think part of the reason why Shaw tanked almost 20% in the weeks following its announcement to buy Wind Mobile (private) had more to do with management than the deal itself. Shaw owned some very high quality wireless spectrum that it sat on for years. It abruptly decided to sell the irreplaceable spectrum to competitor Rogers in 2013.
See, Shaw had a plan to deploy a nationwide wireless network in Canada as early as the mid 2000s. Then in 2009 they scooped up the remains of Canwest media. Canwest is what Shaw sold to Corus to fund the purchasing of Wind. Let me articulate a time line. In the mid 2000s Shaw decides they need a wireless presence. In 2009 they opportunistically buy Canwest for C$2 billion, this halts a wireless development. In 2013 Shaw sells the wireless spectrum they owned to Rogers. In 2015 Shaw buys Wind Mobile to have wireless spectrum. In 2016 Shaw sells Shaw Media (Canwest) to sister company Corus Entertainment. It's frankly baffling and paints the picture of an indecisive management team that can't decide if it wants to be in content delivery or wireless. The argument could be made Shaw was being opportunistic in its timing of buying Wind and Canwest, but clearly the market doesn't see it that way.
An issue with Shaw buying Wind mobile is that it can no longer be acquired. It was long expected that Shaw would be scooped up by Rogers in the coming years. This can no longer take place. See, Canada maintains a strong hold over Canadian telecoms. Now that Shaw and Rogers are direct competitors in wireless they cannot merge. Before Shaw had cable services in western Canada and Rogers the East. But now they have wireless operations both in the west and east.
Adding to the notion that management is indecisive is the rumors of an impending sale of Shaw's US datacenter business, ViaWest. Shaw just bought it in 2014 and it has been an excellent performer for them. So one must decide whether this is another opportunistic move by Shaw to capitalize at the right place and at the right time, or if it shows management does not have a vision for what Shaw should become.
That's all history now (minus the ViaWest sale). How and what are they doing now. Well, Shaw is a decade behind its competitors in building out a network, so now they're working overtime. Shaw has deployed LTE in major Canadian centers it has a foothold in. LTE stands for 'Long Term Evolution' and for laymen is the more modern wireless infrastructure. For the record Rogers launched LTE in Canada back in 2011. Shaw is aggressively pricing its Freedom Mobile (it's rebadge of Wind) wireless plans at almost half of established operators like Rogers and Bell. With this comes significant market share gains. In the second quarter earnings release Shaw stated, "The Company also reported significant improvements in Wireless postpaid and prepaid subscribers, adding over 33,000 RGUs as compared to nearly 10,000 RGUs gained in the first quarter of fiscal 2017. The growth demonstrates that Freedom Mobile's value proposition is resonating with value-conscious Canadians". RGU stands for 'revenue generating unit' for those curious. That's what we outside of the telecom industry call 'customers'...
Earnings have been hit while the capex is being shelled out to make Shaw one of the big four wireless carriers, and the market appears to be OK with that. The six months ended February 28 2016 vs. 2017 saw a drop from C$.75 to C$.47 of EPS. This does not come from any weakness in the businesses though, purely capex.
Shaw's infrastructure also gives it a competitive advantage to BCE (NYSE:BCE) and Telus (NYSE:TU). Shaw has been able to deploy 150 Mbps across almost all its markets by giving customers a new router and installing some new equipment on their side. This is the power of DOCSIS 3.1 and cable infrastructure. Telus and BCE run DSL internet (an infrastructure based on phone lines instead of cable) and those lines peaks at about 50Mbps. DOCSIS 3.1 can do 1000 Mbps without much added cost to Shaw. For Telus and or BCE to match those services it involves them ripping up their entire infrastructure and deploying new fiber optic lines.
I think Shaw is finally getting it right. They are getting back to what makes them a great telecom. While I am not in favor of the sale of ViaWest (no matter what it can fetch), they are truly becoming the 4th big Canadian wireless carrier, mimicking what T Mobile accomplished in America. Their cable infrastructure is objectively superior to that of its western competitors and provides them with a platform with much less capex requirements going forward. I'm happy to sit tight, collect my nice 4% dividend yield and watch Shaw become one of the 'big four' wireless carriers. I missed the ride up T Mobile (NASDAQ:TMUS) has had over the past few years as they joined the big US wireless carries, and I won't do it with my second kick at the cat here in Canada!
Disclosure: I am/we are long SJR.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.