Until last week, the country’s largest telecom companies all obeyed the same commandment: Thou shalt own thine infrastructure.
In every other industrial country, phone companies raised money to build networks and pay down debt by selling off cell towers, fibre networks and data centres. In Canada, the three dominant telecom platforms – Rogers Communications Inc. RCI-B-T, Bell parent BCE Inc. and Telus Corp. – stubbornly held on to their hardware, arguing that owning their infrastructure is critical to delivering their services to customers.
The country’s largest cellphone provider announced plans to raise $7-billion by selling a minority stake in its wireless backhaul operations – the links between its cell towers and its core network – to an unnamed asset manager. If the deal closes as anticipated by the end of the year, Rogers will use the money to aggressively pay down debt taken on in last year’s $20-billion purchase of Shaw.
In the domestic market, the idea of parting with infrastructure is revolutionary. In a conference call last Thursday, Rogers chief executive officer Tony Staffieri rightly said: “This structured financing transaction is the first of its kind in Canada.”
However, in global markets, Rogers is late to the game. U.S., Asian and European phone companies long ago converted to the gospel of selling stakes in their hardware to build balance sheets. In a report, analyst Maher Yaghi at Scotiabank pointed out T-Mobile, one of the top-performing telecom stocks, years ago moved to an “asset-light strategy and leases all their wireless backhaul.”
“We have been very vocal about the need for Canadian telcos to shed assets,” said Mr. Yaghi. He said the Rogers transaction spotlighted the previously hidden value of telecom infrastructure. While Telus and Bell face challenges in selling stakes in their businesses because the two companies share a national network, Mr. Yaghi said: “We believe that they could entertain such a transaction without the need of approval from either partner.”
Over the past five years, infrastructure divestments accounted for 38 per cent of the US$510-billion in deals done in the global telecom sector, according to a report released in August by Bain & Co. Companies raised more money selling assets than they spent on acquisitions, Bain’s data showed, and used the cash to pay down debt.
Phone companies pulled in US$112-billion by selling all or part of their cell towers, US$41-billion from divesting fibre optic networks and US$27-billion from selling satellites. The buyers were pension plans and infrastructure-focused funds such as Brookfield Asset Management Ltd., the largest owner of cell towers in India.
The same asset-management crowd have long been minority investors in infrastructure owned by the country’s largest pipeline operators. Calgary-based TC Energy, for example, paid part of the bill for recent acquisitions by selling a 40-per-cent stake in U.S. natural gas pipelines to Global Infrastructure Partners, a New York-based fund manager, for $5.3-billion.
Blazing a trail on infrastructure sales means Rogers faces questions on the planned sale of its backhaul network, most of which Mr. Staffieri can’t answer until he finalizes what is currently a non-binding agreement. Mr. Staffieri went out of his way to say Rogers will continue to operate its infrastructure, ensuring the company controls the customer experience.
It’s not clear how much of the business’s cash flow the potential investor will receive in return for its $7-billion. Rogers did say the payout will rise as more data moves through a network experiencing 40-per-cent-plus annual growth.
Rogers also said it has the right to buy back the minority interest in its backhaul operations, if it desires. Exercising that right would pose something of a conundrum for Rogers, as the more successful the backhaul business becomes, the more expensive it will be to buy back.
While the details remain murky, it is clear Rogers will achieve its debt-reduction goals more than a year ahead of schedule by selling a stake in an obscure network. Bell faces similar balance-sheet challenges – the company isn’t generating enough cash to cover its dividend payments – and agreed last month to part with its stake in Maple Leaf Sports & Entertainment.
Telecom companies around the world have shown there is a long line of investors willing to pay up for stakes in the data networks and cell towers critical to the digital economy. Now that Rogers has broken faith with the long-held belief domestic telecom companies need to own their infrastructure, a flood of asset sales seems inevitable.
