EUR 850.00 For Business Accounts Only

Morningstar | In Canada's 600 MHz Auction, Contrary Strategies Put Rogers and BCE on Opposite Ends of the Spectrum

The 600-megahertz spectrum auction was more expensive than we anticipated, but more surprising was the divergent strategies of the biggest firms. At the extremes, Rogers spent CAD 1.7 billion on 600 MHz spectrum, while BCE acquired none. Of the other two Canadian firms we follow in the industry, Telus spent CAD 931 million, and Shaw spent CAD 492 million. We had already modeled each of the firms to spend between CAD 500 million and CAD 1 billion on 600 MHz spectrum, so the deviations don't result in material changes to our fair value estimates. Given other puts and takes associated with the results, including the need for other capital spending and the benefits of better networks, we are maintaining our fair values of CAD 63 for BCE, CAD 62 for Rogers, CAD 50 for Telus, and CAD 26 for Shaw. Similarly, the auction does not affect the narrow moat ratings we assign to each of these firms.

Rogers has recently fallen behind Telus and BCE in many industry "best network" tests, and we've postulated that Rogers' business would begin to feel the effects. We thought greater network investment was necessary, so we're encouraged to see Rogers aggressively pursue network enhancement with its 52 new licenses. Though the firm's spending more than doubled the CAD 800 million we projected, we think an improved network will be worth the cost, and the incremental spending isn't outrageous relative to the firm's CAD 3 billion in other capital expenditures, so we don't see the larger outlay as detrimental to valuation.

BCE and Telus share a network, with each responsible for covering 50% of the population, which made the difference in their spending notable. BCE determined that it had enough low-band spectrum that the cost required to secure more was not economical. BCE can split cells and refarm spectrum that had previously been used for its 3G network to address 5G needs. We also expect it will participate in upcoming midband and millimeter-wave auctions to support 5G.

BCE doesn't have substantially more low-band spectrum than Telus or Rogers, so it was not in a unique position. However, it did recently shut down its 3G CDMA network, and we believe it has the potential to maintain a first-rate network by allocating its capital to enhancements other than additional spectrum, so we don't find its refusal to pay up for spectrum to be a negative. Telus chose to go a different route (spending almost double the CAD 500 million we projected for 12 new licenses), but we don't determine one to be better than the other. In the end, we expect both BCE and Telus to do what they need to ensure their shared network remains top-notch.

Shaw's 600 MHz spending was in line with the CAD 500 million we projected, and it won 11 licenses. Since it is still a small player in the Canadian wireless market, less than 5% by our estimates, it was eligible to bid on spectrum that was set aside for smaller competitors (all firms besides Rogers, BCE, and Telus, which collectively serve around 90% of the Canadian market by our estimates). We thought securing spectrum was crucial for Shaw, as we believe it aspires to be a sizable national competitor, but it currently has an inferior network and less spectrum. The auction win will allow Shaw to take another step up, and we expect it to continue increasing its share in the Canadian market, but we doubt it will be a major player any time soon. We project Shaw to be able to add just under 1 percentage point of market share annually over the next five years.