Bell offered to buy Shaw but backed out, opening door for Rogers to finalize $26B takeover

Telecommunications giant BCE Inc. made an offer to buy smaller rival Shaw before abandoning the plan and allowing Rogers to swoop in and buy them instead, new documents reveal.

In its annual report issued Friday, Calgary-based Shaw revealed that in January, it was approached by an unnamed "Party A" about a potential merger deal. Although  the "discussions were exploratory in nature and focused on the strategic merits of a possible business combination," those talks were happening while Rogers was also engaged in discussions to take over the Calgary-based cable and wireless company — talks that eventually turned into a formal takeover offer worth $26 billion last month.

Although Shaw never names the company, BCE — the parent company of the consumer telecom brand known as Bell — subsequently confirmed it was the unnamed Party A after the story was first reported by the Globe and Mail newspaper over the weekend.

Shaw's annual report reveals that over a period of about two months starting in January, Shaw's management was listening to offers from both sides about buying them out. According to the regulatory filing, BCE's initial bid for Shaw valued the company $37 per share. That was higher than Rogers' first bid of $35. BCE subsequently offered as high as $39.25 a share, which was then bested by Rogers at $40.50.

As recently as the end of February, BCE was apparently willing to match that price for the common shares, but Shaw noted that Bell's offer at the time "continued to contain certain regulatory issues that had previously been identified as being of concern."

"[Shaw's] Board concluded that [Bell]'s proposed regulatory approach was not as attractive as [Rogers]'s and contained conditions that were not acceptable to the board. Accordingly, following this discussion, the board determined that it would not be prepared to recommend proceeding with [Bell]'s proposal unless these issues were addressed," the report reads.

Once Bell backed out, things escalated quickly to formalize the Rogers offer. The two sides signed an exclusivity deal on March 12 to hammer out details and then went public with their pact three days later on March 15.

Questions remain

Although both sides have agreed not to talk with other parties and there's a $1.2 billion break fee if the deal falls apart, the pact is still far from certain.

Consumer advocates have decried the deal because it would remove a significant player in Canada's already meagre field of wireless providers. Rogers is the second-largest wireless company in Canada, behind Bell, and just ahead of Telus. All three have roughly 10 million wireless customers. Shaw is a distant fourth with just over two million. A slew of other small regional companies come after that, but those four wireless companies control 95 per cent of Canada's wireless market.

That's a big reason why Canada's Competition Bureau must sign off on the deal, along with telecom regulator the Canadian Radio-television and Telecommunications Commission (CRTC).

Shaw shares are valued at about $34 on the TSX on Monday, almost $6 shy of Rogers' offer price — which is a sign that investors have their doubts that regulators will allow the deal to go through.

One possibility to win approval for the deal would be for Rogers to sell off Shaw's mobile brand, Freedom Mobile. But doing so would remove a big reason for the takeover in the first place.

While numerous hurdles remain, telecom analyst Jerome Dubreuil with investment bank Desjardins says he thinks there's about an 85 to 90 per cent chance of the deal going through in one form or another. That's because he thinks Rogers is mainly interested in owning Shaw's wired and cable business anyway, and if regulators have any problems with the wireless business, there are many other companies who would be happy to take it off Rogers' hands if it is forced to sell it.

"We believe the stock primarily trades on the probability that the takeout by [Rogers] will be greenlit by the regulators, which we see as quite likely given the limited regulatory risk on the wireline side of the deal and with the possibility that [Rogers] will divest of [Shaw]'s wireless assets," he said in a recent note to clients.