Monday, March 15, 2021

You could call it the Curse of Rogers Island

The problem is what to do with all of the loot. The Rogers clan of Toronto lucked into Canada’s biggest money-maker in the 1960s – cable television. It was even more lucrative than the “licence to print your own money” fellow Torontonian Roy Thomson famously quipped he owned in Scotland’s first TV broadcaster. It was more like a money pipeline. Cable viewers could suddenly receive dozens of far-away channels clearly without having to erect huge antennae and still settle for snowy pictures. The cash poured in from grateful customers. Then along came pay TV and the 500-channel universe thanks to satellites, and the cable business got even better. Best of all, the CRTC deregulated cable TV prices in the 1990s after Bell started offering home satellite service. That provided competition for cable, it reasoned, so there was no need for it to keep an eye on what they were charging you every month, which of course only kept going up and up. 

Nowadays many are of course cutting the cord in rebellion and watching video online, but it’s all the same to Rogers since it also dominates in lucrative Internet service provision thanks to government-sanctioned local monopolies. Best of all, it has somehow escaped paying the 5 percent levy on its cable ISP revenues that the CRTC makes it pay on its cable TV revenues in order to fund Canadian content. It made a 49-percent profit margin on its almost $4 billion in cable revenues last year. And don’t get me started on its cell phone services, which come in many disguises. In addition to its main Rogers Wireless division, the company also offers the Fido and Chatr brands. Together they pulled in more than $8.5 billion in revenues, and made a profit margin of 47.7 percent. This is because, thanks to government policies, Canadians pay some the world’s highest rates for telecommunications services such as cable and cellular. Altogether, including its Media division, Rogers made $5.85 billion in profit (EBITDA) last year on revenues of $13.9 billion, for a profit margin of 42.1 percent. Its profits fell 5.7 percent last year, no doubt due to the pandemic, although they rose slightly in its Cable segment. Apparently people still need to pour money into the pipeline even if they are stuck at home. Especially if they are stuck at home. Its profits would thus still exceed the economic output of some small countries.

But the problem is figuring out what to do with all of that money. After all, if you don’t, the government is going to want to tax you on it. Just like the pirates who buried their loot on Oak Island in Nova Scotia, which treasure hunters are currently digging for on television, company founder Ted Rogers found a very good way to keep his growing profits out of the government’s hands. Unfortunately for most other Canadians, it means Rogers keeps growing bigger, and bigger, and bigger, until . . . well, who knows what will happen first. Will Rogers take over the entire country, or will it explode first? It announced the $26-billion acquisition today of Shaw Communications, which dominates telecoms in Western Canada the same way Rogers dominates it in the east. Adding Shaw’s $5.4 billion in 2020 revenues to its own $13.9 billion would bring the combined company’s total to $19.3 billion, right behind the $22.9 billion raked in last year by leader Bell Canada. The question is whether the government will allow it. More importantly, should it?

The Rogers strategy, after all, has led to nothing less than media gigantism in Canada, with the attendant usurious results. Ted Rogers (1933-2008) was more canny businessman than communications pioneer. Caroline Van Hasselt’s compendious 2008 book High Wire Act: Ted Rogers and the Empire that Debt Built explains how the persuasive, tenacious and driven Rogers was, by all accounts, genetically wired as an entrepreneur. His strategy from the beginning was growth financed by debt. The beauty of that, as all business majors know, is that in a growing industry your revenues will always more than cover your debt payments. Best of all, the interest on debt is tax deductible, so your growth is essentially being subsidized by other tax-paying Canadians. Whatever profits you do have to declare, after deducting interest expense, could usually be kept from the taxman by plowing them back into acquisitions, hence the growth strategy. 

Rogers Cable TV (est. 1967) grew and grew first by acquiring other cable companies, most notably Premier Cablevision in 1980, which made it the largest cableco in Canada. In 1986, the company was renamed Rogers Communications and got into the burgeoning cellular telephone business. In 1988, it acquired numerous radio and TV stations from Selkirk Communications. In 1994, Mr. Rogers took over media conglomerate Maclean Hunter for $3.1 billion, which was more than five times the size of the previous largest media takeover in Canada. In addition to Maclean’s magazine and the Sun newspaper chain, which were later sold, Maclean Hunter owned 35 Ontario cablecos serving 9 percent of the national market, along with 21 radio stations in Ontario and the Maritimes. Adding those cablecos to the 24 percent Rogers already owned gave it one in every three Canadian cable subscribers. In 1994, it began swapping cablecos with Shaw, effectively carving up the country between them from east to west. As the profits piled up, so did the acquisitions. In 2001, Rogers acquired CTV Sportsnet and renamed it Rogers Sportsnet. Later that year it added The FAN 590 sports radio station and 14 Northern Ontario radio stations. In 2007, it acquired the Citytv network. In 2012, it acquired Score Media for $167 million and folded The Score Television Network into Sportsnet. In 2011, it formed a partnership with Bell to pay $1.32 billion for a controlling interest in Maple Leaf Sports & Entertainment, which owns the NHL’s Toronto Maple Leafs, the NBA’s Toronto Raptors, the CFL’s Toronto Argonauts, and Toronto FC of the MLS. The federal Competition Bureau looked askance at that deal, but as usual decided not to do anything about it.

Meanwhile in Alberta, J.R. Shaw pursued a similar growth strategy, in 1966 founding Capital Cable Television in Edmonton. It changed its name to Shaw Cablesystems in 1983 and grew by acquiring cablecos including Classicomm in the Toronto area, Access Communications in Nova Scotia, Fundy Cable in New Brunswick, Trillium Cable in Ontario, Telecable in Saskatchewan, and Greater Winnipeg Cablevision. In 1998, Shaw spun off its acquired TV stations into the separate company Corus Communications, which similarly expanded by acquiring radio and television stations across Canada. In 2010, Corus acquired the Global Television network from bankrupt Canwest Global Communications. In 2016, Shaw bought Wind Mobile for $1.6 billion and renamed it Freedom Mobile. Shaw sold its Corus shares in 2019, and that company is now controlled by the Shaw Family Living Trust. It is not included in the proposed sale to Rogers, which in addition to cash would see about 60 per cent of Shaw shares exchanged for Rogers shares. 

Rogers says it expects to achieve $1 billion of synergies from the merger, mostly from cost savings, yet paradoxically pledged to create up to 3,000 net new jobs, including a Western regional headquarters in Calgary. As consumer outrage grew, even the staunchly capitalist Financial Post spoofed the deal as “all do-gooding, all the time.”

Thus its takeover of Shaw will: create 3,000 new jobs; enable a new $1-billion fund “dedicated to connecting rural, remote and Indigenous communities to high-speed internet across the four Western provinces;” involve $2.5 billion of new spending … to build a 5G network in Western Canada, “driving economic growth and strengthening innovation;” “grow” more local jobs across Western Canada; produce $1 billion a year of those time-honoured but always mysterious benefits of mergers, namely, “synergies;” and, finally, not raise Shaw’s Freedom Mobile wireless rates “for at least three years following the close of the transaction.” 

It's enough to make your head spin, but it can’t obscure the truth that the last thing we need in Canada is for Big Media to get any bigger. The Competition Bureau has promised to review the proposed merger, but its investigations take forever and always result in it simply rubber-stamping the deal, as we learned recently in the dodgy Torstar-Postmedia doings. “We feel confident this transaction will be approved,” Rogers CEO Joe Natale told a conference call. He should, at least when it comes to the Competition Bureau. The CRTC might be another matter. After all, the minority Liberal government ordered Canada’s top three wireless operators, which together control 89.2 percent of the market, to cut prices on their mid-range service plans by 25 per cent within two years or face regulatory action. 

Stay tuned. This could get interesting.

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