Shaw: Q3 2012 Results
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During the Shaw Communications conference call and in the MD&A, it suggests that the executive team is happy with the recent results? I guess the market does not agree. We do not think they should be happy either.
With what the MD&A referred to as “disciplined execution”, one could have expected that the subscriber numbers were not going to be good and considering the level of discounting at the moment, we did not need to get the results to know that this would be the case. But we would never have expected Shaw to lose so many internet customers. Wasn’t this the key to “winning the home” a few quarters ago? So if Shaw loses internet customers, does this mean they are losing the home? But don’t worry because more market price discipline leads to better revenue…well except this quarter. Total revenue was actually down compared with Q3 last year.
Revenue was particularly weak. Give the supposed discipline surely one could have expected a healthy rise in revenue. Cable revenue was up $9m over Q3 last year, Satellite up $1m, but Media was down $17m. So what happened? They put prices up, but revenue did not increase? In the conference call all questions about prices were met with comments about how customers were upgrading and ARPU was increasing, but we are not sure the math says this is what happened during the quarter. If you divide Cable Revenue by digital subscribers (a proxy for ARPU), monthly revenue dropped from $148 per digital subscriber per month to $137.
If our math is correct, that is a 7% decrease in our ARPU proxy. This is an ominous warning. We think this puts Shaw in an interesting position: When they drop prices, TELUS follows, which mean that existing Shaw customers (who are not on contracts) move to TELUS to get the better prices. At the same time TELUS customers are in contracts and have been given hardware, so are still not likely to move to Shaw. So when Shaw puts prices down, they continue to lose customers. Oops. What happens when they raise prices? Well when they raise prices customers do not buy from them either. Why not go to TELUS which has better technology, faster speeds (uplink and more consistent) and TELUS provide equipment including whole home PVR and Xbox, which Shaw customers have to pay for.
What about wireless?
Wireless is pretty key in the overall balance of power between TELUS and Shaw. And to be fair, even if Shaw did have wireless, it would not be in Ontario, Quebec and the Atlantic provinces. But as long as Shaw has no wireless, TELUS will win every price war. Assuming TELUS and Shaw’s operations were equally efficient and well run, then if Shaw pushed their entire base’s prices down to cost (this is obviously unlikely to happen), then Shaw would be losing close to 80% of their EBITDA. According to TELUS’s last conference call is TELUS did the same, they would still keep 80% of their EBITDA since most is made in wireless. So combination of technology and wireless makes it impossible for Shaw to beat TELUS. Even irrational pricing from Shaw would cause them more harm than TELUS.
Consumers should use Shaw’s incredibly weak strategic position and consider putting up with poor service, if necessary, if they can get good deal on their home telecom and entertainment. Note that since TELUS has been matching Shaw’s prices, customers can benefit by either staying with Shaw and demanding their new rates or by jumping ship for a better product.
So what is supporting the share price?
Most analysts (7 out of 11) have the stock at a hold rating, while 3 have it as a strong buy and 1 a sell. Interestingly no analysts have buy or underperform, indicating a particularly polarizing stock? Some same that even though their results are the worst in the industry, below a certain price, they are a take out target for Rogers? We are not so sure. Not sure Rogers will overpay for their own former customers in the west and not sure the Shaw family really wants to sell (at any price)?
The last deal between Rogers and Shaw was amazing, but it took two of the best deal makers in the planet to make it happen, Jim Shaw and Ted Rogers. Our understanding is that Jim and Ted had a very good relationship with a similar entrepreneurial zeal. For deals like this to happen the stars really need to align, so a failing Shaw business is only one of the necessary, but not sufficient conditions for a successful takeover by another player. One only needs to look at RIM to understand that even a business at a fraction of its previous value might not be cheap enough for a deal. Beauty is in the eye of the beholder. The final takeover point is how many companies are interested in Shaw? Too big for foreign players, TELUS is out, the TELUS-Bell network share probably means Bell is out, Cogeco and Bragg are probably too small and MTS is not their biggest fan. So how much premium would Rogers have to pay when they are the only horse in the race?
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