Looks like I got a bit lucky with the timing of last week’s sale of Northlake’s remaining position in Rogers Communication (RCI). On Friday, it was reported that Telus and Bell Canada will be building a competitive HSPDA network that could undercut Rogers monopoly on high end customers and roaming. The stock got clipped on that news and was down again yesterday because Merrill Lynch used the news and the recent rally in RCI shares to downgrade from buy to neutral.
As usual, there is more to this story than appears. RCI’s competitive position is not under nearly as severe a threat from the new Telus/Bell Canada network as the article would suggest. The new network is being built with no underlying GSM network. This means that there are likely to be dead spots with HSPDA only devices. It also means that covering those dead spots will require roaming on RCI’s GSM network or RCI’s already built out HSPDA network. In other words, this looks like an insufficient catch up move. RCI may build out an even more advanced network and once again reassert a clear lead in network quality.
What makes this news difficult for RCI shares is that it comes just as the new entrants who purchased spectrum in May’s auction are ready to roll out their business plans….

….Those plans likely will include one or two new national players which will raise fears of market share loss for industry leader RCI and stoke worries about voice pricing and roaming revenue.
It is this poor sentiment set up that led me to exit RCI more than any worries about RCI’s numbers over the next year or two. Given a serious contraction in global wireless multiples and more competition, RCI shares look a bit expensive. I suspect the company will weather the storm quite well and that rapidly growing free cash flow will be well spent to support the business and provide flow to shareholders.
The play now on RCI is to be on the sidelines and wait for the sentiment to shift too far to the downside. I’d say a price in the $20s, all else equal, would be about right.