Why are Canada’s largest telecom companies selling stakes in their core infrastructure?

Canada’s largest three telecoms long maintained it was crucial to own their own infrastructure, even as their global peers sold off their cellphone towers for fortunes. Now, the carriers are in the sizing up those assets for sale, and one just finalized a multibillion-dollar deal, laying the groundwork for its rivals to follow. What changed?

For years, global telecoms have raised billions by divesting passive infrastructure assets, often to private equity or infrastructure funds, as part of strategic realignments of their businesses. But Canada is unique among developed markets in that its carriers have largely not spun off their infrastructure assets.

Rogers Communications Inc. RCI-B-T, BCE Inc.’s BCE-T Bell Canada and Telus Corp. T-T have long held tight to their infrastructure, insisting that controlling these assets was critical to efficiently delivering services.

In recent months, though, they’ve changed their tune. Finally, Canadian companies are following their global peers.

In October, Rogers announced it would sell an investor a minority stake in a portion of the company’s wireless network, raising $7-billion in structured equity to reduce its debt. The communications and entertainment company finalized that deal last Friday morning.

In February, BCE and Bell chief executive officer Mirko Bibic told analysts the company was reviewing non-core assets for opportunities to monetize where it made sense, and that the company had retained financial advisers to assess the best way to surface value in its infrastructure.

And in March, The Globe and Mail revealed that Telus had formally put a minority stake in its countrywide tower network up for sale with an estimated $1-billion-plus price tag. Telus has indicated it is open to global buyers.

What happened? Telecom balance sheets became stretched, the competitive logic flipped, and willing and waiting markets greased the wheels.

Debt is one key factor. Together, Rogers, Bell and Telus owe more than $100-billion, accrued over years of spectrum purchases, acquisitions and network expansion. Add to that a mature, deeply saturated market, slowing immigration growth and high interest rates. Altogether, this means that growth will be limited for the foreseeable future, said Sean McDevitt, who leads the North American telecom practice at Boston-based consultancy Arthur D. Little.

High dividend payouts are costly, and institutional investors have been pushing the carriers to decrease their debt. Maintaining an investment-grade credit rating remains a telecom north star – for the purposes of retaining a low cost of borrowing and for the status that rating imparts.

Given that analysts have valued the carriers’ network infrastructure as worth billions of dollars, selling those assets could raise injections of cash quickly, and all the players have indicated a desire to lower their leverage as soon as possible.

Next, there’s the competitive logic. For Canada’s dominant telecom players, owning a facilities-based network was seen as a way to keep rivals at bay and, as the carriers explain it, encourage network investment and improvement. Having full control over a network could also make it easier to quickly and flexibly roll out new technology.

Regulatory shifts over the past decade, such as a rule requiring carriers to grant competitors access to wireless cell locations and fibre internet connections at mandated prices, have removed some of the incentives for vertical integration – but not, they frequently note, the costs of building and maintaining those networks.

And a new competitor, Quebecor Inc.’s Freedom Mobile, has further reduced the incentive. As of last May, 60 per cent of Quebecor’s cell sites were located on other incumbents’ networks, according to Bank of Nova Scotia analyst Maher Yaghi, in a note to investors at that time.

“We don’t believe the current and changing regulatory environment in Canada provides a clear competitive advantage to those owning their macro sites,” he said.

Global precedents, such as Verizon Communications Inc.’s US$3.3-billion tower sale last year, also showed Canadian players the immense potential value stored in their networks. And given the potential of a shaky macroeconomic environment resulting from U.S. tariffs, stable, utility-like investments are attractive right now, Mr. McDevitt said.

Investors have noticed the wealth of Canadian assets available to be bought in bulk – a rare opportunity, he said. Canadian carriers still own 95 per cent of their towers, for instance, as opposed to European and U.S. carriers, who have only held on to single-digit percentages.

Meanwhile, pension funds and insurers have become more comfortable investing in telecom in infrastructure in recent years (the Rogers deal is an example of this), adding more players to a potential bidding war, Mr. McDevitt said.

Did these carriers want to sell their networks? Analysts say that they were likely were backed into a corner. The fact that Telus and Rogers are each selling only a minority stake in their assets suggests a desire to retain control, though it also speaks to Canadian government requirements that limit foreign purchases of critical Canadian assets.

Moreover, the Canada’s current trade tension with the United States has made the potential of selling critical assets to an American firm a touchy area.

But for cash-stretched carriers, selling assets may be the best choice for more balanced finances.

“Dry powder has been sitting on the sideline,” Mr. McDevitt said. For Canadian telecoms, it’s the chance to “fill up the pantry before the winter.”