Tag: SJR

How much is a vote worth? Rogers Class A vs. Class B Shares

As the Canadian election trail continues, media frequently comments on the dropping voter turnout over the past few elections. There may be an economic reason for the drop in turnout – mainly that as electoral districts increase in population, the value of a vote is subsequently less.

Trying to quantify the value of a vote in an election (e.g. if you could “sell” your vote, which is illegal) has always been an interesting academic exercise. However, there is real market data that could give some sort of insight to the matter. The data can be obtained from companies that have dual classes of shares which share the economic interests, but split the voting interests in the firm.

One example of this is Rogers Communications (TSX: RCI.A / RCI.B). Each class of shares has the same dividend and economic interest in the corporation, while the Class A shares give you one vote in the election to the board of directors. Rogers’ voting shares is 90% owned by a family trust and hence the shares trading are in a minority position. However, in the event of a buyout offer, Class A and Class B shares can receive different economic consideration.

Class A shares are relatively illiquid – they trade about 5,500 shares a day, while Class B shares are very highly liquid. However, the voting rights with Class A shares, offset by the liquidity penalty that the shares would have, trade approximately $1-2 higher than Class B shares. Measuring the ratio of Class A to Class B share values, you have the following rather interesting chart:

Over the past three years, the ratio has gone from about a 10% price differential to as low as 1%, and there has been some badly placed orders that have brought the ratio below 1 – which gives you the economic interests AND voting interests – presumably this is a discount for illiquidity.

Shaw Cable (SJR.A / SJR.B) also has a similar structure, with the voting shares having a slightly lower dividend than the non-voting B shares. The spread there, however, is about 20% and the voting shares are highly illiquid.

Although both of these examples are not a precise comparison since the voting shares are majority-owned and thus your vote in the voting shares are meaningless, it is an interesting exercise in measuring the value of a vote. I am sure readers out there can come up with better examples of companies that have dual class structures that do not have majority ownership on the voting shares.

Shaw Cable bill escalating

Shaw Cable services most of Western Canada and they have been steadily escalating their prices each year. I only use them for cable internet services and subscribe to the high speed service.

The bill has had the following escalation curve, with sales taxes included (12%):

January 2008: $45.87
May 2009: $46.99 (+2.4% from previous)
September 2009: $49.23 (+4.8% from 4 months ago)
September 2010: $52.64 (+6.9% from 12 months ago)

Total since January 2008: +14.8%

While I have had few issues with my service, I do not believe that these price increases are “inflationary” in nature, and rather reflect economic elasticity – customers are likely not to go through the hassle of canceling and getting the alternative service (TELUS’ ADSL) to save a few dollars.

The standard corporate line is likely “We have to do this to make improvements to our network”, but the service itself has not changed since getting it – anecdotally, it feels slower, but this could just be because there is more garbage that gets sent through the internet these days.

The price increases are getting to the point where I am examining options. TELUS’ high speed internet service (without bundling) is $37/mo pre-tax, compared to Shaw’s new price of $47/mo pre-tax. Is one service better than the other? Is switching a seamless process (i.e. will I have loss of service)? It is these types of questions/risks that make me wonder whether it is worth $134/year to make a switch decision.

It is clear that the companies are only competing against each other for marginal customers, and will not engage in price competition for their existing customers.

In terms of publicly traded stocks, while it is clear that Shaw (TSX: SJR) and TELUS (TSX: T) will not double their equity valuations overnight, they do represent a store of value assuming that no other companies will be able to disrupt the wireline broadband marketplace. The same holds true for equivalent companies on the eastern side of the country (to name some: Bell, Videotron, Rogers). TELUS also has diversification in their wireless marketplace, but this is being chipped away by the deep-pocketed Orascom subsidiary, Wind Mobile.

Shaw Communications – Moving into Wireless

An article questions Shaw’s slow entry into the Canadian Wireless market.

RBC Capital Markets analyst Jonathan Allen said the delay gives other new competitors time to gain traction before Shaw is even in the market.

…

“It’s difficult to say whether Shaw launching with LTE is the right move,” Allen wrote in a research note, noting Shaw would be among the first globally to choose this network standard.

My opinion is less questioning – waiting is completely the correct decision. The reason is that there is no first mover advantage in this second expansion of the Canadian wireless domain. With incumbents (Telus, Bell and Rogers being the big three) having a dominant advantage in terms of size, capital and capability, it will be difficult for newcomers to quickly penetrate into the marketplace. My guess is that Shaw will be carefully looking at how Wind Mobile, Public Wireless and Mobilicity perform before doing their own launch.

In the strategic sense, Shaw must get into the wireless space – they have a huge customer base with their cable and internet services, but their expansion into the phone space has been slow, mainly because landlines are now obsolete. A wireless expansion that bridges the internet and voice service seems to be quite a logical move. Their system needs to be able to deliver enough reliable bandwidth to provide both voice and highspeed data service. They will also have the ability to bundle this with their cable packages, and as a result may have better success with market penetration than other providers.

In terms of valuation at a glance, Shaw’s equity appears to be fairly valued. I don’t see a compelling story that would boost their equity price dramatically – it would be an economic miracle if they doubled in five years from their current market capitalization of $8.1 billion. They also are capitalized by $4 billion in debt, supported by roughly $600 million of yearly free cash flow at present. Construction of a wireless network is likely to cost a lot more, so it remains to be seen whether they will decrease the dividend or raise more debt capital to finance it. Shaw does have the advantage of having their billing and customer support infrastructure established, which is something the other new upstart providers are struggling with.

As a company, I have always liked Shaw’s positioning and corporate direction. As an investment, I have never found them compelling. Their common shares will represent a good store of value in terms of their ability to drive cash flows from Canadian’s desire to receive cable and communication services, but I will not project much in the way of capital gains.