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2 Big Reasons Why the Rogers-Shaw Deal Might Be in Jeopardy

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The Canadian 5G landscape has become much more intriguing of late. Indeed, the recent takeover of Shaw Communications (TSX:SJR.B)(NYSE:SJR) by Rogers Communications (TSX:RCI.B)(NYSE:RCI) has sent shockwaves through the sector.

The $20 billion deal would create a behemoth in the Canadian telecommunications sector. Certainly, there’s no doubt that this consolidation will have immense long-term growth potential — that is, if it’s approved.

There’s going to be a highly anticipated regulatory review on the horizon. Accordingly, investors do have some reason for concern about this deal right now.

Regulatory hurdles might not allow the deal to be approved

Wireless concentration is the biggest hurdle that might stop this deal from materializing. For four years, the Canadian government has been trying to encourage a fourth player to compete with the big players in the telecommunication space.

Innovation Minister Francois-Philippe Champagne said that the government believes competition is one of the vital factors that could address consumer complaints regarding high prices. Critics of this deal have suggested that this merger could further raise consumer costs, as this deal could lead to the loss of a competitor like Freedom Mobile.

Many analysts still believe that this deal will overcome regulatory hurdles. However, they believe that there will be certain remedies required to push the deal through. For example, following the approval, Rogers may be required to divest some wireless assets of Shaw Communications.

According to both Shaw and Rogers, the takeover will allow them to make multi-billion-dollar investments in network upgrades. Furthermore, it would also enable them to provide improved services to Canada’s remote and rural areas. Nevertheless, Champagne has dismissed claims that consolidation is required to facilitate innovation.

Upcoming spectrum auction posing concerns

In an attempt to promote competition, the Canadian government has been auctioning wireless spectrum at a discount to smaller wireless players. Accordingly, it will be interesting to see whether the government allows Rogers to keep Shaw’s spectrum licences after the acquisition. Furthermore, investors will be keeping an eye on Shaw’s participation in the upcoming auction of the 3,500-MHz wireless spectrum.

Indeed, we have to wait and see whether the company will be allowed to take part in the auction, as the takeover deal will not get regulatory approval by then. Champagne revealed that the government is currently evaluating the best course of action, as the guidelines concerning the auction are being set. Furthermore, he added that Canada’s government is committed to decreasing wireless prices even more.

Bottom line

There’s certainly a lot of excitement surrounding this takeover. However, there also remain a lot of unknowns right now.

Whether or not this deal can ultimately pass regulatory hurdles is what’s on investor’s minds right now. I think investors may be best suited waiting on the sidelines to see how everything ultimately shapes up.

Of course, Rogers is definitely a great buy for investors who remain optimistic that this deal will be approved. However, it’s imperative to note that some volatility might be on the horizon as investors await the verdict.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Chris MacDonald has no position in any of the stocks mentioned. The Motley Fool recommends ROGERS COMMUNICATIONS INC. CL B NV.

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