Quebecor Earnings: Long Road Ahead After Freedom Acquisition, but Integration Looks Smooth

Quebecor QBR.B has a long way to go before it’s a legitimate fourth national wireless competitor. While results are not yet impressive, the firm has already made several strides to improve the Freedom offering within that brand’s footprint. More important, because of the bargain price we believe Quebecor paid, we see the possibility of substantial upside—even assuming Quebecor remains a distant fourth national competitor—with lower risk. After getting our first look at the effect that Freedom has on Quebecor’s financials, we are raising our fair value estimate to CAD 38 from CAD 35.

Shaw’s wireless business was split when it merged with Rogers on April 3, with the much smaller Shaw Mobile customer base going to Rogers, and Freedom Mobile going to Quebecor. It appears that Freedom’s average revenue per user, or ARPU, is lower than we anticipated, but the EBITDA margin is materially better. We no longer think that Quebecor’s telecom EBITDA margin will take as big of a hit from the acquisition. We do, however, think it will contract from the 50.6% margin Quebecor posted in the second quarter. Quebecor added only 49,000 net new wireless customers to the combined Quebecor-Freedom customer base in the second quarter. As Quebecor continues to improve Shaw’s network and amps up its marketing efforts, we expect the margin to routinely sit below 50%.

Canada’s Big Three wireless carriers added between 110,000 and 165,000 net new wireless phone customers each in the second quarter. We think it will partially close the gap with its rivals over the next couple of years, as its network improves and its reach expands. Quebecor has also already begun to upgrade Freedom’s network with 5G and deploy midband spectrum that Quebecor had previously acquired. Also, while the combined Freedom/Quebecor wireless network now reaches 70% of the Canadian population, Quebecor will soon be able to offer service in additional markets as well by using the network capacity of its bigger competitors.