Xplornet, Stonepeak partnership could reduce broadband prices in rural areas: analyst

Shruti ShekarTelecom & Tech Reporter
Yahoo Finance Canada
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If new investment is put towards network infrastructure upgrades, analysts suggest the Canadian rural broadband services company Xplornet might be able to reduce the prices of broadband services.

Xplornet signed an agreement on February 27 to be acquired by New York-based private equity firm Stonepeak Infrastructure Partners, a press release said. The transaction “remains subject to regulatory approval and is expected to close in the coming months.”

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The release said Stonepeak will “acquire a controlling stake in Xplornet,” and that the current chairman and his fund will “remain material investors in the business.”

A source familiar with the deal confirmed in an interview the deal’s value is about $2.6 billion. Yahoo Finance Canada is not identifying the source because they are not authorized to speak while the deal is being reviewed by regulatory authorities. The source noted that existing investors want to maintain shares in the company. 

Innovation, Science and Industry Canada will review what percentage of ownership Stonepeak will hold in the company. Xplornet is a New Brunswick-based carrier that uses fibre and satellite to offer internet and voice services across Canada.

According to the release, the acquisition would help Xplornet “accelerate investment in its national hybrid fibre wireless and satellite broadband network for rural Canadians.”

James Maunder, vice-president of public affairs and communications at Xplornet, said in an interview that the goal of the acquisition is to double speeds from 50 megabits per second and to roll out 5G networks. 

“In order to do this, it’s all about equipment, so it requires massive upgrades... deployments of all kinds of capital to fund the equipment for existing facilities,” he said, adding that Allison Lenehan intends to stay on as the CEO, and existing senior leadership will also remain. 

Reza Rajabiun, a competition policy and industrial regulation expert, said in an interview that Xplornet has a strategic advantage in growing its subscriber base if the investments are put towards expanding the technology of existing infrastructure that includes fibre and satellite. 

“They have a large number of subscribers... and if there are new investors that can invest in accelerating technological change... so expanding the reach of the fibre closer to the rural user, then there is a strategic advantage given the market that Xplornet has developed in rural Canada,” he said. 

Rajabiun said wireless services are “pretty widely available and satellite is pretty ubiquitous,” in rural and remote areas, but prices are high and the quality is very low.

“The more advance technologies they adopt they can reduce the prices,” he said. 

Brian Beaton, a telecom expert with over 30 years of experience and co-founder of First Mile Connectivity Consortium, argued that the acquisition isn’t going to benefit rural and remote communities in New Brunswick.

Beaton said that while Xplornet has been growing, residents are still waiting for quality to improve.

“There are communities right now that are stuck with their satellite services, which is really oversubscribed, and people are getting frustrated with it,” he said. “There’s no benefit to Canada, no benefit to the rural sector, the guys in New York, they’re going to take what they can get. They’re far away from the realities in Canada.

Ministry won’t have issues with the transfer of ownership: Stephen Zolf

Stephen Zolf, a telecom and competition lawyer and partner at Aird Berlis, said approvals for the acquisition should be completed without any issue because the private telecom company meets the Telecom Act rule of having less than the 10 per cent threshold of total annual revenue in Canada.

Zolf said that if the company's annual revenue goes over that threshold, then it would have to divest its non-Canadian ownership. This would be done "to go back to the current rules that govern large telecom providers."

In that circumstance, Zolf said the company could have a non-Canadian entity hold up to a one third voting interest through a holding corporation. It would also mean that Xplornet would have to ensure that the facilities part of the company would be Canadian owned, while other assets could be owned by a foreigner. 

“But you would have to restructure if and when you got to that point and that’s probably a long way away,” he said.  

Zolf explained that whenever a transfer of ownership occurs, the federal Ministry of Innovation, Science and Industry will review what types of assets the new company will hold. In this case, the ministry will review how much spectrum and fibre Stonepeak would own. 

“I think [the ministry] would be agnostic as long as it’s not going to an incumbent who has a lot of spectrum,” he said. 

“For example, if Xplornet was transferring control to a big player like Telus, Bell or Rogers, I’m sure that [the ministry] would look at that under their current spectrum concentration policies and they might [question it.] The issue is they need to see who’s acquiring and I think as long as it doesn’t trigger their concerns under their spectrum concentration framework, they would likely check if off and approve the new owner.”

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