TORONTO – Rogers Communications has held a significant stake in Cogeco Communications and Cogeco Inc. for quite some time, but it’s now time for Rogers to sell that stake, according to one Bay St. analyst. Proceeds from selling the stake could go towards share buybacks, paying down debt or upcoming wireless spectrum auctions.
In a research note to clients Monday, Scotiabank’s telecom and media analyst Jeff Fan recounted a long-ago plane ride with Rogers late founder Ted Rogers, in which the company creator made clear his frustration at not being able to buy Cogeco outright – so that the company could repatriate the broadband and cable customers in the Golden Horseshoe region (Oakville, Burlington, Hamilton, St. Catharines, Niagara Falls and other smaller towns).
Rogers sold those systems to Cogeco in 1996 in order to help pay down debt the company incurred when it purchased MacLean-Hunter Cable two years earlier for $2.5 billion. As many in the industry may remember, Ted hated selling core assets and spinning off the Golden Horseshoe systems to Cogeco was done very reluctantly.
As part of the sale, Rogers retained some ownership in Cogeco. It gained further shares of the Audet-family owned cableco when it swapped east-for-west cable systems with Shaw Communications in 2000, which included Shaw’s shares in Cogeco. Over the years, Rogers purchased further shares in Cogeco, the last of which happened in 2010, writes Fan.
Rogers owns 10.7 million shares of Cogeco Communications (CCA) and 6 million shares of Cogeco Inc (CGO). Based on the close of trading Monday, those shares are collectively worth approximately $1.4 billion.
Despite the fact Rogers has a 35.5% voting interest in the company and that everyone on Bay Street and in the TV and telecom business has long viewed an acquisition by Rogers as inevitable, the Audet family, led by CEO Louis Audet, has never indicated a readiness or even a hinted at the possibility the company is for sale. The family retains majority voting control over CCA and CGO and has been very active in growing the company Stateside through its Atlantic Broadband subsidiary.
Fan believes Rogers should divest for three primary reasons:
“The Audet family is not close to selling its stake in Cogeco. In fact, with the company’s diversification into the U.S. cable market; the market’s support, including private equity support from Caisse de dépôt et placement du Québec (CDPQ); and the shares being at an all-time high, we see few incentives for the family to sell at this time,” reads Fan’s report
“In the future, if and when the Audet family decides to sell, Rogers would still be the front runner and the strategic expansion would not be altered. We believe Rogers would still be the most likely buyer because of the extensive operating synergies between the two companies. These synergies could also serve to keep other buyers away.
“Selling CCA and CGO shares would be accretive to Rogers, and provide flexibility. Depending on the use of proceeds between debt repayment and share repurchases, we believe selling CCA and CGO shares would be accretive to Rogers, reduce its leverage, and provide flexibility for future investment in its core business in about two years, namely spectrum auction(s),” Fan writes.
There is a downside, however, that Rogers would have to pay a big premium if and when it comes time to buy Cogeco. “Given the value that the sale could create, we believe the premium would have to be at least over 50% before Rogers could be seen as being worse off. Therefore, CCA shares would have to be acquired at $132 today… and CGO shares would have to be acquired at $114. With the passage of time, the value to Rogers compounds and unless the appreciation of CCA and CGO shares compounds at a faster rate, the 50% is expected to remain constant,” reads the report.
“The 50% estimate is based on the assumption that Rogers will use the entire proceeds to pay down debt, which is less accretive than buying back shares. If the company used all the proceeds to buy back shares, the premium would have to be almost 90% before Rogers is seen as worse off.”
Finally, “we also believe Rogers investors would applaud such a move,” Fan adds. “And for Rogers management and family, should the Audet family decide to sell in the future, we believe Rogers would still be in the driver’s seat given the tremendous synergies. While it may have to pay a premium on its current position, the benefit of selling today (i.e., at lower interest cost and shareholder accretion) should more than offset the higher premium in the future, whenever that may be.”
