Top 10 priorities
TORONTO – Expectations will be high for Joe Natale when he takes the elevator up to the 10th floor of 333 Bloor St. E. for the first time as CEO of Rogers Communications.
Since he has such a long history in Canadian telecom and wireless and stellar track record leading so much of the growth at Telus since joining that company in 2003 (and departing in 2015), Bay Street expects Natale to waste no time making his presence and his priorities felt.
BMO Capital Markets telecom/media/cable financial analyst Tim Casey even went so far as to construct a top-10 list of priorities for the incoming CEO – whose first day is Wednesday, where he will be introduced during RCI’s annual general meeting, a day after the company’s Q1 financials are released Tuesday. In his research note to investors, Casey said he expects a quick ramp up and to quickly see a “refreshed corporate strategy and balance sheet priorities”, or a Rogers 4.0, if you will (former CEO Guy Laurence spent much of his time instituting his plan, which he dubbed Rogers 3.0…)
In any event, after Natale meets and listens to as many internal and external stakeholders as he can, Casey suggests the following list of priorities.
1. Improve wireless subscriber churn. “While Rogers’ current operating momentum is encouraging, we believe improving customer service and churn management continues to be an important strategic priority at Rogers, perhaps the most important priority for accelerating EBITDA growth,” wrote Casey.
He also noted that Rogers has consistently performed below Telus and Bell on customer satisfaction surveys, which contributes to churn, which dampens subscriber growth and with Rogers as the largest carrier, churn “matters more at Rogers.”
Should Natale be able to bring Rogers churn levels down by 35 basis points – or closer to industry leader Telus, that would “generate (or perhaps retain is the more appropriate term) roughly $150 million in annual revenues. While that may seem immaterial, it is worth noting that (1) most of that revenue should drop to the bottom line; (2) it will compound each year; and (3) it is only a starting point. Lower churn pressure will free up resources across the enterprise, be they customer service and/or call centre assets, promotional discipline and management resources. For perspective, $150 million in operating profit – once again, a conservative impact, in our view – represents a ~6% increase on current wireless cash flows.”
2. Reverse video competitive losses with X1 rollout. Rogers dumped its years-in-the-making in-house IPTV product shortly after it let former CEO Laurence go (with a $484 million write-down) – and decided to cast its cable TV lot with Comcast’s X1 platform. Bay Street has approved of this move as it will bring Rogers Cable’s TV product more in line with competitor Bell Fibe TV and, it’s hoped, deliver subscriber gains like Comcast is now seeing, Stateside.
No pressure though, Mr. CEO, as Casey writes: “Joe Natale’s flawless execution X1 execution will be critical to stemming/reversing competitive video losses.” However, Natale does have experience with next-generation IPTV as Telus’ OptikTV grew quickly under his watch there.
3. Resume dividend growth. Much to the chagrin of some, Rogers has not raised its $1.92/share dividend for two years as Laurence deployed his vision and invested in a number of projects (some of which have been jettisoned). However, with Natale in the CEO suite, dividend growth is expected to re-start in 2018. For example, writes Casey: “During his tenure at Telus, Joe Natale consistently highlighted his focus on profitable growth (i.e., AMPU over ARPU) and ongoing cost efficiency programs as being a part of the company’s DNA. Among the Big Three, Telus is the only company that reports EBITDA excluding restructuring costs.” Ed note: AMPU is average margin per user while ARPU is average revenue.
4. Quebecor’s Toronto AWS-1 spectrum. Quebecor holds a put option to sell its unused AWS-1 spectrum in Toronto to Rogers for $180 million ($2.70/MHz-POP), subject to ISED approval, notes Casey. Quebecor acquired this 10MHz block of spectrum in the 2008 AWS-1 auction for $96.4 million for a 10-year term. ISED is expected to hold public consultations for the AWS-1 spectrum licence renewal process in 2018, at which point it will determine which licences are renewed/extended for another term, his note continues. “As we remain skeptical that ISED will extend/renew licences of unused/idle spectrum, there could be several AWS-1 spectrum deals announced over the next several months, including those held by Quebecor in Toronto and Shaw/Freedom Mobile in Atlantic Canada.”
5. Shaw network/spectrum sharing arrangement? Shaw Communications could significantly benefit from a potential network/spectrum sharing agreement with Rogers for Shaw’s Freedom Mobile brand, “it remains unclear to us why Rogers would entertain such a partnership,” writes Casey. “At this point in time, we think the relative contributions would be materially uneven in Rogers’ favour that any potential deal would likely require Shaw to bring additional benefits to the table beyond spectrum and capital.”
6. Cogeco Shares. Rogers has long wanted to acquire Cogeco’s Canadian cable business and has held a significant share stake for many years. While Rogers has not acquired any additional shares in Cogeco since 2011 and it is very unclear if or when Cogeco’s controlling shareholders, the Audet family, will be willing to sell, Rogers’ equity in Cogeco shares is currently valued around $1.1 billion, wrote Casey. However a sale of those shares would accelerate the deleveraging process “we doubt Rogers will sell down its stake in Cogeco,” wrote Casey.
7. Media asset sales/write-downs? Given the fact that traditional media continues to face secular challenges, the performance of Rogers Media has no/little implication for Rogers’ share price, Natale’s experience/skillset is in telecom and not media, recent history suggests Rogers is receptive to asset sales/write-downs (B2B publications, shomi, IPTV), and its slow start with the $5.2 billion 12-year NHL content rights deal, there sure could be more media sales or write-downs under the new CEO.
8. Business segment strategy. Natale joined Telus in 2003 as president of Telus’ Business Solutions segment and it grew very well under his stewardship. Casey believes Natale’s “prior experience and expertise in the business segment bode well for Rogers’ Business Solutions (RBS) segment, which historically has under-indexed in the business market.”
9. Senior management team overhaul? Rogers’ current team members are relatively new and hired by Laurence. Casey is not expecting major changes immediately, but notes there could be some changes over time, “but likely not the complete overhaul that we saw under prior CEO Guy Laurence.” There have been some departures already (notably chief strategy officer Frank Boulben and chief corporate affairs officer Jacob Glick).
10. Sharespace office environment. Laurence reconstructed the way Rogers’ employees work by completely rebuilding the company’s office environment to what is now called Sharespace, as Cartt.ca profiled. It’s unlikely Natale will completely undo this office concept (as Telus has been a leader in building ultra-modern and green office spaces), “we doubt he will allocate more capital towards this initiative unless there is strong evidence of cost savings and faster/better decision-making,” writes Casey.
