A Cogeco location in LimeRidge Mall in Hamilton, Ont., on Sept. 30, 2020.Glenn Lowson/The Globe and Mail
Credit rating agencies are pressing Rogers Communications Inc. RCI-B-T to sell its $1-billion stake in cable rival Cogeco Inc. CGO-T and pay down debt, prompting innovative pitches on potential exits from investment banks.
Four agencies downgraded Rogers’ credit ratings in the wake of the company’s $20-billion, debt-financed acquisition of Shaw Communications Inc. SJR-B-T Three of the firms – DBRS Morningstar, Fitch Ratings and S&P Global Ratings – said Rogers will need to sell assets to avoid further downgrades, if its financial results over the next two years fail to meet expectations.
“Rogers could monetize assets from its stake in Cogeco Communications Inc. and parent Cogeco Inc. (valued at roughly $1-billion) and its sports and media stakes” to keep its current investment grade rating and avoid higher borrowing costs, Fitch said in a press release. Rogers is the largest shareholder in both Cogeco and Cogeco Communications.
Rogers chief executive officer Tony Staffieri said in an interview the company plans to pay down debt by cutting costs and boosting revenue, and has no plans to issue equity or sell assets. That’s not stopping Bay Street from presenting Rogers executives with novel plans to raise money on its long-held Cogeco holding, and arguments on why now is the time to sell.
Ted Rogers, the founder of the company that bears his name, built a stake in Cogeco over several decades, anticipating eventually being able to acquire the Montreal-based rival. That was the plan as recently as three years ago, when Rogers made a hostile bid for Cogeco, only to be rebuffed by its controlling shareholder, the Audet family.
Since then, Rogers concluded a friendly takeover of Shaw that ended with federal Industry Minister François-Philippe Champagne approving the union in late March, along with Quebecor Inc.’s purchase of Shaw’s Freedom Mobile cellphone business.
In granting his approval, Mr. Champagne shut the door on further consolidation in the sector, on concerns it would leave consumers vulnerable to higher cellphone and internet bills. Regulators at the federal Competition Bureau also fought, unsuccessfully, to prevent the Rogers takeover and are expected to take the same view of future deals.
Investment bankers are now telling Rogers and Cogeco executives that with government blocking a potential acquisition, both telecoms can benefit from a breakup, according to multiple sources attempting to win mandates from the companies. The Globe and Mail agreed not to name these sources because they are not permitted to speak publicly on potential deals. Fees for selling Rogers’ stake on Cogeco could reach $40-million.
Bankers are pitching tax-efficient transactions in which Rogers would swap its Cogeco stakes for a portion of the Montreal-based companies’ assets in Ontario. Cogeco Communications provides cable and internet services in cities such as Kingston, Oakville, Burlington and Hamilton, territories that Rogers covets.
In the past, Cogeco CEO Philippe Jetté said the company would consider buying back its own shares from Rogers if its rival decided to sell. In a recent investor presentation, Cogeco highlighted $408-million in cash as part of its $990-million in available liquidity. Investment banking sources said Cogeco shareholders would react positively to the company spending up to $400-million repurchasing its shares, while credit rating agencies would endorse Rogers paying down the same amount in debt.
Cogeco Communication’s share price dropped over the past two years, in part because of weak results from its U.S. cable business. Its stock trades at a multiple of 5.7 times its forecast 2023 earnings before interest, taxes, depreciation and amortization, according to a recent report from RBC Capital Markets.
Investment bankers said Cogeco could sell Rogers a portion of its Ontario cable networks at a valuation of about 10 times their EBITDA, then buy back its own stock from Rogers at 5.7 times EBITDA, and conclude a transaction that works for both companies.
Regulators would likely approve transactions involving regional cable networks, according to investment bankers. In seeking to block further telecom deals, the federal Industry Minister may have opened the door to consolidation in Ontario’s cable market.
Prior to the Shaw takeover, Rogers had borrowed $31.7-billion and its debt-to-EBITDA ratio – a key measure for credit rating agencies, was 3.5 times. S&P said the ratio jumped to 5.4 times EBITDA when the acquisition closed this month, and needs to fall to about 4.5 by the end of 2024 to preserve Rogers’ current credit rating.