Rogers’s purchase of MLSE is questionable, based on ego and not common sense

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Dvai Ghose is the principal at Ghose Investment Corp. His clients include Telus Communications Inc. He is the former head of global research and strategic development for Canaccord Genuity Group.

Rogers Communications Inc. RCI-B-T announced Wednesday that it is acquiring BCE Inc.’s BCE-T 37.5-per-cent stake in Maple Leaf Sports & Entertainment (MLSE) for $4.7-billion, giving Rogers a 75-per-cent controlling interest. Equity analysts have greeted the deal as a “win win” for Bell and Rogers shareholders, but is this really the case?

Is this really an appropriate asset for Rogers’s dividend-hungry public shareholders at a time of unprecedented industry pressure or just a trophy play for controlling shareholder Edward Rogers?

The positives for Bell are obvious and significant, especially given unprecedent pressure in the Canadian telecom sector, rising interest expense from its $39-billion of debt and recent credit downgrades. Bell has sensibly said that it will earmark proceeds primarily for debt reduction, which in turn could reduce its debt and interest expense by as much as 12 per cent.

This could result in a credit rating upgrade, further reducing BCE’s interest expense and increasing cash flow, which should not only defend the company’s ability to keep issuing the currently high dividend, but could also help drive modest dividend growth.

On an operational basis, the deal gives Bell’s TSN sports broadcaster access to renewed MLSE sponsorship and broadcast rights for 20 years that includes rights to half of the Maple Leafs’ and Raptors’ regional games. Bell does not seem to really lose much operationally from this deal and stands to gain $4.7-billion.

For Rogers, one might argue that sports these days is all about the content play, and that there is value in amalgamating the major sports franchises in North America’s third-largest market. That is especially so if the Rogers-owned Blue Jays is folded into MLSE.

Why BCE was forced into selling its MLSE stake to arch-rival Rogers

But what does Rogers truly gain? Canadian telcos have never shown that sports ownership helps their core telecom franchises. Rogers has owned the Blue Jays for 24 years and has never shown how this helps their core assets and the same can be said for Bell and Rogers which have co-owned MLSE since 2012.

Despite Rogers’s public statement to the contrary, it’s hard to see how it isn’t layering another $4.7-billion of debt on top of its existing $46-billion debt to increase exposure to an asset that does not generate any meaningful cash flow at a time of unprecedented competitive, regulatory and maturation pressure on the telecom industry. Unlike its telco competitors, Rogers has not even started investing meaningfully in fibre-optic service to the home.

Analysts assume that Rogers will decrease future debt by selling part of its MLSE stake to private or public investors at a profit. Analysts have concluded that Rogers could acquire the 25-per-cent minority stake in MLSE owned by MLSE chair Larry Tanenbaum and the Ontario Municipal Employees Retirement System; and then Rogers could put 100 per cent of MLSE in a new company with its Blue Jays and Sportsnet ownership and spin it out by way of a initial public offering (IPO) at a higher valuation.

The problem is that such an asset would not generate significant cash flow, would likely report volatile results and so would not appeal to traditional cash-flow investors. While North American sports franchises generally appreciate in terms of value over time, there is a reason why such franchises have traditionally been owned by wealthy individuals or private equity rather than public companies (with some notable expectations such as Madison Square Garden Sports Corp. (MSGS), which owns basketball’s New York Knicks and hockey’s New York Rangers).

Of course, Rogers could bring in minority private-equity partners, but the current deal values the franchise highly at $12.5-billion; one wonders if any private-equity partners would be prepared to value MLSE at a premium to $12.5-billion for a non-control position. MSGS in New York has an enterprise value of only US$6-billion.

It is difficult to see how Rogers’s debt leverage does not increase as a result of this transaction. While Rogers may indeed enjoy a hefty windfall if it sells control of MLSE over time, there is no guarantee as to if and when that may happen and at what valuation.

The problem for Rogers shareholders is that this is not the first time that Rogers may be putting ego over cash flow. For more than 20 years Rogers tied up $1-billion of capital in a hostile minority stake in Cogeco Inc., with no significant cash-flow generation to Rogers, before finally agreeing to sell their shares at a discount in 2023.

The bottom line is that Canadian telcos make virtually all their profits from wireless and to a lesser extent wireline, and sports acquisitions do nothing to enhance the value of telco assets, tie up scarce capital that should be used for vital telecom investments such as fibre-to-the-home and provide a high-profile and unnecessary distraction for management.