Shaw shares closed Friday at $35.64 in Toronto, $4.86 or 12 per cent below the takeover price of $40.50.Jeff McIntosh/The Canadian Press
The share price of Shaw Communications Inc. is trading at a significant discount to the price at which Rogers Communications Inc. has agreed to buy the Calgary-based telecom, highlighting an opportunity for investors willing to bet that the deal will close next year.
It may be a risk worth taking.
In March, Rogers announced a deal to acquire Shaw for $26-billion, including debt, and gain a national footprint for its wireless services. The controlling Shaw family has embraced the move, and analysts expect that the combined entity will generate enormous savings for Rogers, owing to scale and the elimination of duplicate operations.
But the deal hasn’t closed. Regulators haven’t yet said what it will mean for Canada’s competitive landscape. And the leadership upheaval within Rogers – the chairman has tried to fire the chief executive, and the board of directors has tried to fire the chairman – has led to some analysts forecasting that the deal may not close until the second half of next year. That’s a notable delay from previous projections.
Shaw shares closed Friday at $35.64 in Toronto, $4.86 or 12 per cent below the takeover price of $40.50.
While there has been a gap since the deal was announced, it has widened significantly over the past month, reflecting the risk that something could go wrong here.
There is a compelling case here to support the bullish view, though, starting with what Shaw is saying. After releasing its fiscal fourth-quarter results on Friday morning, the Calgary-based telecom reiterated its commitment to close the deal with Rogers.
Analysts expect the deal will close, even if it is delayed. In a note on Friday, Jeff Fan, an analyst at Bank of Nova Scotia, reiterated his “sector outperform” recommendation on Shaw (equivalent to a “buy” recommendation) with a target price of $40.50.
Credit rating agencies do not appear ruffled by the leadership uncertainty within Rogers. They prefer to judge the credit-worthiness of Rogers on what the deal with Shaw will look like when it concludes, in terms of assets, leverage and management.
“What we will be evaluating is: What is the credit-risk profile of the new entity?” Scott Rattee, an analyst at DBRS Morningstar, said in an interview.
On Thursday, S&P Global maintained its “creditwatch negative” view of Rogers – in place since March – and addressed the leadership uncertainty by noting that it is an “ongoing distraction to executive management.” But the rating agency added that the distraction is unlikely to be long-term, and it merely revised its assessment of Rogers’s governance to “fair” from “satisfactory.”
That’s hardly a reason for investors to panic.
Lastly, it may be worth looking at another deal – which also began earlier in the year and remains subject to regulatory approval – to get a better appreciation for the Shaw discount.
Canadian Pacific Railway Ltd. emerged victorious in a deal to acquire Kansas City Southern with a US$27.3-billion offer that valued the Missouri-based railway at US$300 a share in mid-September. Kansas City’s share price on Friday: US$310.32.
Sure, there are some differences between the two deals.
The telecom deal is all cash, while the railway deal is cash-and-stock. That explains why Kansas City’s share price moved higher over the past six weeks as CP’s share price rallied. As well, Kansas City shares were bolstered by two active suitors – Canadian National Railway Co. had been a leading contender at one point – while Shaw appears to have only Rogers at its door.
And, of course, leadership at Rogers is now up in the air.
Should that dissuade investors? The risks are real, and they may persist for months. Mr. Fan estimates that the fundamental value of Shaw is $26 a share if the takeover deal falls apart. That implies that the downside risk for the stock is a 27-per-cent downturn, versus an upside potential capped at 13.6 per cent.
Clearly, some investors don’t like these numbers. For others, though, the discount may be hard to ignore.
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