OVERVIEW OF THE DEAL
The 15th of March 2021, Rogers Communications announced that it will acquire its competitor Shaw Communications for $26 billion, including a 69% premium paid. This merger of two major companies in the communications industry of Canada is expected to create new jobs and most importantly to accelerate the deployment of 5G in Canada. It will be a friendly merger, with the boards of directors of both Rogers and Shaw supporting the transaction.
Company Details: Acquirer – Rogers Communications Inc
Founded: 1960
Headquarters: Toronto, Canada
CEO: Joe Natale Status: Public
Number of Employees: 25,300
Market Cap: 30.44B CAD
Revenue: 13.9316B CAD
EBITDA: 5.857B CAD
Rogers Communications Inc. operates in 3 segments: Wireless communications, Cable Tv and Media. It is the market leader in both wireless communications & cable TV operations in Canada with 10.8 million & 1.7 million subscribers across the country respectively. Wireless communications represent 60% of its profits, cable represents 30% and the 10% remaining are achieved by its media activity. The company has multiple brands under its portfolio, most famous of them being City TV, Chatelaine Magazine & Toronto Bue Jays. The company is owned mainly by the Rogers Control Trust (approximately 10%) and the Royal Bank of Canada (approximately 8%).
Company Details: Target – Shaw Communications Inc
Founded: 1966
Headquarters: Calgary, Canada
CEO: Bradley Shaw Status: Public
Number of Employees: 15000
Market Cap: 17.21B CAD
Revenue: 5.4B CAD
EBITDA: 1.775B CAD
Similar to Rogers, Shaw Communications Inc. (Shaw) operates mostly in Canada & provides a wide array of services. It provides consumers with phone, internet, television & mobile services. It delivers excellent home telecommunications services in Alberta and British Columbia & satellite television all across the country. Around 80 percent of the voting rights of the company belong to the family of its founder. The company operates in two segments: the Wireless and the Wireline segment. The former provides wireless services for phone & data communication through Freedom Mobile & Shaw mobile whereas the latter provides telecommunication services & data networking to businesses, customers and public-sector entities.
SYNERGIES
1. Targeted synergies
According to Rogers Communications, the deal’s synergies are expected to exceed $1 billion annually within two years of closing. Additionally, it is expected that the transaction will be significantly accretive to earnings and cash flow per share during the first year after closing. Such synergy value is expected due to the combination of assets and capabilities regarding wireless services.
2. Synergies analysis
Due to the combination of assets and capabilities, it is expected that cost synergies are realized, since, by employing the same technology, there shall be a cost reduction due to the combination of machinery and equipment. Additionally, revenue synergies can also be realized due to the intention of expanding the 5G service in Western Canada, therefore increasing market access and power. Having that said, we believe that the synergies realized are mostly positive due to the economies of scale which can be derived from it, based on the cost synergies cited.
As the two companies each operate in different regions of Canada for their wireline activities, they are not direct competitors, and their merger would thus allow Rogers to enter the wireline market in Western Canada, where the telecom giant would be able to expand its presence over the long term, resulting in additional revenue for the firm.
Furthermore, the companies’ CEO have emphasized the importance of achieving critical mass in order to make the necessary investments for the future 5G network in Canada. Given that building a 5G network requires huge investments, especially in a country as large as Canada, the merged company, with its significant new scale, will be able to manage the new investment cycle ahead. In the long run, this merger will therefore surely prove beneficial to Rogers and its ability to assert itself as a key player in the 5G revolution in Canada.
RISKS AND UNCERTAINTIES
The main uncertainty this deal can encounter lies in the possibility that Canadian competition regulator or political authorities will not approve the merger of two major telecom companies. Indeed, some consumer organizations and competitors of Rogers and Shaw have expressed their concerns about the impact of the merger on competition in the wireless telecommunications sector, particularly in Western Canada, Shaw’s core market. The merger could therefore be stopped by Canada's competition watchdog, or Rogers could be forced by it to sell some of its own or Shaw’s divisions in order to complete the transaction without reducing competition.
Furthermore, the scrutinization process is likely to take a year or even longer and the Canadian government has the final say, which makes it all the more possible that Rogers will have to make concessions to get this deal approved. Investors are well aware of these risks and take them seriously, explaining why Shaw shares were traded 16% below the takeover price at the end of the day of the announcement.
FINANCIAL CONSEQUENCES
As the merger is an all-cash deal, meaning that Rogers will not issue new shares in order to acquire Shaw, the control of the acquirer over the target company will be more important since it is a bigger company, with a market capitalization 8 billion more than the target’s market capitalization. Rogers will be granted a stronger power over the decision making of the new entity and its shareholders control, despite a slight decline, will remain great. On the opposite, Shaw former shareholders will see their control on the company drop significantly after its acquisition by Rogers. For example, Rogers’ major shareholders like Rogers Control Trustthat owns 9.89% of the company and Royal Bank Of Canada (8.32%) will still have a great influence over the new group whereas firms like The Vanguard Group and Royal Bank of Canada which respectively own 2.65% and 9.10% of Shaw will be diluted. It is interesting to notice that Royal Bank Of Canada is also a major shareholder of Shaw. It means that the control of Royal Bank of Canada on the new entity created by the acquisition of Shaw by Rogers will be unchanged, or even bigger.
Moreover, in terms of leverage, Rogers will not benefit from this operation, yet it is not an issue. Indeed, as the buyout of Shaw is an all-cash deal, Roger’s debt level will naturally increase. The firm has a current net debt to EBITDA ratio of 2.09x; it is due to the fact that it has a balance between cash and debt on its balance sheet. With the acquisition of Shaw (net debt to EBITDA of 2.10x), the merged companies will reach a ratio of 4.10x due to the fact that Rogers will finance the deal fully in cash and increase its leverage ratio consequently.
Furthermore, Rogers will benefit from an earnings per share accretion as the new entity with Shaw should have an EPS of $4.82, which represents around 40% increase to the company’s current EPS of $3.4. This projection is based on the $734 million post-tax yearly synergies that should be generated by the deal according to Rogers’ CEO.
IS THIS DEAL FAIRLY PRICED?
The 40.50 CAD offer values Shaw at an estimated $bn. This includes both the $20bn equity value and the $6bn of Shaw’s net financial debt. Considering the $2,423bn LTM EBITDA of Shaw, the final EV/EBITDA transaction multiple is worth 9.9x. Even though it seems in line with the median transaction multiples (10.7x), it would be more relevant to compare it with very recent transactions. This deal is expensive when compared to the recent acquisition of Cablevision by Vodafone in December 2020, which was paid at an EV/EBITDA multiple of 7.3x. This is due to the large premium paid by Rogers in order to complete the deal.
Let us now compare the market value of synergies and the premium paid. The deal is expected to create $1bn pre-tax synergies, which corresponds to a market value of around $9.7bn based on an EV/EBITDA ratio of 9.7x (median of the trading comps’ multiples). We can compare this to the 69% premium paid to make the transaction, which represents a value of $13.8bn. This is why according to our analysis the deal is unlikely to be profitable for Rogers’ former shareholders, even if Rogers will benefit from a huge leverage effect thanks to the debt issued to pay the deal.
CONCLUSION
This deal between Rogers and Shaw is a big step in the development of the 5G in Northern America. Telecommunications are a critical industry in the further growth of Canada, as it is for any country, and the arrival of 5G is not something a country wants to be late on. This merger could be an asset for Canada in the war on 5G, which has already brought tensions, in the USA for example, where Huawei has been banned. This asset is an element that the regulator will take into account when deciding whether the deal, approved by both companies, will be closed or not in the end.
Authors: Aisha Jinsi, Anubhav Narwal, Leo Clement, Titouan Guillon, Youssef Nammour,
Alexis Bernet, Hector de Vergeron
Contact: alexis.bernet@hec.edu
Date: 28-April-2021