The markets are experiencing a late-year swoon. All major indexes lost ground Tuesday, with the Dow Jones Industrial Average down for a ninth consecutive session. While the Dow is solidly in the black in 2024, up more than 15%, this is not a good sign heading into 2025.
Regarding 52-week highs and 52-week lows, the latter took control in Tuesday trading, with the lows nearly doubling the highs, 114 to 59. Energy, industrials, and basic materials stocks accounted for 57% of the 52-week lows on the day.
One of the stocks hitting a 52-week low was Rogers Communications (RCI), a Canadian cable, internet, and wireless provider. It hit its 37th 52-week low of the past 12 months and its sixth 10-year low.
Does that make it a value play or a value trap? I’ll look at both sides of the argument.
RCI Stock Has Not Had a Good Second Half
The Barchart data point about the stock’s monthly performance over the past five months says it all.
Rogers' stock has declined in value in all but one of the past five months, bringing it to its sixth 10-year low. However, it remains well off its 20-year low of $12.19, set in January 2005.
From a timing perspective, its Tuesday closing price of $31.67 is 159.91% off its 20-year low of $64.55 and 50.94% off its 20-year high of $64.55, set in April 2022.
The last time the stock fell into the $20s was during the 2009 correction, 15 years ago. Investors should ask whether they think it will happen again in 2025.
Three issues are holding it back: the need for growth, significant debt, and its purchase of MLSE (Maple Leaf Sports & Entertainment).
A Lack of Growth
The company reported Q3 2024 results at the end of October. Revenue slowed to a crawl, up 1% year-over-year to CAD$5.13 billion ($3.8 billion). For the nine months ended Sept. 30, it was slightly better, up 8% to CAD$15.12 billion ($10.56 billion).
However, it added just 101,000 postpaid wireless customers, 29,040 fewer than analysts expected and down from 225,000 in Q3 2023. Further, its churn rate increased slightly in the quarter to 1.12%, four basis points higher than a year ago. In the nine months, it was 1.10%, 18 basis points higher than a year ago.
Cable revenues fell 1% in Q3 2024, whereas reported revenues jumped 17% for the nine months. However, excluding its acquisition of Shaw Communications, it declined by 2.6% year over year.
Surprisingly, Rogers' media business, which accounts for just 12% of its overall revenue, increased by 11% year-over-year due to higher revenues from sports broadcasting and the Toronto Blue Jays.
Overall, it was a mediocre performance in the growth department.
Is It Overleveraged?
As of Sept. 30, its adjusted net debt was CAD$43.28 billion ($30.22 billion), and its adjusted EBITDA for the trailing 12 months was CAD$9.41 billion ($6.57 billion). This resulted in a debt leverage ratio of 4.6x, down from 5.0x as of Dec. 31, 2023.
AT&T’s (T) was 2.8x as of Sept. 30, while Verizon’s (VZ) was 2.5x, considerably lower than Rogers.
However, Rogers believes that the CAD$7 billion ($5 billion) sale of a minority stake in its wireless infrastructure to Blackstone (BX) will improve its balance sheet.
“The deal concerns Rogers’s backhaul networks, which transport data from its towers to its core network. It is separating a portion of this backhaul network into a subsidiary, in which the investor is buying a minority stake. The investor will then receive periodic cash distributions from the subsidiary,” the Globe and Mail reported on Oct. 24.
According to the Globe, it is paying 4.5% interest on $7 billion of its debt. It intends to use the proceeds of the sale to pay that down. It will save approximately CAD$300 million ($209.49 million) annually in interest. However, the distributions it will pay to Blackstone will be slightly higher than that, and these payments aren’t tax deductible where the interest payments on the debt were.
Due to the debt repayment, its leverage ratio will fall to 3.7x by the end of December, considerably lower than in September but well above its U.S. peers.
Will MLSE Stake Be a Legacy Maker or Breaker?
Rogers announced on Sept. 18 that it had agreed to acquire BCE’s (BCE) 37.5% ownership stake in MLSE for CAD$4.7 billion ($3.28 billion). MLSE owns the NHL’s Toronto Maple Leafs, the NBA’s Toronto Raptors and several other sports properties and real estate.
With the acquisition of BCE’s stake, Rogers will own 75% of MLSE, with the remaining 25% owned by MLSE Chairman Larry Tannenbaum (20%) and OMERS (5%). In November 2023, OMERS, one of Canada’s largest pension plans, paid $400 million (CAD$572.3 million) for the 5% stake.
So, the good news is that the OMERS purchase valued MLSE at $8 billion (CAD$11.45 billion). The 37.5% purchase valued MLSE at CAD$12.53 billion), more than CAD$1 billion higher in less than a year.
The bad news is that Rogers will fund the acquisition with equity from private investors. At its current share price of CAD$45.34, it will have to issue approximately 103.66 million shares, increasing its share count by nearly 20%.
Can you say “dilution?”
Even with this dilution, the media and analysts have speculated that Edward Rogers, Executive Chairman and majority owner of Rogers through the family holding company, could move to fold the Toronto Blue Jays and its Sportsnet TV network into MLSE and then spin off a piece of the sports conglomerate into its own publicly traded company.
“Vince Valentini, a telecom analyst at TD Securities, outlined a scenario where Rogers buys out both MLSE partners for about US$5.8 billion and adds the Blue Jays, valued at US$2.4 billion. Rogers would then sell 49% of the combined assets to private investors for US$5.75 billion,” iPhoneinCanada.com reported in September.
‘“Rogers ends up with 51% control of an entity owning all the key Toronto sports teams,’ Valentini noted, adding that this structure provides Rogers control and better visibility of the asset’s value going forward.”
Another analyst from the National Bank of Canada, Adam Shine, believes it would take more than two years for this to happen. By then, MLSE could be worth significantly more than today's estimate of CAD$16.5 billion ($11.53 billion).
The Bottom Line Verdict on RCI Stock
I don’t think there’s any doubt that an MLSE IPO would be a slam-dunk homerun with both retail and institutional investors. The valuation could get silly when it’s ready to go public. That’s a tremendous plus for Rogers.
Rogers expects its free cash flow for 2024 to be CAD$3.0 billion ($2.1 billion) at the midpoint of its guidance. Based on an enterprise value of CAD$69.69 billion ($48.71 billion), its current free cash flow yield is 4.3%, putting it in fair value territory, which I consider anything between 4% and 8%.
It’s not a deep value play, but it could realistically test its all-time high with some timely maneuvers in the next 24 months.
Rogers stock is a Buy.
