Rogers Communications has price target chopped at Scotia

It’s possible, but it is going to take a lot for Rogers Communications (Rogers Communications Stock Quote, Chart, News, Analysts, Financials TSX:RCI.B) to make MLSE work going forward.

That’s the opinion of Scotia analyst Maher Yaghi who, as reported by the Globe and Mail November 21, cut his price target on RCI from $71.60 to $69.00, while maintaining his “Sector Outperform” rating on the stock.

On September 18, Rogers announced that it had agreed to buy the 37.5% stake it had in Maple Leaf Sports & Entertainment (MLSE) for $4.7-billion.

“MLSE is one of the most prestigious sports and entertainment organizations in the world, and we’re proud to expand our ownership of these coveted sports teams,” CEO Tony Staffieri said. “As Canada’s leading communications and entertainment company, live sports and entertainment are a critical part of our core business strategy.”

Yaghi says he lowered his price target not just on MLSE concerns, but owing to an expectation of slower wireless growth.

“There are two goals that drove Rogers to consolidate control over MLS,” Yaghi wrote. “The first is to surface value of its sports franchises and real estate (Jays, stadium and ownership in MLSE). The second is to generate a positive cash return on invested capital over time. The playbook that will best deliver on those two objectives will require consolidating the Jays within MLSE, generating the needed cost and revenue synergies, and bringing the entity public. In this report, we analyzed how this playbook will affect leverage and the required revenue and cost synergies to generate a return on those investments that would be better for the company than having simply allocated the capital spent to buy BCE’s MLSE stake towards stock buybacks or debt reduction. Having done the analysis, we believe there is a path forward to achieving a positive NPV but this will require strong operational execution. In other words, if the playbook is run properly, the company could end up surfacing around $9/share over time. Finally, given the slower expected growth in wireless due to pricing pressure and lower gross adds, we have lowered our wireless EBITDA multiple by 0.5 times down to 7 times in our NAV.”