Rogers Communications: Buy, Sell or Hold?

Desjardins Securities analyst Jerome Dubreuil says Rogers Communications (Rogers Communications Stock Quote, Chart, News, Analysts, Financials TSX:RCI.B) could temporarily look more expensive if it exercises its right to buy the remaining 25% stake in Maple Leaf Sports & Entertainment from Larry Tanenbaum’s Kilmer Group.

As reported by the Globe and Mail, in a June 25 report, Dubreuil maintained his “Hold” rating and $59.00 target on Rogers. The average target is $59.74.

Dubreuil expects Rogers to pay about $4.4-billion for the remaining MLSE stake, which he estimates would represent a 15% to 20% premium to private market value.

“Sports franchise transactions are typically executed at a premium to private market valuations, but public markets generally apply a discount to sports assets,” Dubreuil said. “We expect this will challenge RCI’s value creation in the near term.”

The analyst said the transaction could temporarily lift Rogers’ leverage to 4.2 times, or 4.9 times including the Blackstone financing, while making the company appear more expensive because the added stake would not increase reported earnings.

Dubreuil said monetization of sports and media assets will be critical. He expects Rogers to pursue $5-billion to $8-billion of asset monetization in 2027, likely including MLSE, the Toronto Blue Jays and media assets.

“Monetization is critical,” he said.

Dubreuil said Rogers’ sports assets are not fully reflected in its share price, though the discount appears broadly consistent with other publicly traded sports assets. He said telecom investors typically prefer stability, free cash flow and tangible assets, while sports franchises tend to have lower free cash flow and more intangible value.

“We believe it will be challenging for RCI to fully close the gap between the value of sports assets reflected in the share price and the PMV,” Dubreuil said.

He said the most effective way for Rogers to unlock value would be to monetize as much of the sports portfolio as possible, reducing the amount subject to the public market discount.

“We believe RCI will ultimately emerge from this process in a better position, but maintain our ‘Hold’ rating in the meantime,” he said.

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