DBRS Morningstar Places Rogers Communications Inc.’ s Ratings Under Review with Negative Implications Following Announcement of Potential Acquisition of Shaw Communications Inc.

DBRS Limited (DBRS Morningstar) placed all ratings of Rogers Communications Inc. (Rogers or the Company) Under Review with Negative Implications following the Company’s announcement of an agreement to combine Rogers with Shaw Communications Inc. (Shaw; rated BBB and Under Review with Developing Implications by DBRS Morningstar) in a $26 billion transaction (including the assumption of approximately $6 billion of Shaw’s debt; the Transaction). The closing of the Transaction is subject to a series of approvals including regulatory considerations and is expected to close by the first half of 2022.

Rogers has offered to acquire all issued and outstanding Class A Shares and Class B Shares of Shaw for a price of $40.50 per share in cash, which reflects a premium of approximately 70% to Shaw’s recent Class B Share price, valued at approximately $20 billion. Approximately 60% of the Shaw family shares are proposed to be exchanged for 23.6 million Class B Shares of Rogers, which would result in a 4.5% ownership stake in Rogers. The purchase of Shaw’s equity is expected to be funded primarily by approximately $18.5 billion in cash and debt and the remainder in Rogers shares. Furthermore, Shaw will have two seats on Rogers’ board of directors, which highlights Shaw’s commitment and support of the Transaction and combined entity. Approximately $6.0 billion of Shaw’s existing debt is expected to be rolled into the combined entity, resulting in a total Transaction value of $26 billion. The Transaction is not conditional upon financing, as Rogers has secured committed financing to cover the cash consideration.

DBRS Morningstar notes that under the Arrangement Agreement, Rogers has the right to cause Shaw to redeem the Company’s outstanding preferred shares on June 30, 2021 (valued at $293 million as of Q4 F2020) in accordance with its terms by providing written notice to Shaw. As of the date of this press release, Rogers has not exercised this right.

The Transaction has been unanimously approved by Rogers’ board of directors and unanimously recommended by Shaw’s board of directors.

On a pro forma basis, the combined company would have generated more than $19 billion in revenue and $8 billion in EBITDA, based on most recent annual results. DBRS Morningstar expects Rogers to realize significant cost synergies by leveraging a coast-to-coast wireline network, complementary technologies, benefits from scale, and a wholly owned national wireless network with spectrum capacity needed to serve next generation technologies. If approved, the combined entity has committed to invest $2.5 billion in 5G networks over the next five years across Western Canada; invest $3.0 billion to support additional network, services, and technology investments; create a $1.0 billion Roger Rural and Indigenous Connectivity Fund; and maintain an operating presence in Calgary.

The Under Review with Negative Implications status reflects DBRS Morningstar’s view that while Rogers’ business profile should benefit from increased scale, an enlarged geographic footprint, and enhanced spectrum license portfolio and potential cost synergies, the benefits do not completely offset the risks associated with the initial increase in financial leverage as lease-adjusted debt-to-EBITDA may increase above 5.0 times on an unadjusted basis and assuming leveraged acquisition.

In its review, DBRS Morningstar will focus on (1) assessing the business risk profile of the combined entity as well as the risks associated with integration and realization of synergy potential; (2) Rogers’ financial risk profile on a pro forma basis, including free cash flow-generating capacity of the combined entity; and (3) the Company’s longer-term business strategy and financial management intentions going forward.

DBRS Morningstar believes that based on the merit of the Transaction, the Company should be able to maintain an investment-grade rating even without significant deleveraging post-close; however, a negative rating action could be limited to one notch based on the business benefits, and the Company’s ability and willingness to deleverage toward its stated intention within a two- to three-year time frame. DBRS Morningstar will proceed with its review as more information becomes available and aims to resolve the Under Review status by the closing of the Transaction.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Rating Companies in the Communications Industry (July 30, 2020; https://www.dbrsmorningstar.com/research/364691), DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020; https://www.dbrsmorningstar.com/research/369167), and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 14, 2021; https://www.dbrsmorningstar.com/research/369167), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrsmorningstar.com.

This rating was not initiated at the request of the rated entity.

The rated entity or its related entities did not participate in the rating process for this rating action. DBRS Morningstar did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is an unsolicited credit rating.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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