DBRS Limited (DBRS Morningstar) resolved the Under Review with Negative Implications status of Rogers Communications Inc.’s (Rogers or the Company) by downgrading the Issuer Rating and Senior Unsecured Notes rating to BBB (low) from BBB (high). All trends are Stable. The resolution of the Under Review status reflects the completion of the $26 billion acquisition of Shaw Communications Inc. (the Shaw transaction) concurrently with the divestiture of Shaw’s Freedom Mobile to Videotron Ltd. (the Freedom transaction), a wholly owned subsidiary of Quebecor Media Inc. (not rated by DBRS Morningstar). The rating downgrades reflect the increase in gross leverage required to finance the Shaw transaction and anticipated challenges related to network, cultural, and operations integration amid an intensely competitive landscape, while acknowledging the long-term competitive benefits for Rogers as it enhances its national footprint and competitive positioning, particularly in Western Canada. The Stable trends reflect DBRS Morningstar’s expectation of a multiyear deleveraging path toward the Company’s long-term leverage target, as earnings are expected to benefit from a strong market position of the combined entity.
On April 3, 2023, Rogers announced it has closed its $26 billion acquisition of Shaw, which included the acquisition of all of Shaw’s outstanding Class A and Class B shares for $40.50 per share valued at ~$20.2 billion and the assumption of approximately $6.0 billion in Shaw debt. Prior to closing the Shaw transaction, Shaw divested its mobile operating division, Freedom Mobile, to Quebecor Media Inc.’s Videotron Ltd. for $2.85 billion (cash consideration of $2.17 billion).
In terms of the earnings profile, DBRS Morningstar has a positive view of the long-term operating benefits of the Shaw transaction primarily related to five factors: 1) the highly complementary wireline network footprint where currently Rogers operates in the east and Shaw operates in Alberta and British Columbia (BC) where Rogers does not have a wireline offering, 2) the high level of network compatibility as both companies operate DOCSIS cable fibre network, 3) the ability to offer a competitive bundled service (i.e., mobile + Internet + TV + phone/security) in all mobile markets, which should reduce churn and provide revenue opportunities longer term, 4) Rogers’ likely ability to leverage Shaw’s enterprise solution business in its Eastern markets, and, finally, 5) the friendly nature of the acquisition, which should reduce the internal integration risk considerably as there should be limited integration ‘surprises.’
Although DBRS Morningstar has a favourable view of the strategic rationale of the Shaw transaction, there are numerous business risks that could affect credit quality that Rogers will need to manage. Our primary concerns include: 1) Shaw’s wireline network has been optimized to provide best-in-class download speeds within its footprint; however, the network is behind other national competitors in terms of its fibre-optic backbone, which limits data speeds to ~1 gigabyte per second (Gbps), 2) we do not believe that the Rogers brand has the same presence in Western Canada as it does in Eastern Canada, and the Company could come under pressure as a result of potential FTE rationalization, and 3) Rogers’ go-to-market strategy in Alberta and BC may face execution risks.
DBRS Morningstar believes that Rogers’ earnings profile continues to support an investment-grade rating, considering the benefits of a larger network footprint, an increased subscriber base, new bundling opportunities in Western Canada, and the potential to recognize material cost synergies. However, DBRS Morningstar also considers the challenges of integrating the two businesses, a softening economic environment, and a highly competitive landscape. DBRS Morningstar forecasts Rogers’ revenue to grow to approximately $19.0 billion–$19.3 billion in 2023 and to rise to $21.2 billion–$21.5 billion in 2024, reflecting approximately nine months of contribution from Shaw in 2023 and mid-single-digit growth in the legacy Rogers and Shaw business in each year. Reflecting a larger revenue base and the strong margin performance of Shaw’s legacy wireline business, combined with cost synergies and top-line growth, DBRS Morningstar believes that the Company will be able to modestly expand consolidated EBITDA margins in 2023 and 2024. As such, DBRS Morningstar forecasts EBITDA to grow to approximately $8.35 billion–$8.55 billion in 2023 and to approximately $9.4 billion to $9.6 billion in 2024.
In terms of Rogers’ financial profile, DBRS Morningstar forecasts gross leverage to rise materially from pre-acquisition levels to roughly 5.3 times (x) on a reported basis (~5.0x on a pro forma basis) at year-end (YE) 2023. As Rogers works to integrate the Shaw acquisition and build its national presence, DBRS Morningstar expects Rogers’ financial profile to steadily improve over time, supported by continued earnings growth combined with the expectation that the Company will maintain conservative financial management practices that prioritize debt reduction with available free cash flow post ongoing network investments. DBRS Morningstar expects capital expenditures (capex) of about $3.2 billion in 2023, rising to approximately $4.0 billion in 2024, in order to accelerate network integration and improve performance. Dividends are expected to remain stable at about $1.0 billion per year in 2023 and 2024, resulting in free cash flow (FCF; after dividends but before changes in working capital and lease principal payments) average of $1.5 billion in 2023 and 2024, although some of this is expected to be allocated to the purchase of 3800MHz spectrum license acquisition costs. Overall, DBRS Morningstar expects Rogers will apply FCF primarily toward debt reduction, such that gross leverage is expected to improve to well below 5.0x by YE2024 and move toward 4.0x by 2026.
The new ratings are supported by Rogers’ strong market position as a national telecommunications and media provider, its strengthening position in Western Canada with the Shaw acquisition, and high-quality national network, while also acknowledging the increase in leverage, the challenges related to integration, and changes in the competitive landscape that will see a ‘new’ national entrant, as well as the risks associated with the regulatory environment, technological change, and the industry’s capital-intensive nature.
Looking ahead, a positive rating action may occur if Rogers is able to leverage its expanded national footprint in order to drive EBITDA growth and/or reduce debt such that gross leverage is sustainably between 3.5x and 4.0x. DBRS Morningstar notes that Rogers has several levers that could provide access to capital and may be used to reduce the Company’s debt stack and accelerate its deleveraging efforts, including the sale of noncore assets and access to the equity markets. Conversely, if Rogers were to experience weakening operating performance that falls materially below DBRS Morningstar’s current forecast and/or the Company were to pursue more aggressive financial management such that FCF was not directed to debt reduction, resulting in a delay in the deleveraging plan or that leads to the expectation that leverage would be maintained structurally at current levels, a negative rating action may occur.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
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/396929 (May 17, 2022).
All figures are in Canadian dollars unless otherwise noted.
DBRS Morningstar applied the following principal methodologies:
-- Rating Companies in the Communications Industry (July 21, 2022; https://www.dbrsmorningstar.com/research/400203)
-- DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023; https://www.dbrsmorningstar.com/research/411694)
-- DBRS Morningstar Global Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 20, 2022; https://www.dbrsmorningstar.com/research/404248).
The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.
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 firstname.lastname@example.org.
The rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
This is a solicited credit rating.
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at email@example.com.
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577