On March 15, 2021, Toronto-based Rogers Communications Inc. announced that it had reached an agreement to acquire Calgary-based Shaw Communications Inc. for about C$26 billion, including about C$6.0 billion of debt outstanding at Shaw. The largely cash transaction adds significant leverage at Rogers and will likely spur intense regulatory scrutiny, in S&P Global Ratings' opinion. As a result, we placed our 'BBB+' issuer credit rating (ICR) on Rogers on CreditWatch with negative implications on March 15, reflecting the potential for a significantly weaker balance sheet amid integration and transition risks. Our 'BBB-' ICR and positive outlook on Shaw are unchanged.

Investors have asked several questions about the transaction and S&P Global Ratings has provided answers below along with its preliminary views on the merger and implications for the Canadian telecom industry.

Frequently Asked Questions

How does the acquisition benefit Rogers' business risk profile?

We view the merger positively for our strong business risk profile on Rogers reflecting: a national cable footprint that covers almost 60% of Canadian households with quad-play capability; improved scale, with about 27% of wireline residential consumer revenue generating units (RGUs); greater market share of wireless subscribers at 38%; balanced revenue diversity among wireless and wireline with a strong exposure to growth-oriented services (see table 1); and the potential for meaningful operating synergies (about 8%-10% of pro forma EBITDA by 2024). The transaction also improves Rogers' competitive position in wireless, with a significantly stronger wireless spectrum position including attractive low- and mid-band spectrum, and most notably addresses Rogers' fiber backhaul needs for 5G (a current limitation) in Western Canada in a timely two- to three-year time frame compared with a longer five-to-10 years if developed organically. In terms of size, after acquiring Shaw, Rogers will be about as big as BCE Inc./Bell Canada and, in our opinion, more aligned with BCE's strong business risk profile.

We believe the acquisition provides Rogers with a significant advantage to not only compete in the future with Telus Corp. in a converged services marketplace in Western Canada, but also allows the company to compete with Telus and Bell Canada in nationwide 5G wireless. Also, in our view, the spectrum position on a combined basis will be significant in relation to either Bell Canada or Telus. Finally, the purchase should improve visibility and reduce potential variability in Rogers' future capital expenditure (capex) profile while allowing the company to benefit from scale-driven savings.

Table 1

What is the risk of S&P Global Ratings' downgrading Rogers below investment-grade?

In our CreditWatch listing on Rogers, we highlighted the risk of an up to two-notch downgrade on the company. This assumes the transaction, excluding Rogers' shares issued to the Shaw family (about C$1.4 billion), is entirely debt funded. Under this scenario, we would expect Rogers' leverage to initially weaken to about 5.0x from current 3.2x at year-end 2020. We assume economic recovery amid re-openings and greater mobility will generate modest improvement in EBITDA in 2021 but produce greater growth in 2022. Even after incorporating a haircut to operating cost synergies guided by Rogers' management (about C$1 billion; see table 2), we believe the company can still produce annual EBITDA growth of approximately 4%-6% through 2023, which should allow pro forma leverage in the high-4x to low-5x range in the first two years after the acquisition closes, potentially improving more meaningfully to the low-4x area in 2024. In contrast, management has more aggressive deleveraging aspirations as it expects pro forma leverage to improve significantly to 3.5x within 36 months post-merger. Factoring in costs related to the integration, anticipated spectrum purchases and capex spending to integrate the networks, we believe Rogers could be challenged to deleverage to these levels over the next couple of years. As a result, our two-notch downgrade limit factors in more conservative assumptions for EBITDA accretion that support Rogers' ability to deleverage to the low-4x area by 2024, and more important, we believe that management is committed to reducing leverage to below this level. We see leverage in the low-4x area as consistent with a 'BBB-' rating for telecom providers with a strong business risk profile (see table 3).

The time frame for deleveraging and associated risks will be an important factor. Typically we could be more patient with strong investment-grade rated issuers embarking on transformative acquisitions where the industry risk profile is expected to be relatively stable, and place emphasis on the year-three leverage but have a meaningful consideration for the next two years, which would presumably include significant nonrecurring restructuring costs. Post-transaction, should Rogers face delay in synergy generation or integration missteps, such that we don't anticipate any significant improvement in leverage metrics in the third year, we could consider further negative rating action.

Table 2

What leverage expectation would be commensurate with a 'BBB' or 'BBB-' rating on Rogers?

As noted, the proposed transaction strengthens our assessment of Rogers' business risk profile. We view the company's prospective business risk profile (strong) as similar to that of other North American investment-grade peers such as Comcast Communications Inc., Verizon Communications Inc., and BCE, although we rank the company slightly below these peers. In our opinion, North American telecom and media companies with similarly strong business characteristics can support a 'BBB' ICR if we believe they can sustain an S&P Global Ratings' adjusted debt-to-EBITDA ratio in the mid-3x area. Similarly, consideration for a 'BBB-' ICR would typically reflect sustained leverage expectation of about 4x (see table 3). Any deviation from these leverage levels for the corresponding rating would usually reflect issuer-specific relative strengths or weaknesses that are themselves boosted or mitigated by subsector, financial policy, governance, or other factors. The typical time horizon consideration for an investment-grade outlook is two years, but in cases of transformational transactions we are willing to look beyond the first two years, when most of the integration and restructuring costs could temper EBITDA and free cash flow, which might not ideally represent the underlying capacity to support debt. In our view, Rogers' leverage in the third year will likely start trending to levels that are consistent with an investment-grade rating. However, we will assess the credit quality reflecting the achievement of the integration synergies and RGU execution through the transition.

For more information on relative rankings and our leverage expectations for North American telecom and media issuer ratings, see the following articles published on RatingsDirect:

• Amid Secular Pressures, Most U.S. Media Companies' Long-Term Prospects Have Diminished Somewhat, Feb. 19, 2020
• Re-Ranking Major U.S. Media, Telecommunications, And Cable Companies: Has Anything Changed?, Dec. 10, 2018

Table 3

What consideration beyond leverage can support each outcome?

Stronger organic revenue growth and potential revenue synergies in the later years could aid deleveraging. Our base-case forecasts pro forma revenue growth of 3%-4% annually, largely reflecting the return of wireless roaming and data overage revenues as well as the ongoing growth in wireline supported by demand for high-speed internet services. Normalization of immigration and increasing penetration of wireless could further accelerate revenue growth. Revenue synergies will also be a material driver in deleveraging, especially in the later years of the transition, as Rogers takes advantage of cross-selling opportunities and offers quad-play bundles across its footprint, while also re-focusing on the small-to midsize business segment where Shaw has established a better track record. Longer term, we believe potential business-to-business and enterprise revenue could be additional opportunities as Rogers develops appropriate solutions and services national customers.

Asset sales could be another consideration, but the deleveraging benefit is likely modest. While Rogers' management has indicated that it does not expect any asset dispositions, including sale of the company's shares in Cogeco Inc. to finance the Shaw purchase, it still indicates that a decision to sell its Cogeco shares will be a separate consideration. Rogers' ownership of Cogeco has a C$1.8 billion current market value, and net proceeds after capital taxes and after selling discounts could net an estimated C$1.4 billion-C$1.6 billion, allowing for 0.2x of deleveraging. Media assets such as 37.5% ownership of Maple Leaf Sports & Entertainment Ltd. (Toronto Maple Leafs, Toronto Raptors, Toronto FC, other regional sports franchises) and 100% of Toronto Blue Jays have considerable value but might be more strategic to the company and, in our opinion, harder to monetize.

Proceeds from regulatory remedies could prove to be a material source of funds. We anticipate limited divestitures from the wireline business, given that there is minimal overlap between the cable footprint. However, given the wireless overlap in Western Canada and significant subscriber market share in Ontario, Rogers might need to divest of wireless subscribers or spectrum, or both, to win regulatory approval. While a complete sale of Shaw's wireless assets (including spectrum) might not be an acceptable outcome for Rogers, such an event could support at least C$3.5 billion-C$4.0 billion of proceeds reflecting the book value of spectrum and some value attributed to Shaw's wireless customers given the lower-margin profile of Shaw's mobile customer base. The divestment could support about 0.2x of deleveraging against our base-case scenario, although the loss of valuable spectrum could be viewed as credit negative for Rogers.

Lower wireless spectrum expenditure from a more rationale marketplace with better supply could aid debt reduction. Our base case assumes about C$3 billion of cumulative investment in spectrum over the next few years, and we estimate that a C$500 million reduction in spend equates to 0.05x-0.07x of leverage improvement.

What are the key risks that could derail anticipated deleveraging?

We believe integration and transition risks could delay cash flow growth and hence deleveraging. As noted, Rogers has identified significant cost savings that will be material contributors to the deleveraging plan. In our view, upfront cost synergies will primarily come from general and administrative costs, corporate overhead, infrastructure optimization, and rationalization of real estate. That said, we note that competition from Telus and limited access to non-affiliated customers (pro forma wireless share in British Columbia and Alberta is high) could make material share gains difficult. Rogers could prove to be a more aggressive competitor than Shaw as it relates to market share retention and subscriber acquisition, which could lead to profit pressure through the transition period. Also, incremental market share gains in the mid-to-large business telecom segment could take time. As a result, we believe EBITDA could be pressured, reflecting integration risks and competition not to mention the upfront restructuring costs.

We expect some regulatory approval risks as well because the acquisition would take a value-oriented fourth wireless player out of the market. Given that in Ontario the combined wireless market share is expected to be above 50%, the deal will be reviewed by the independent Competition Bureau of Canada and potentially other regulatory bodies. However, we believe that Rogers has had experience in acquiring and integrating its base since 2004, when it acquired Fido for C$1.4 billion, which was then the fourth-largest wireless operator in Canada, with about 1.2 million subscribers. However, to smooth the regulatory path, Rogers said it would not raise wireless prices on Freedom Mobile customers for the next three years. It also promised to launch a new C$1 billion fund to improve connectivity in rural, remote, and Indigenous communities and expand its low-cost internet offerings for seniors and low-income individuals with investment in its 5G network buildout.

How could the Rogers-Shaw merger affect the industry risk profile and what are the possible regulatory outcomes?

The transaction has the potential to significantly alter the industry's competitive landscape and much depends on the outcome of the regulatory review. Not unlike the 2017 Bell-Manitoba Telecom Services transaction, the competition bureau will consider net efficiency (C$1 billion of synergies), unilateral effects, and coordinated behavior risk, as well as the sustainability of a maverick player; yet could support the transaction with moderate remedies. However, the appetite for lawmakers to bless the transaction could ultimately result in a political decision as lawmakers weigh the benefits against the risk of potentially lower affordability and choice to consumers and businesses.

An outright approval could represent an acceptance by lawmakers amid a pivot to endorsing stronger and bigger companies that can foster real broadband access to rural and remote markets and bridge the digital divide in inner cities. A three-player wireless market for most of Canada, even with some added regulatory scrutiny, would contribute to moderate competition, price stability, and better return on capital outcomes. Nevertheless, two players--namely, BCE and Rogers--will have a strong national presence with access to greater than 60% of households each, and control more than 70%-75% of the industry's telecom and video revenue, a factor that will undoubtedly be part of the regulatory review, potentially spurring more consolidation among the remaining players as a relatively weaker scale becomes a limiting factor.

Alternatively, lawmakers and regulators could continue their support for a strong fourth regional player in wireless forcing a near-full divestment of Shaw's mobile assets and subscribers. Under this scenario, we could see other existing (or less likely, new) players entering the market, but possibly supported by more privileges such as mandated mobile virtual network operator (MVNO), existing and new spectrum access, and an attractive entry price to begin with. While we believe the long-term success of a new fourth player is debatable, the entrant could prove to be a formidable competitor in the value-oriented consumer market if the player embraces low-cost operating models and limits investment needs owing to regulatory support.

Related Research

• Rogers Communications Inc. Ratings Put On CreditWatch Negative On Announced Acquisition Of Shaw Communications, March 15, 2021
• Shaw Communications Inc.'s Acquisition By Rogers Likely To Create Higher Leverage For Combined Entity, March 15, 2021
• 2021 U.S. Telecom And Cable Outlook: Rising Leverage Overshadows Economic Resilience, Jan. 15, 2021
• Amid Secular Pressures, Most U.S. Media Companies' Long-Term Prospects Have Diminished Somewhat, Feb. 19, 2020
• Industry Top Trends 2021 Telecommunications: Leverage Risk Transcends Pandemic Resilience, Dec. 10, 2020