Transaction Overview: On March 15, 2021, Rogers Communication (TSX: RCI.B) announced that it would purchase all outstanding Class A Shares and Class B Shares of Shaw Communications for CAD 40.50 per share in cash, reflecting a ~70% premium to Shaw’s Class B Share’s closing price on March 12, 2020. Following this announcement, Shaw Communications (TSX: SJR.B) surged approximately 41.6% and settled at CAD 33.85 at the end of Monday’s trading session against the previous close of CAD 23.90.               

Transaction Cost: In the transaction detail, it was highlighted that the transaction is valued at approximately CAD 26 billion, comprising of approximately CAD 6 billion of Shaw debt, equivalent to 10.7x 2021 Calendar Year EBITDA based on the consensus estimates, or 7.6x post synergies.

Mode of Funding: Transaction would be funded by cash consideration of CAD 40.50 to all shareholders, except for approximately 60% of the Shaw family shares, which would be exchanged for 23.6 million Class B Shares of Rogers at an exchange ratio of 0.70. Transaction unanimously approved by the Rogers Board of Directors and unanimously recommended by the Shaw Board of Directors.

Key Synergies: It is expected that synergies are expected to exceed CAD 1 billion annually within two years of closing, and the transaction would be significantly accretive to earnings and cash flow per share as of the first year after closing.

Other Details: Under the terms of the transaction, holders of Shaw Class A Shares and Class B Shares would receive CAD 40.50 per share in cash. The Shaw Family Living Trust, the controlling shareholder of Shaw, and certain members of the Shaw family will receive 60% of the consideration for their shares in the form of 23.6 million Class B Shares of Rogers valued on the basis of the volume-weighted average trading price for the ten trading days for the Rogers Class B Shares ending March 12, 2021, and the balance in cash.

Key Benefits from Rogers and Shaw Acquisition Deal

The joint entity would create a strong legacy of two family-founded Canadian companies. The combined entity would have the scale, assets and capabilities needed to deliver unprecedented wireline and wireless broadband and network investments, innovation and growth in new telecommunications services, and greater choice for Canadian consumers and businesses. As part of the transaction, the combined company would invest CAD 2.5 billion in 5G networks over the next five years across Western Canada, which would enhance competitiveness, offer consumers and businesses more choice and improved services, help close the digital divide between urban and rural communities, and deliver significant long-term benefits for businesses and consumers.

The combined company is committed to continuing to offer affordable wireless plans, with no overage fees, that meet the budgets and needs of Canadians. As part of this commitment, Rogers will not increase wireless prices for Freedom Mobile customers for at least three years following the close of the transaction.

Recommendation:

We see that Rogers acquisition of Shaw would benefit the shareholders of both the entity. Shaw’s shareholders are getting a 70% premium on Friday closing price. Also, at the last closing price, Shaw Communication still has an upside scope for ~20%, as Rogers is paying CAD 40.5/share to acquire Shaw Communication.

Further, the merger of two giant telecoms would bring scale, assets and capabilities needed to deliver unprecedented wireline and wireless broadband and network investments, innovation and growth in new telecommunications services, and greater choice for Canadian consumers and businesses. As part of this commitment, Rogers will not increase wireless prices for Freedom Mobile customers for at least three years following the close of the transaction. Also, the combined entity’s coast-to-coast fibre network would create new competition for Bell and Telus for large enterprise and government customers across Canada.

Therefore, given the potential opportunities for both the companies can have in future, we recommend a “Hold” rating on Shaw Communication at the closing price of CAD 33.85 on March 15, 2021, and reiterate our Buy rating on Rogers Communication at the closing price of CAD 61.57 on March 15, 2021, with lower double-digit upside potential.

SJR.B (LHS) and RCI.B  (RHS) 1-Year Price Chart (as on March 15, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.