Dividends After the Rogers-Shaw Merger

Ruth Saldanha: In a massive telecom deal in Canada, Rogers Communications agreed to acquire Shaw Communications for around $26 billion. What does this mean for both companies, especially for their dividends? Analyst Matthew Dolgin is here today to talk about that. Matthew, thank you so much for being here today.

Matthew Dolgin: Hi, Ruth. Thanks for having me.

Saldanha: First up, how are you reading this merger?

Dolgin: Well, when I saw the news of this deal, three things immediately struck me. First, I thought this seems like a really big premium for Shaw. Second, I was wondering whether this could get regulatory approval. And then, finally, I thought, wow, this is really good for the wireless carriers if this goes through.

So, to expand on those, actually, first about the regulatory approval. Ultimately, we think this deal is more likely than not to happen right now based on our fair value adjustments for Shaw, what kind of pricing two to one that it does happen. There are good reasons why the regulators would not want it to mainly because Shaw has been kind of the fourth wireless player on a national level in Canada that's had some impact on the market and been good for competition. But with that said, they're really only 4% or 5% market share based on our estimates of their wireless subscribers. So, that's not really material enough versus the big three that I think that that would cause regulators to nix the deal. The wireline footprints of Shaw and Rogers don't overlap it all. And then, finally, Rogers made some promises that we think is kind of designed to make regulators like this deal. They are going to spend billions of dollars accelerating 5G buildout, bringing broadband access to some more rural and underserved areas. So, all things considered, although there is real risk that the deal won't happen, we think it probably does.

As far as the premium that Rogers paid, it was about a 70% premium to Shaw's closing price the day before the merger was announced and about 50% premium to our fair value estimates and the value shot about 10.7 times EBITDA, which is really expensive. With that said, Rogers says that with the synergies they expect of about $1 billion, it would make the valuation more like 7.6 times and that's right in line where we thought Shaw was. So, altogether, we think there's risk for Rogers there, but it doesn't really change our view of Rogers' valuation.

And that kind of brings us to the industry overall, which we think it's going to be good for the wireless carriers, Rogers being one of them, but BCE and Telus even more so because, as I said, although Shaw was really small, it was shaking up the industry. It, kind of, spurred the unlimited plans that have become prevalent throughout Canada in the last couple of years, and it really kept a lid, I think, on the pricing. So, with them removed, that should help, and I think each of the remaining firms will benefit.

Saldanha: Now, one thing that's very popular in Canada is dividends and telecom companies have often been good dividend payers. What does this deal mean for telecom dividends, especially for Rogers and Shaw?

Dolgin: Yeah, for Rogers and Shaw – well, Shaw should continue to pay theirs until the deal closes, if it does, which is expected to be in early 2022. As far as Rogers' dividend, the firm implied that there will be no change. So, right now, Rogers pays about $2 a share. That should continue even through the merger. We don't think it will get raised, but it shouldn't be cut, and the firm said that within a couple of years the payout ratio should be down to about 30% of free cash flow. So, it should be safe for Rogers. As far as BCE and Telus, we don't really think this deal has any bearing on their dividends. Certainly, if there are major changes to the industry, there could ultimately be some impact, but it doesn't change our thinking right now whatsoever for BCE and Telus which are both very good dividend payers.

Saldanha: So, finally, what is your top Canadian telecom pick right now and why?

Dolgin: BCE is our top pick. It's the most undervalued relative to our fair value estimate. We really like both the wireline and the wireless business for them, I guess, the wireless as much as each of the big three. We think they're kind of in the same boat and BCE will be one of the winners long term with the other two. And like I said, I think this deal probably even helps that a little bit. But wireline is where they've really made some inroads. They've been building fiber-to-the-home, and it's allowed them to take some market share from Rogers where they compete head-to-head in wireline business in many places, and it's allowing them to price better, reduce their costs. So, with that enhanced network and enhanced offering, we like BCE's business prospects.

Saldanha: Great. Thank you so much for being here today, Matthew.

Dolgin: Thanks, Ruth.

Saldanha: For Morningstar, I'm Ruth Saldanha.