Joe Natale has a problem every big bank is trying to help him solve: How does the chief executive officer of Rogers Communications Inc. avoid taking a haircut as he exits a $1.5-billion investment in Cogeco Inc. and Cogeco Communications Inc.?
Rogers and New York-based cable company Altice USA Inc. have all but given up on their $11.1-billion bid to acquire the Montreal-based companies in the face of unwavering opposition from their controlling shareholder, the Audet family.
While the offer from Rogers and Altice is scheduled to remain open until Nov. 18, Altice CEO Dexter Goei said last week there is a “low chance” of anything getting done. Mr. Natale said in a conference call last month that if the takeover fails, “we would do what you would expect us to do, we would review our capital allocation priorities.”
In banking circles, the expectation is Mr. Natale will soon sell Cogeco stakes built up two decades ago, when founder Ted Rogers was calling the shots.
Cashing out gives Rogers more money to plow into building 5G networks and acquiring wireless spectrum when the federal government puts it up for auction next year. Rogers projects it will spend $2.7-billion on gear next year. The sale could also represent a payday for the Street: If Rogers simply sold its Cogeco holdings into the open market, banks could be in line for up to $60-million of fees.
When, not if, Rogers exits, the company faces two significant issues. First, both Cogeco and Cogeco Communications are relatively illiquid stocks. Selling Rogers’s massive blocks into the open market would knock back the share price.
For a sense of the discount that Rogers might have to accept, look back to the hit Bank of Nova Scotia took when it sold a $2.3-billion stake in asset manager CI Financial Corp. in 2014. That deal took place at a price 12.5 per cent below where CI stock traded when Scotiabank announced it was selling. Apply that discount to Rogers’s stake in the Cogeco operations based on today’s stock prices, and Mr. Natale would be giving up about $180-million in gains, plus $60-million in commissions to bankers.
Secondly, Rogers faces a massive potential tax bill. Owning Cogeco shares has been a hugely successful investment – the stock price has more than tripled – and simply selling into the open market will trigger significant capital gains taxes. In its annual report last year, Rogers disclosed $3.4-billion of deferred tax liabilities, a total that includes the Cogeco holding and gains on other long-held investments such as baseball’s Toronto Blue Jays and their stadium.
Mr. Natale, and a great many bankers, are now trying to minimize the friction costs and tax hit. While no one on the Street wants to talk openly about their pitch, for fear of alienating Rogers or giving away an original approach, past experience shows Rogers has a few cards it could play. However, Rogers’s most attractive options require Cogeco’s support.
First, the Montreal company could buy back all or part of Rogers’s holding, removing the need for a public stock sale that knocks back the share price. Philippe Jetté, CEO at both Cogeco and Cogeco Communications, was asked about buying Rogers’s stake last week during a conference and said: “We could certainly be part of the solution if this becomes available.”
While Mr. Jetté would be hard-pressed to justify dropping $1.5-billion for Rogers’s entire holding, a number of analysts have suggested “a Quebec investor” – code for the Caisse de dépôt et placement du Québec – could help out by taking a larger stake in the Montreal company. The Caisse is already a minority shareholder in Cogeco’s U.S. cable network.
However, selling stock to Cogeco and the Caisse doesn’t fix Rogers’s potential tax hit. The most attractive exit for Mr. Natale would be a tax-efficient transaction in which Rogers somehow swaps its Cogeco stakes for a portion of the Quebec companies’ assets in Ontario. Cogeco Communications provides cable and internet services in cities such as Kingston, Oakville and Burlington, territory that Rogers covets.
Reaching such a deal would mean the Audet and Rogers clans, and their emissaries, would need to set aside any bad blood stemming from this fall’s hostile takeover. There’s a rich tradition of cable rivals setting aside their differences – Rogers and Shaw Communications Inc. struck a peace treaty 20 years ago when they swapped networks and effectively divided the country. Mr. Natale’s best path forward is to replicate that landmark transaction.
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