Rogers Communications Inc.’s deal to acquire Shaw Communications Inc. and create a national telecom behemoth has driven up the stock prices of both companies this week – and left investors wondering if it’s still worth pouncing on either stock as regulators examine the agreement over the next many months.
The answer, according to some analysts and investors, is yes. But the downside risks are considerable given that the deal could fall apart.
Since the two telecom companies announced the takeover on Monday, Shaw’s share price has rallied to $34.51, up 44.4 per cent from its close on Friday.
That’s a big jump. But Rogers has offered to buy the company for $40.50 a share, which means that the current share price (as of Thursday’s close) is $5.99 shy of the takeover offer, even though Shaw has agreed to the deal. That leaves plenty of money on the table – along with quarterly dividends – for investors who believe the deal will eventually clear regulatory scrutiny and conclude in about a year.
Julian Klymochko, chief executive officer of Accelerate Financial Technologies Inc., a Calgary-based investment firm that offers a number of alternative asset exchange-traded funds, estimates that the market is pricing in a 60-per-cent chance that the deal will proceed. That’s based on the current share price relative to the takeover price and the predeal price.
“From an arbitrager’s perspective, assuming this deal closes by next summer, you can earn a 14-per-cent annualized return, which is a good return in an era of basically 0-per-cent interest rates,” Mr. Klymochko said, in an interview on Wednesday.
But he’s not buying Shaw shares, given that he sees more promising opportunities elsewhere, in terms of greater upside potential and lower risk.
“I think there is quite a perilous path through antitrust approval,” Mr. Klymochko said.
Some analysts are more upbeat though. Jeff Fan, an analyst at Bank of Nova Scotia, believes that the market is being too conservative and suspects that the odds of the deal succeeding stand closer to 75 per cent to 85 per cent.
“The market still thinks all the regulators, politicians and policymakers care about is reducing [wireless] prices by 25 per cent. That was the case back in 2019,” Mr. Fan said in a note on Monday.
Now, he added, some politicians are talking more about broadband availability – which is something that Rogers underscored in its announcement of the deal.
Rogers’s share price has also rallied since Monday: It gained as much as 10 per cent earlier this week, before retreating 6.8 per cent from this intraday high by Thursday. The gains are particularly interesting because the stocks of acquirers tend to slump on big deals over concerns that the companies are either overpaying or embarking upon a difficult merger.
But this particular deal comes with the promise of tremendous cost savings over a relatively short amount of time. Rogers said it expects to find more than $1-billion in savings a year within two years of the deal closing, in areas such as duplicated technology and wireline operations.
Observers expect that these savings will have a big impact on a number of profitability metrics for Rogers that go beyond the mere combination of the two businesses.
According to Aravinda Galappatthige, an analyst at Canaccord Genuity, Rogers will see its 2023 EBITDA (earnings before interest, taxes, depreciation and amortization) rise about 50 per cent above the company’s predeal profits, boosted in part by the savings. Earnings per share should rise 27 per cent and cash flow per share should rise 32 per cent. And that’s assuming that just 80 per cent of the expected cost savings are discovered by then.
“On the face of it the $1-billion appears on the high side,” Mr. Galappatthige said in a note.
“However,” the analyst added, “we note that this still represents below 10 per cent of the [operating expenditures] of the consolidated entity and the sheer magnitude of the transaction suggests greater savings in terms of renegotiating more favourable rates from suppliers, rationalization in terms of back office and customer service, etc.”
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