Some analysts were concerned about growing debt leverage, as Quebecor sought partners to invest in the $500-million (U.S.) expansion fee.Graham Hughes/The Canadian Press
Losing out on a National Hockey League expansion team may be a disappointment for Quebec City hockey fans, but financial analysts say it could actually be a good thing for Quebecor Inc.'s stock.
The Montreal-based telecom and media company applied for an expansion franchise last summer, but reports now suggest that the league is set to award a team to Las Vegas, with approval expected at its June 22 board of governors meeting.
Quebecor management said last year that it would seek partners for the investment, which would have helped defray the estimated $500-million (U.S.) expansion fee, but the company still wanted majority control.
That had some analysts concerned about growing debt leverage, particularly with a looming deadline for Quebecor to buy out the remaining interest the Caisse de dépôt et placement du Québec holds in the company.
"It's probably a net positive for the stock," Greg MacDonald, head of research at Macquarie Capital Markets, said on Wednesday of the reports suggesting that Quebec City will not be awarded a team.
"I believe the market has come to grips with the prospect of a Quebecor-owned NHL team. Evidence from other Canadian franchises suggests it can be run at positive free cash flow and the content would certainly be a positive for TVA Sports," he said, referencing the specialty French-language sports network the company owns.
But Mr. MacDonald called the expansion fee – which comes out to almost $650-million (Canadian) because of the loonie's low value – "rich" and said not winning the option "opens the prospect of a less expensive transfer of an existing economically challenged team which is less risk to the balance sheet."
The Caisse currently owns 18.9 per cent of Quebecor Media Inc., the company's main subsidiary and owner of its profitable Videotron Ltd. cable and wireless division.
Quebecor plans to repurchase the balance of that interest by 2019 and it was valued at about $1.25-billion in September, when the company last bought back some of its interest. This plan has been well known for several years, but it will still put pressure on the company's balance sheet.
RBC Dominion Securities Inc.'s Drew McReynolds said in report on Tuesday that he does believe Quebecor has a "concrete and profitable plan to bring an NHL team to Quebec City."
But he added, "We also believe this strategic initiative for Quebecor brings an added element of financial and execution risk. As such, a decision by the NHL not to expand to Quebec City, in our view, helps further de-risk the Quebecor story and should underpin a continued re-rating of the stock."
Some were still skeptical about the financial commitments associated with bringing a team back to Quebec City, Aravinda Galappatthige of Canaccord Genuity said in a note to clients on Wednesday.
"Management, in past conference calls, had asserted that in addition to the franchise fee … there would be little upfront costs associated with the venture. However, our take is that investors were generally less enthusiastic of this initiative particularly in the backdrop of the weakening Canadian dollar, which raised the starting cost of the business," Mr. Galappatthige said. "In that context, the market may actually view this positively."
Martin Tremblay, a spokesman for Quebecor, said on Wednesday that the company will not comment on the expansion process.
Earlier this month, former prime minister Brian Mulroney, chairman of Quebecor's board of directors, said he believes that an NHL franchise will eventually return to Quebec City, but he suggested that he did not believe it was imminent.
"I spoke about this three months ago in Quebec City and I mentioned that, in my opinion, it wasn't for tomorrow – and I haven't changed my mind," he said, according to The Canadian Press.
"I am still enthusiastic, for sure," he added. "For sure, we will continue to work very hard on this file and I am convinced that ultimately the people of Quebec City will be happy."
With a report from The Canadian Press