July 05, 2012 - 4:24pm EST by
2012 2013
Price: 37.13 EPS $2.92 $2.78
Shares Out. (in M): 528 P/E 12.9x 13.5x
Market Cap (in $M): 19,816 P/FCF 16.1x 14.9x
Net Debt (in $M): 10,238 EBIT 2,804 2,628
TEV ($): 29,015 TEV/EBIT 10.3x 11.0x
Borrow Cost: NA

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  • Canada
  • Wireless
  • Multi System Operator (MSO), CATV, Cable
  • Competition short


Rogers Communications Inc. - SHORT IDEA
Business Description

Rogers is the largest provider of wireless and cable services in Canada.  As of 1Q12, Rogers had 9.3 million wireless subs and 2.3 million basic cable subs.  Rogers also operates a media division, which owns TV stations, radio stations, and sports teams.  Rogers’ EBITDA is roughly 2/3rds wireless and 1/3rd cable.

Short Thesis

1. Wireless competition is intensifying.

  • Canadian ARPU is the highest in the developed world.  Penetration is also the lowest.
  • The regulator is hard-set on increasing competition to increase wireless penetration and has awarded spectrum to 4 new entrants (Wind, Moblicity, Videotron, and Public).
  • Bell and Telus (the other two incumbents) are also taking share by investing in their networks/handset portfolios.
  • If Rogers’ ARPU falls to Verizon’s level, EBITDA will decline by 20%.  I am not advocating that this will happen overnight, but it should happen over the next two years, which will provide a constant EBITDA headwind.

Back-of-the-Envelope Math Illustrating the Above

2011 Post-paid Wireless ARPU                   $70.26  
x Average Subs                       7,450  
2011 Wireless Network Revenue                 $6,281  
Contribution Margin %                   80.0%  
Verizon Post-paid APRU                   $55.43  
Implied EBITDA Hit                 $(1,061)  
2011 EBITDA                     $4,716               100.0%
Less: ARPU Hit                     (1,061)               (22.5)%
PF EBITDA                     $3,655                 77.5%

Why haven’t we seen it yet?  We have.

  • The new entrants are now taking 35-40% of net adds!
  • Bad ARPU and churn trends have been masked by increased smart phone penetration.  This will change in 2012.
    • In 2011, the underlying ARPU decline was masked by large increases in smart phone penetration (37% to 52%).  Even if 100% of adds take smart phones, penetration won’t increase by another 15%.  This will make for a very tough ARPU comp in 2012.
    • The underlying churn trend has also been masked by smart phone penetration gains.  Churn increased this year even though smart phone penetration increased.  This means underlying churn spiked a lot.  Note that smart phone churn will also rise as the base ages.  Current smart phone churn is around 1%, which is much lower than overall post-paid churn.
2. Cable competition is intensifying.
  • Bell is rolling out IPTV in 70-80% of Rogers footprint.  Assuming similar penetration rates as U-verse, Fios, and Optik (~25% penetration), Rogers could lose several hundred thousand video subs assuming the bulk of this penetration comes from Rogers.  In addition to the sub loss, ARPU will likely be pressured by a few percent due to increased competition.  All together, EBITDA could decline by another 3-5%.
Back-of-the-Envelope Math Illustrating the Above
Video ARPU                     $68.34      
x Cable Subs Lost                      (388) Assumes 25% IPTV penetration and 60% of this comes from Rogers
Video Revenue Lost                    $(318)      
Video Incremental Margin                   30.0%  Low incremental margins due to high variable programming costs 
EBITDA Lost                        $(95)      
Video ARPU Price                   $68.34      
Price Hit                     (5.0)%      
PF Video ARPU                   $64.92      
Lost ARPU                     $(3.42)      
x PF Cable Subs                     2,691      
Video Revenue Lost                    $(110)      
Contribution Margin                 100.0%      
Total EBITDA Lost                    $(110)      
Adj. EBITDA                     $4,716               100.0%    
EBITDA Lost                        (206)                 (4.4)%    
PF EBITDA                     $4,510                 95.6%    
  • EV / EBITDA = 6.2x
  • P/E = 13.1x
  • Dividend yield = 3.8%
  • Pure play NA wireless (S, PCS, LEAP) trade at 3-5x EBITDA
  • NA telecom (T, VZ, BCE, CTL, Telus,BellAlliant,Manitoba) trade at ~6x EBITDA
  • NA telecom dividend yield ~4.5-5%
  • 5x EBITDA (slight premium to pure play wireless and discount to telco peers due to competitive headwinds and overexposure to wireless) implies $25 or -29% downside including dividend. 
2012 Adj. EBITDA          $4,656
Multiple                  5.0
Enterprise Value        $23,280
Less: Total Debt         (11,078)
Plus: Cash and Cash Equivalents                  -
Plus: Cogeco Cable Inc.             502
Plus: Cogeco Inc.               267
Plus: Other Investments             269
Market Cap        $13,240
Shares                 528
Price per Share          $25.08
Plus: Dividend              1.42
Adj. Price per Share          $26.50
Current Price          $37.53
% Upside / (Downside)          (29)%

Estimates vs. Consensus

      12/31/09 12/31/10 12/31/11 12/31/12 12/31/13
Revenue          $11,731      $12,142      $12,428      $12,310      $12,294
Consensus                12,499        12,709
% Above / (Below)                 (1.5)%         (3.3)%
EBITDA            $4,370        $4,635        $4,716        $4,656        $4,480
Consensus                  4,716          4,802
% Above / (Below)                 (1.3)%         (6.7)%

I only included my consolidated revenue and EBITDA projections, but if you want detailed stats for wireless (post-paid ARPU, churn, gross adds, pre-paid stats, EBITDA, etc.) and cable (basic subs, HSD subs, VoIP subs, etc.), please let me know in the comments and I will post.  In general, I was much more conservative than the above BOTE analyses so I think there is further downside to my estimates if my thesis plays out.

Why now?  Rumblings of increased competition from new entrants has been around for years…

  • It’s timely.  Smartphone penetration gains have been masking underlying trends.  As smartphone penetration gains slow this year, the underlying trends will become more apparent.
  • Capital allocation is shifting.  Historically,Rogers has aggressively bought back stock.  These buybacks will slow this year due to higher cash taxes (NOLs are exhausted), increased capex for LTE, upcoming spectrum auctions, and cash funding of the Maple Leafs transaction.
  • IPTV roll-out is happening now.  In 1Q, Bell’s IPTV roll-out in Toronto already started negatively impacting results. This will likely continue throughout the year.


  • Smart phones won’t mask the underlying trends as much this year i.e. 2012 comps are hard.
  • Rogers already missed in 1Q and will likely have to lower full year guidance.
  • Upcoming spectrum auction.  New rules (set asides, caps, forced roaming) announced in February favor new entrants.
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