Description

All values in Canadian dollars unless otherwise stated

UPDATE: As I finished writing this up on Friday night, Shaw, Rogers, and Quebecor jointly announced an agreement for the sale of Freedom Mobile to Quebecor. I think this significantly improves the probability of the deal closing. That said, I think it is probably unlikely that the stock trades to near the $40.50 deal price immediately, as there are still a few steps to go (negotiation of definitive documentation between three iconic Canadian families, Competition Bureau dropping its injunction and approving the deal, and ISED approval). As such, depending on where the stock opens on Monday and where these bonds trade, the risk/reward on the bonds could improve even further, particularly when paired with a merger arb position in the stock. 

Description

Rogers Communications (“Rogers” or “Company”) is the largest telecom operator in Canada. The Company provides cable, internet, home phone and security services to millions of customers across Eastern Canada. Rogers is currently in the midst of attempting to close on its acquisition of Shaw Communications (“Shaw”).

Background to Shaw Deal

On March 15, 2021, Rogers announced it would acquire Shaw in an all-cash deal for $40.50 per Shaw share, which represented the coming together for two of Canada’s largest family controlled cablecos. I previously wrote about the Shaw risk arb on VIC in June 2021. This piece will focus on some of the developments since then as well as a fresh angle on the trade. 

Similar to Rogers, Shaw consists of a wireline business, as well as a wireless business. The wireless business, Freedom Mobile, was acquired a few years ago and was the fourth player (disrupter) in many markets including Ontario, Alberta and British Columbia (the T-Mobile equivalent in Canada). When Rogers announced the transaction in 2021, they touted the $1 billion of synergies from Shaw’s wireline business and most were under the impression that Rogers was planning to divest of Freedom in its entirety in order to satisfy regulatory bodies. Consequently, the deal was viewed as a horizonal acquisition in which Rogers and Shaw did not previously compete in each other’s territories. This transaction requires approval from:

• Canadian Radio-television and Telecommunications (“CRTC”);

• Competition Bureau; and

• Innovation Science and Economic Development Canada (“ISED”). 

Rogers received approval from the CRTC in March 2022 for the transfer of Shaw’s licenced broadcasting undertakings (link).

Based on public commentary from Rogers and Shaw throughout 2021 and the first four months of 2022, the market was under the impression that the deal would close in Q2 2022 and that approvals from the Competition Bureau and ISED were due in short order. However, a wrench was thrown into this thinking on May 7, 2022 when Rogers/Shaw issued a press release stating that the Competition Bureau intended to “file applications to the Competition Tribunal opposing Rogers’ proposed merger with Shaw.” Rogers and Shaw also agreed to extend the outside date of the transaction from June 13, 2022 to July 31, 2022.

The Competition Bureau put out a press release itself briefly outlining its opposition to the deal which can be read here. 

Over the last month or so, Rogers/Shaw and the Competition Bureau have gone back and forth in the media and through private speeches – each presenting their case as to why the deal should be approved ordenied. On May 30, 2022, the two sides reached an agreement whereby Rogers will not close on its acquisition of Shaw until the Competition Bureau’s challenge is heard and decided by the Competition Tribunal.

• Shaw press release

• Competition Bureau press release

That is where we effectively stand today. I think this transaction ultimately closes with Rogers fully divesting Shaw’s wireless assets to one of a number of potential buyers (numerous parties have publicly stated their desire to acquire this asset from Rogers/Shaw including Quebecor and Globalive). That said, the probabilities of close are arguably lower today than they were when I first wrote about this transaction in June 2021. 

What Is the Trade?

A new angle to this trade comes in the form of Rogers bonds. On March 7, 2022, Rogers announced that it had issued five series of US dollar denominated senior notes for US$7.05 billion and four series of Canadian dollar denominated senior for $4.25 billion. Rogers stated that it “expects to use the net proceeds from both offerings to pay a portion of the cash consideration for its pending acquisition of Shaw Communications Inc. and to pay associated fees and expenses.” The full press release can be found here. 

For the purposes of this writeup, I will be focusing on the $1.0 billion 3.75% 2029 Canadian dollar issue. These bonds were issued at par per the sixteenth supplemental indenture dated March 11, 2022.

What’s interesting about these 3.75% 2029 and most (but not all) of the bonds issued on March 7, 2022 is that they have Special Mandatory Redemption (“SMR”) language in the supplemental indenture. 

Source: Rogers March 11, 2022 Supplementary Indenture

Essentially, the language states that if the acquisition of Shaw does not close prior to December 31, 2022 (or is terminated prior to then), Rogers must redeem the bonds at 101. Most did not think anything of the language at the time of issue given the Competition Bureau opposition was not known then and the 101 price was similar to the 100 issue price. 

However, fast forward a few months later and we have:

• Competition Bureau opposition to the transaction (i.e. a lower probability of the deal closing by December 31, 2022);

• Underlying interest rates having risen; and

• Credit spreads having widened. 

As a result, the dollar price of the 3.75% 2029 bonds has fallen to the low 90s. In other words, the SMR language suddenly has real value. 

Source: Bloomberg

The RCICN 3.75% 2029s trade at a +172bps spread. Rogers also has 3.25% 2029 bonds that were issued in 2019 that do NOT have the SMR language. These bonds trade at a +197bps spread – so there is call it a 25bps spread between the 2029 SMR and non-SMR bonds. 

Source: Bloomberg

I think an interesting asymmetric trade is to go long the RCICN 3.75% 2029 bonds with SMR language and to short in the RCICN 3.25% 2029 bonds without SMR language in equal amounts. This trade allows you to be hedged for rates, spread and term. The only difference is that you benefit disproportionately if the deal fails to close by December 31, 2022. If I assume the SMR 29s widen out to the same spread as the non-SMR 29s in a deal close scenario (i.e +197bps), then the equivalent dollar price is $91.22. This hedged trade has very interesting asymmetry with an upside/downside ratio of 6.2x. If rates continue to move higher and spreads wider, you are essentially perfectly hedged in a deal close scenario (by shorting the non-SMR 29s) and you benefit even more in a deal termination scenario (you’ll still get 101 for your SMR bonds and the non-SMR 29s hedge will have fallen even more). 

This hedged trade is wonderful if you are leaning towards the Competition Bureau prevailing or it can be used as a hedge for a long position in the common equity of Shaw as it is currently trading at a gross spread of 18%.

Conclusion

The events of broader equity and credit markets over the last few months combined with the Competition Bureau’s opposition to Rogers’ acquisition of Shaw has created an attractive asymmetric trade in the bonds of Rogers. Both sets of 29s are liquid and the non-SMR 29s are easy to borrow at 0.5%.

Recommendation: BUY RCICN 3.75% 2029 and SHORT RCICN 3.25% 2029 in equal amounts. 

Risks

-One scenario where this trade could go against you is if rates fall meaningfully, credit spreads narrow meaningfully and the Rogers/Shaw transaction is terminated. In this scenario, you’ll receive a fixed 101 for your SMR 29s, but the non-SMR hedge could wipe out your gains. The all-in yield on the non-SMRs could have to go from 5.30% to 3.79% in order to wipe out your gains from the long position. I think this is an extremely low probability event, but it could happen.  

Catalyst

Catalysts

-Termination announcement of the Rogers/Shaw transaction