Last week, there was a huge news story that fell from the sky over Canada. It was an important announcement for any hockey fan North of the border and, believe me, there are many! Last week, Rogers Communications (RCI.B) sealed a $5.2B deal to buy the exclusive rights for all Canadian hockey teams’ games with the NHL. This includes the right to broadcast, on any kind of media, games from the Vancouver Canucks, Calgary Flames, Edmonton Oilers, Ottawa Senators, Toronto Maple Leafs and the Montreal Canadiens. Note that the broadcast of 2 of the 3 richest hockey teams (the Leafs and the Habs) are in the package.

 

I really like Canadian telecoms because they evolve in a protected market similar to Canadian banks. There are only four big players sharing roughly 85% of the market. Let’s take a deeper look at the transaction and what it really means if you hold any of these stocks.

 

The Art of Losing a Marketing Asset for Bell

 

Prior to this deal, Bell had the broadcasting exclusivity. It is important to understand that BCE is making an important effort to diversify its business portfolio lately. After buying 75% (in a joint-venture with Rogers!) of Maple Leaf Sports & Entertainments (MLSE owns the Maple Leafs, the NBA Raptors and the MLS Toronto FC) in 2011, they went for another deal in the entertainment/media business with the purchase of Astral Media this year.

 

At first, I kind of liked BCE’s strategy of generating revenues outside the phone and mobile environment. We all know the big three (Telus, Rogers and BCE) generate a lot of profit from their mobile branch but we also know that this is also something they can lose pretty fast if another Verizon (VZ) would invade their playground. We saw Rogers, Bell and Telus shares fall by 12%, 12% and 5.6% between June 14th (when the invasion rumor of VZ was gaining traction) and August 14th, when VZ finally announced moving its cash towards Vodaphone’s shares in the company buyback.

 

The reason why BCE didn’t fall as fast as Rogers and Telus is because they were heading towards a direction different than solely mobile.

 

Now that BCE lost this important contract, they will have to fill a lot of air time for TSN and its Quebec sister RDS with… curling? The NHL broadcasting rights in Canada are probably as important as the NFL rights in the US. This is what BCE lost a very important marketing asset.

 

It’s far from being the end of the world though as the transaction looks bigger than it is.

 

What $5B Really Means for A Company the Size of Rogers or BCE

 

I love to put numbers into perspective as it gives real meaning to money. I’ve read many reactions last week in regards to this transaction. Most were coming from hockey fans and not shareholders. In fact, all the above mentioned companies barely moved more than the market on that day. Most financial analysts thought it was“insignificant” news. Why is that? After all, I won’t be watching hockey on TSN anymore, I will have to buy Sportsnets channels on my TV!!!

 

Last year, BCE’s net earnings stood at $8.5B and Rogers at almost $5B. Therefore, a $5B transaction is nothing more than one year of profit for each company. Let’s go further. Let’s say that Rogers generates an additional $100M in profit per year from this transaction; this would represent 2% growth of its current earnings. Nothing to write home about.

 

As I mentioned previously, the real loss is a marketing play – not a financial one. Starting next year, Rogers will be able to use its WMM (Weapons of Mass Marketing) to offers its products to all hockey fans. Since hockey is very popular in the 18-35 years old arena, it is a perfect market to push mobile and other techno products.

 

The Question is; Why did BCE let it Go?

 

Maybe its because they didnt want to compete with an overpriced offer.

Maybe its because they have enough on their plate integrating Astral.

Maybe they think they can do like ESPN (Disney’s (DIS) Sport Channel) and become the reference of pre-game and after-game shows. This would keep their stations healthy if they replicate ESPN’s model.

Or maybe they just dropped the ball and went running under their desks to cry.

 

One thing for sure, this is another reason why I won’t change my shares of Telus for Bell! In fact, for a dividend  growth investor like me, I think Telus is a better choice. Just check how the dividend has increased since 2009 (the year Telus started to grow its dividend consistently):

BCE vs T vs RCI.b

 

As you can see, Telus has a “good” habit of raising its dividend by about 10% per year.  When you look at the three companies’ payout ratios, you can see that Telus doesn’t move too fast and they will have enough room to continue going forward:

payout ratio

 

An interesting play right now could be to look at how Rogers will be able to use its new WMM to gain market share in Canada. One thing is for sure, after this transaction the NHL is the biggest winner and the Canadian telecom market is more hostile than ever to any other foreign companies who wish to enter this market.

 

Readers, what do you think of this transaction? Did you change your mind toward telecoms companies?

 

 

 

Disclaimer: I own shares of Telus and Disney

 

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2 Comments   |  

2 Comments

Francois
December 4, 2013, 7:00 pm

I agree with your analysis and believe that Canadian Telecom have their place in dividend investors’ portefolio. They each have a good base of clients and litteraly do business in an oligopol. And, the Canadian government won’t let them down. I like BCE and Rogers because of their diversity (producer of content, distributor of content through cable, cell phone, land lines, internet provider, etc.) over Telus. I have had BCE in my portefolio for 1-2 year, and got into Rogers when the price crashed during the Verizon scare. I also have Bell Aliant, a smaller company partly owned by BCE that give huge dividends, I have had this one for more than 10 years. The price of the stock is the same as when I bough it, but the dividend has been constant and increasing (but I sold half of my shares to buy BCE).

Actually, the deal might be bigger for the French market, TVA.B saw some increase after that deal was announced (that is the French channel that belongs to Quebecor and who partners with Rogers to air the hockey games in French). For that channel, this is important content, they will finally have something to show on their sport channel.

DivGuy
December 5, 2013, 7:46 am

Hello Francois,

Indeed, Quebecor is taking a serious step in the hockey industry and it will definitely pay since Quebecois are big hockey fans! This also means a lot for RDS, TSN French sister as they will most likely lose all Montreal Canadiens broadcast rights…

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