DBRS Confirms Rogers Communications at BBB, Trend Stable

DBRS has today confirmed its rating on Rogers Communications Inc. (RCI or the Company) at BBB. The trend is Stable. The confirmation reflects: (1) a steady business risk profile, albeit heavily geared toward wireless that has seen increased competition in Canada; and (2) a financial risk profile and credit metrics that have remained within the BBB range – despite leverage increasing in Q1 2011 – along with ample liquidity and a manageable maturity profile.

In terms of business risk, RCI has a high degree of exposure to the wireless sector (roughly two-thirds of its EBITDA) which has become increasingly competitive with the addition of new entrants over the past couple of years and as the other incumbent wireless carriers have overlaid and upgraded their networks to eliminate the competitive advantage that RCI has had for many years. Furthermore, potential regulatory changes could lead to additional competition. Despite these factors, DBRS notes that RCI has maintained a reasonable share of the subscriber growth and, like the other national incumbents, largely focused on the post-paid market for new growth along with moving new and existing subscribers to higher ARPU generating smartphones. While this has and will continue to place some pressure on EBITDA margins in the near term (just below 45% in the latest period) given the higher subscriber acquisition costs, DBRS notes that these subscribers have a greater lifetime value with higher ARPU with more data used and lower churn levels.

DBRS notes that RCI’s Cable segment has been focused on efficiency initiatives in recent years as growth rates have slowed given the maturity of these services. This has lead to the improvement in EBITDA margins to the mid-40% level for its core cable business which is more typical for a cable operator. DBRS notes that the telecom operators that RCI competes with are moving to stem the pressure that Cable has placed on them as they move to offer terrestrial video services as part of a bundle to retain their subscribers. DBRS notes that while RCI has a highly advanced cable network that offers competitive advantages in terms of capacity and therefore high-speed Internet services, the telcos are enhancing their networks while transmitting terrestrial television in a different manner to close this gap. As such, DBRS believes that bundling capability is an important consideration. DBRS notes by offering wireless, RCI has better capability than most North American cable operators; however, outside of its incumbent Ontario and Maritime territories, the Company is limited to only offering wireless services across the rest of the country. This may place RCI at a disadvantage should the telcos’ bundling efforts become highly successful.

Like some of its peers, RCI operates a media segment that is highly diverse with some portions of the content businesses tying into the distribution capability of its wireless and cable networks. While it still remains early days for most communications and media companies in fully realizing the benefits of vertical integration (owning both content and distribution), this could become more of a factor as some of Media’s competitors have recently become part of cable and telco operators. This could be increasingly relevant in a market where the gradual de-regulation of broadcast and specialty television is beginning to occur while technologies and demand for television over the Internet is increasing.

From a financial risk perspective, RCI’s leverage and credit metrics have largely remained within the BBB rating category despite leverage increasing in the near term to fund acquisitions and share repurchases. DBRS expect that growth in EBITDA (around $4.7 billion expected for 2011) and cash flow from operations should offset higher capex levels to leave free cash flow of around $500 million for the year. With debt helping to finance acquisitions in Q1 2011, this free cash flow is expected to be directed to share repurchases through the remainder of the year. DBRS notes that RCI has maintained ample liquidity (over $2 billion available) and with its latest financing in March 2011, has a manageable maturity schedule with no debt maturing until 2012.

Overall, DBRS believes that RCI can maintain its rating despite the increased competitive landscape in Canada by growing into new areas, seeking additional efficiencies and investing to maintain its competitive position. This, coupled with a stable financial risk profile, should support its current rating. Alternatively, any pressure on these factors could pressure its rating. In order for RCI to improve its rating, DBRS needs to see more certainty regarding the competitive environment and meaningful improvement in RCI’s leverage and credit metrics. One caveat that DBRS notes is that, in recent months, there has been significant regulatory activity in the Canadian communications industry. While this could have a considerable impact on the industry’s business risk profile, DBRS will assess these and any potential effects on the industry as/should they become apparent.

Notes:
All figures are in Canadian dollars unless otherwise noted.

This rating did not include issuer participation and is based solely on publicly available information.

The applicable methodologies are Rating the Communications Industry, Rating the Newspaper and Magazine Publishing Industry, Rating the Radio Broadcast Industry and Rating the Television Broadcast Industry, which can be found on our website under Methodologies.