DBRS Comments on the Investment of Bell Canada and Rogers Communications Inc. in MLSE

DBRS notes that today Bell Canada and Rogers Communications Inc. (Rogers) announced that they have agreed to jointly acquire a 75% stake in Maple Leaf Sports & Entertainment Ltd. (MLSE) from Ontario Teachers’ Pension Plan (OTPP) for just over $1 billion on a net basis. The transaction values MLSE’s total equity at roughly $1.66 billion, for an enterprise value of just over $2 billion.

As part of the agreement, Bell Canada and Rogers will create a joint partnership to purchase a 75% stake of MLSE (each contributing $533 million of cash on a net basis, following a leveraged recapitalization of MLSE) and the current minority shareholder, Kilmer Sports Inc. (KSI), will increase its position by roughly 5% to 25%. The transactions will result in MLSE being owned as follows: Rogers, 37.5%; Bell Canada, 28%; Bell Master Trust Fund, an independent trust that manages the pension obligations for the BCE Group, 9.5%; and KSI, 25%.

While DBRS notes that this investment does not affect DBRS’s ratings of Bell Canada and Rogers – at A (low) and BBB, respectively – DBRS does note that this investment is strategic for both Bell Canada and Rogers given they are both vertically integrated communications and media companies very interested in owning the marquee content of MLSE, which includes the Toronto Maple Leafs, the Toronto Raptors, the Toronto Marlies and the Toronto FC sports franchises, among other assets such as real estate, entertainment assets and specialty TV networks.

DBRS notes that, given the the live nature of sports and its passionate fans, owning the broadcast and digital rights to sports content has become increasingly valuable (both on a strategic and monetary basis) to both content aggregators, such as broadcast/specialty sports TV and radio networks (e.g., The Sports Network (TSN/RDS) and RogersSportsnet), and content distributors, such as Bell Canada and Rogers, whose platforms include satellite/Internet Protocol television (IPTV); cable networks, which distribute broadcast and specialty TV content; and newer platforms such as the Internet and mobile devices that distribute digital content. Interestingly, both Bell Canada and Rogers also own print content; Bell Canada owns a 15% stake in The Globe and Mail and Rogers has a large portfolio of magazines. This transaction would give Bell Canada and Rogers, which are already both vertically integrated operators, long-term rights to the valuable MLSE content, which they, in turn, would distribute to their subscribers in an attempt to increase the stickiness of their subscription-based communications services (i.e., satellite/IPTV, cable, wireless, high-speed Internet and telephony services).

Additionally, DBRS believes that this investment would also indirectly act as a hedge against rising costs of sports content – something for which both companies have continued to compete aggressively in recent years. This competition increased as media content evolved in Canada to become both linear and digital, and the regulation of TV aggregators has continued to be liberalized in Canada in favour of further competition.

From a financial perspective, DBRS notes that this is a relatively small investment for both Bell Canada and Rogers (BCE Inc.’s enterprise value is more than $45 billion and that of Rogers is more than $30 billion) and is not expected to have any material impact on either company’s credit profile. (Bell Canada’s current leverage is just below 2.0 times gross debt-to-EBITDA and that of Rogers is 2.22 times at September 30, 2011.) Both companies have indicated that their investments would be funded with cash on hand at closing. DBRS notes that MLSE generates positive EBITDA and free cash flow.

Finally, DBRS notes that while it may seem unusual for Bell Canada and Rogers to partner in such an investment given that they are intense competitors in many areas of the communications and media industries, it is not unprecedented. DBRS notes that Bell Canada and Rogers have partnered in other manners in terms of media properties and communications networks in Canada in recent years, such as co-owning the linear and digital rights to the 2010/2012 Olympics, Dome Productions (a sports and event producer/broadcaster) and wireless network ventures such as Inukshuk.

DBRS notes that the transaction to purchase MLSE from OTPP is subject to regulatory approvals and the approval of the leagues involved and is expected to close in mid-2012.

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

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.