DBRS Confirms Rogers Communications Inc. at BBB, Stable Trend

DBRS has today confirmed Rogers Communications Inc.’s (Rogers or the Company) Issuer Rating and Senior Unsecured Notes rating at BBB with Stable trends. The ratings continue to be supported by the Company’s position as a leading wireless carrier and cable operator in Canada. The ratings also reflect the intensifying competitive landscape in both the wireless and cable segments and the resulting challenges associated with growing subscribers while maintaining average revenues per user. DBRS notes that Rogers’s financial leverage has increased significantly due to the debt financing related to the Company’s $3.3 billion spectrum purchases from the 700MHz spectrum auction in February 2014. That said, DBRS believes the Company is now well-placed in the current rating category, given DBRS’s previous view of Rogers at the higher end of the BBB range.

Rogers’ wireless segment revenue remained relatively flat at $7.3 billion in 2013. Revenue growth has subsided in recent years due to lower net additions and falling ARPU as a result of intensifying competition. DBRS believes Rogers lost wireless subscriber market share for the third year in a row in 2013, with net post-paid additions of 228,000, compared to 378,000 for each of Bell Canada and TELUS Corporation. Adjusted operating profit margins were up 135 basis points to 43.4%, primarily due to lower handset subsidies (in part due to lower discounts accompanying two-year plans). As such, adjusted EBITDA rose 3% to approximately $3.16 billion. In the cable segment, revenue grew by 3.7% to just under $3.5 billion in 2013 as revenue gains from Internet services and the acquisition of Mountain Cable exceeded the effect of continued declines in television subscribers. Operating margins in cable increased to 49.6% from 48.0% in 2012, primarily as a result of the revenue mix shifting to higher-margin Internet and phone services. As a result, adjusted operating profit for cable increased 7% to $1.7 billion in 2013.

In terms of financial profile, Rogers’ free cash flow generating capacity has decreased in recent years, due to higher capex, the onset of cash taxes and steadily increasing dividends. This, combined with the fact that Rogers raised nearly $2.9 billion of debt in 2013 to prefund spectrum purchases and for smaller tuck-in acquisitions, has resulted in a deterioration of credit metrics, particularly, diminished free cash flow as a percentage of debt, and gross debt-to-EBITDA (2.87 times (x) in 2013 vs. 2.33x a year earlier).

Going forward, DBRS believes it will be challenging for Rogers to grow its market share in wireless and maintain its cable subscriber base while sustaining ARPU levels due to the intensifying competitive environment. DBRS forecasts that revenue will increase slightly in 2014, ranging between $12.8 billion and $13 billion. Top-line growth within the wireless segment should be driven by moderate increases in wireless subscribers. DBRS expects a greater number of gross additions industry-wide as customers adapt to the rate hikes and the transition from three to two-year plans. Cable segment revenues should increase in the low single digit range, as growth in Internet services continues to exceed declines in television revenue resulting from the Company’s loss of market share to IPTV services. DBRS expects consolidated adjusted operating profit margins to improve modestly in 2014 as the revenue mix within cable shifts towards higher-margin Internet services and wireless margins remain relatively stable. Adjusted operating profit is expected to be within the range of $4.9 billion and $5.1 billion.

In February 2014, it was announced that Rogers acquired 22 nationwide licenses in the 700 MHz spectrum auction for $3.3 billion. The price tag significantly exceeded DBRS’s expectation and was substantially more than its competitors (over $4/MHz-pop for Rogers compared to under $2/MHz-pop for Bell and TELUS). Although DBRS believes Rogers’ spectrum purchases provide the Company with a modest near-term network advantage, the return on investment is difficult to assess, as the benefits will depend on deployment decisions and be achieved over many years.

In terms of financing, DBRS expects Rogers’ spectrum acquisition will essentially be funded with cash/debt, raising Rogers’ gross debt/EBTIDA to 3.0 times (x), from 2.8x currently (net debt-to-EBTIDA to 3.0x from 2.4x). DBRS’s rating does not rely on Rogers to de-lever to their previously stated target range of 2.0x to 2.5x net debt-to-EBITDA. Despite the resilience of Rogers’ credit risk profile, it should be noted that material deterioration in credit metrics, particularly free cash flow after dividends as a percentage of debt and gross debt-to EBITDA resulting from significantly weaker than expected operating performance and/or meaningfully more aggressive than expected financial management, could result in pressure on the ratings.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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

This is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer and did not include participation by the issuer or any related third party.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

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