Back in October, Rogers Communications announced plans to sell a minority stake in its wireless backhaul business, which generates fees from carrying data, to Blackstone Inc. for $7-billion.Darren Calabrese/The Canadian Press
Investors hate the telecom sector.
The combination of consumer-friendly price competition on cellphone and internet services and a sharp drop in immigration numbers knocked back stock prices at Bell parent BCE Inc. BCE-T, Rogers Communications Inc. RCI-B-T and Telus Corp. T-T over the past year, while the domestic market’s benchmark index soared.
Bay Street is pushing a crash diet as a way to change sentiment toward these widely held stocks. Ahead of the sector’s release of financial results over the next two weeks, investment bankers are pitching telecom CEOs to sell off infrastructure such as cellphone towers and satellite services and use the cash to pay down debt.
The theory, expressed in numerous recent analyst reports, is that telecom platforms can change a negative narrative by raising billions from asset sales, strengthening balance sheets, funding growth initiatives and, in Bell’s case, generating enough cash to cover the company’s dividends.
If CEOs buy into these pitches, expect a flurry of deals. There is a long line of potential buyers for infrastructure such as cell towers, with fees that will rise as we transition to a digital economy full of consumers who stream data all day long, every day.
Over the past three years, private equity funds have snapped up towers around the world. Brookfield Asset Management Ltd. owns a network in India, OMERS runs towers in Australia and the Ontario Teachers’ Pension Plan invested in New Zealand towers. Verizon Communications Inc., one of the biggest U.S. telecom platforms, raised US$3.3-billion in November by selling 6,340 towers.
Bell, Rogers and Telus now stand out from their global peers as owners of their own infrastructure. If they decided to cash in, Barclays analyst Lauren Bonham estimated Rogers could raise $4-billion to $6-billion from selling its towers. She said Bell could pull in $3-billion to $5-billion and Telus would be in line for $2-billion to $3-billion – the two companies share ownership of their network.
“Given the difficult operating environment and strained balance sheets, one option Canadian telecoms should pursue in our opinion is to monetize tower assets in order to reduce debt levels and improve payout ratios,” Ms. Bonham said in a report last week.
However, Rogers’ recent experience demonstrates that selling infrastructure doesn’t change the way investors view the company’s prospects. Back in October, the company announced plans to sell a minority stake in its wireless backhaul business, which generates fees from carrying data, to Blackstone Inc. for $7-billion. Rogers will use the money to pay down the debt taken on to purchase Shaw Communications Inc. two years ago.
While Rogers is still working on the details of the asset sale, preliminary estimates from analysts show Rogers will pay a little more in dividends to Blackstone than it will save by cutting its interest costs. That means the company’s all-important free cash flow, which drives stock market valuations, could fall slightly once the deal is done.
To date, a massive potential investment from Blackstone has failed to light a fire under Rogers’ stock price. It is now clear investors were more concerned with the telecom’s growth prospects than its debt load.
The key to shifting sentiment around telecom stocks is to return to a historically compelling story around revenue growth. In the past, Bell, Rogers and Telus shares commanded a premium price compared with those of their U.S. peers because subscribers paid up for data and roaming and because new immigrants signed up for cellphones and internet service.
Canadian telecom revenues are now growing at a slower pace than those of U.S. companies. Ms. Bonham of Barclays predicted U.S. trade battles could “result in further pain.” Despite these headwinds, valuations of domestic telecom stocks are still slightly higher than those of U.S. peers. The worst may not be over for Bell, Rogers and Telus shareholders.
Bell’s strategy is to boost its business by acquiring U.S. fibre networks. Rogers’ growth will come in large part by successfully selling its wireless services to former Shaw cable customers. Telus has a multi-faceted growth plan wrapping in technology, health care and agriculture. None of these initiatives scream quick turnaround.
“Until new value propositions emerge and scale to create meaningful new revenue streams, 2024 revenue headwinds are likely to persist through 2025, making any meaningful Canadian telecom comeback more of a 2026 story,” said analyst Drew McReynolds at RBC Capital Markets in a recent report. For Bell, Rogers and Telus, selling cellphone towers isn’t likely to speed up their comeback story.