Did Rogers Overpay in the Spectrum Auction?

Rogers buys the most spectrum, but at a price.

| More on:
The Motley Fool

It was only three months ago that Rogers Communications Inc (TSX:RCI.B)(NYSE:RCI) emerged as the winner of a bidding war for NHL broadcasting rights. Yesterday afternoon, Rogers again emerged as the winner of numerous spectrum licenses. And once again, the company’s victory came at a price.

Rogers paid $3.3 billion for the “A block” in every major market. The number is more than three times what analysts expected Rogers to spend, and also accounted for a majority of the $5.3 billion that the Canadian government raised from the auction.

It should not be particularly surprising that Rogers is acting ambitiously. Its wireless and cable businesses have come under a lot of pressure recently, showing practically zero growth. Analysts and investors have been unimpressed with the company – its shares trade at a discount to its large rivals, BCE Inc (TSX:BCE)(NYSE:BCE) and Telus Inc (TSX:T)(NYSE:TU). But the question remains, was $3.3 billion too much to pay in an effort to reignite the company?

The total operating profit of Rogers’ wireless business was about $3 billion in 2013, so this spectrum cost Rogers more than its entire wireless operating profit for all of last year. But if the new spectrum can increase Rogers’s operating profit in that segment by 10-20%, then the company will earn an acceptable rate of return on its investment.

Even without that rationale, Rogers executives could argue that the purchase was necessary from a strategy point of view. The 700 MHz spectrum band is much more able to penetrate walls & buildings, making the signal stronger in places like elevators and parking garages. That frequency is used by American carriers Verizon and AT&T in their networks. So even if Rogers does not see that 10-20% uplift, the company did at least block its large rivals, and thus may have prevented a decline.

There have also been concerns about what this purchase will do to Rogers’ balance sheet. The company already has net debt of nearly $11 billion, over 2.3 times its shareholders equity. But Rogers is of course very profitable, and its subscription-based revenue model makes its earnings profile relatively smooth. Thus the company is perfectly capable of handling such a debt load, which only represents about 50% of its market capitalization. The spectrum purchase would bring that number up to 65%.

Foolish bottom line

Most people seem unimpressed with the company’s purchases. The shares opened trading the following morning down 3%. But with such a strong strategic rationale, and a manageable price tag, it’s still too early to pass judgement.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Investing

Double exposure of a businessman and stairs - Business Success Concept

3 Stocks You Can Keep Forever

Despite all of the recent volatility, here are three Canadian stocks that you can feel confident loading up on today.

Read more »

tsx today
Stocks for Beginners

TSX Today: What to Watch for in Stocks on Monday, September 25

After tanking by more than 4% last week, the main TSX index now trades with only 2% year-to-date gains.

Read more »

stock analysis
Dividend Stocks

Got $2,500? 2 Top Stocks That You Can Buy and Hold for a Lifetime

Are you looking for a stock you can buy and hold for a lifetime? Here are two options to buy…

Read more »

Growing plant shoots on coins

This Growth Stock Could 10X in 10 Years

WELL Health Technologies Inc. (TSX:WELL) is a growth stock in the telehealth space that boasts exciting potential going forward.

Read more »

edit Safety First illustration

3 Safe TSX Stocks to Strengthen Your Portfolio

These three TSX stocks could be excellent defensive bets, given their solid underlying businesses and healthy growth prospects.

Read more »

sale discount best price
Dividend Stocks

These 3 TSX Dividend Stocks Are on Sale Right Now

Here's why undervalued TSX stocks such as Exchange Income are compelling investments for long-term shareholders.

Read more »

A bull outlined against a field
Tech Stocks

1 Tech Stock You’ll Be Glad You Bought When the Bull Market Starts

The stock market 20-month-long muted growth could be coming to a climax. You might want to own this tech stock…

Read more »

money cash dividends
Dividend Stocks

Passive Income: How to Make $120 Per Month Tax-Free

Here’s a great Canadian dividend stock that can help you easily earn reliable monthly passive income for years to come.

Read more »