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November 29, 2007
Rogers Hit Hard
The spectrum auction and build out rules in Canada are more favorable than expected for new entrants. As a result, Rogers Communications are trading down by 10% today. I have already seen two downgrades of the shares. Even with more favorable provisions for new entrants into the Canadian wireless market, I suspect that any impact on Rogers financial performance will be minimal for at least 2008 and 2009. However, the sharply negative tone of analyst and press coverage is likely to weigh heavily on sentiment toward the shares. It is also possible that Rogers will play it safe with its free cash flow and balance in order to protect its financial capacity against new competition. This could lead to a modest disappointment when the company announces its shareholder value plans next month. Rogers may also issue more conservative than expected 2008 subscriber and financial guidance in early 2008. Finally, even though quarterly earnings are likely to continue strong, the analysis will be more skeptical so even a minor issue will hurt sentiment toward the shares.
After saying all that, I am not ready to sell the shares, which even after today's drubbing will be up 50% this year. I'll be visiting with Rogers next week when they present at the UBS Media conference in NY. I'd like to hear their reaction and the tone of the Q&A portion of their presentation. I think it makes sense to let the dust clear before making a final decision.....
....The specifics of the auction and buildout requirements provide a set aside of spectrum for new entrants only, mandated roaming for new entrants on incumbents networks at commercial rates, and sharing of incumbent towers with new entrants. The roaming and tower rules are more favorable to new entrants than expected.
As the only GSM carrier in Canada, Rogers may be most impacted as the new entrants will probably build GSM networks. This will erode one of Rogers' key competitive advantages and could cut into very profitable international roaming revenues where its GSM network presently gets the bulk of the minutes. Offsetting this to some extent is the fact that Rogers will earn almost all of the roaming minutes from subscribers to new entrants in the period prior to their completing their network buildout. Furthermore, any subscribers won by new entrants away from Rogers' competitors will be roaming on Rogers network until the new networks are built out (2010 or later?).
The bottom line is that reality of fear will overcome the reality of minimal near-term financial impact. This will keep pressure on the shares. As a result, bulls like me need to re-evaluate their position. My approach is to pause and think rather than act immediately when there is major new information on one of my holdings so I'll be completing further analysis and deciding how to proceed next week. I think you can tell from the tone of this post, however, that I am leaning toward taking my profit and moving on.
Posted by Steve Birenberg at November 29, 2007 12:05 PM in RG
