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April 11, 2007

Private Equity Comes To Canada - Good News For Rogers

Private equity speculation comes to Canada. More rumors about a takeout of BCE Inc (BCE), formerly Bell Canada, emerged yesterday with speculation about a buyout led by the Ontario Teachers Pension Plan with the help of Providence Equity. BCE shares closed up more than 6% but remain well below a rumored bid from this group near $35 (C$40).

This news along with prior speculation of KKR financed bid have pushed the shares of Rogers Communications (RG) to a new all-time high. RG has been gaining wireless and cable telephony subscribers at the expense of BCE and is leading the healthy Canadian telecommunications industry with strong double digit operating income growth.

I got long RG back in December under $30 on the basis of the superb results coming from the company’s wireless and cable businesses. I established a $38 target based upon RG trading at 10.5 times 2007 EBITDA in 2H2007, a level consistent with where it has traded on forward estimates in the past year.

Since that time...

RG reported better than expected 4Q06 results and issued favorable 2007 guidance. Additionally, the company indicated it is looking at how shareholders could benefit from the company's transition to a significant generator of free cash flow. These two facts reinforce my $38 target.

Although it was not central to my initial buy recommendation, I think that RG is an excellent acquisition candidate in its own right. The company is controlled by the Rogers family, whose patriarch, Ted Rogers, will be 74 in May. Ted is going strong and has to be enjoying the fantastic returns produced by RG over the past few years (the stock was under $3 in October 2002) but eventually estate planning considerations have to enter his thinking and make him consider the possible sale of the company.

Any deal that would privatize BCE would focus potential acquirers on RG. A BCE deal with a significant foreign ownership component would further increase speculation toward RG. Canada has a conservative government, which according to the Globe and Mail, showed a willingness to be flexible on foreign ownership when Inco was sold last year to a Brazilian mining company.

Any private equity firm is a logical acquirer of RG. Not only does RG have good fundamentals, significant and growing free cash flow, and a reasonably leveraged balance sheet, but there are significant assets that could be sold such as the Toronto Blue Jays and their stadium, the Rogers Centre, and publishing and broadcasting assets.

I also think that RG would be a very logical acquisition for Comcast (CMCSA/CMCSK) or Time Warner Cable (TWC). Both of these companies are likely heading toward a quadruple play that includes wireless. As a leading wireless player in Canada, RG would bring expertise along with synergies in the cable business. RG may also view Comcast as a satisfactory acquirer given the shared legacy of family ownership and control.

The bottom line is that RG remains an attractive investment on its own fundamentals. Reaching the upper $30s on 2007 estimates and low to mid $40s as another double digit growth year in 2008 comes into focus. If privatization and takeover speculation continues to swirl around BCE, RG's own attractiveness as a takeover candidate just reinforces my upside targets and provides downside support for the shares.

Posted by Steve Birenberg at April 11, 2007 03:11 PM in RG