Rogers could turn MLSE into $16.5 billion sports powerhouse

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That transaction implies an overall valuation of $12.5 billion for MLSE, according to an analysis led by telecom analyst Adam Shine, which would then climb once the sports properties Rogers already owns — The Toronto Blue Jays baseball franchise, the Rogers Centre and Sportsnet specialty TV services — are rolled in.

He said a spinoff or IPO would likely value the mega-sports property with Toronto’s premier teams and sports assets at an even higher valuation than $16.5 billion because it is unlikely to take place for a couple of years. The BCE deal isn’t expected to close before next year and then, in 2026, Rogers will get an opportunity under the MLSE shareholders’ agreement to buy out remaining partner Larry Tanenbaum and his Kilmer Group, which owns 25 per cent.

Rogers executives are understood to have been mulling ways to get more appreciation for the value of the company’s sports properties, so an eventual spin-off or IPO is viewed as almost inevitable by many company watchers.

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“Once Bell and Kilmer are taken out of MLSE, the next expected step would be for Rogers to vend-in its key sports and media assets into MLSE,” Shine wrote.

This “enhanced MLSE” would have revenues of $2.07 billion and earnings (before interest, taxes, depreciation and amortization) of $300 million, representing a 14.5 per cent margin, according to Shine’s analysis.

While the $16.5 billion valuation would imply multiples of eight times revenue and 55 times EBITDA, the analyst said those valuation metrics would be expected to come down over the coming years as a result of revenue and cost synergies. For comparison, he noted that Madison Square Garden Sports trades at just over five times revenues and 48 times EBITDA based on 2024 consensus estimates, while the Atlanta Braves trade at 11.5 times revenue and 66 times EBITDA.

Despite widespread anticipation of an IPO, Jérome Dubreuil, an analyst at Desjardins Securities, argues that there is value in the recent MLSE deal for Rogers even if the assets are not spun off through an initial public offering.

“The deal with BCE is an excellent valuation point by itself, probably more reliable than any other scenario I could come up with,” Dubreuil said. “IPO is a possibility, yes, but is only one of many ways that RCI (Rogers) can finance the transaction.”

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Still, the analyst acknowledged that the lack of public disclosure from MLSE regarding its profit and loss picture and leverage makes it difficult to confidently conclude that the deal is accretive to Rogers’ net asset value.

It’s “like a close call at the blue line that has been under review for 10 minutes,” Dubreuil wrote in a report to clients after the deal was announced.

“We believe it makes sense to expect investors will now attribute more value to the MLSE shares RCI owns, but ‘market is always right’ investors could argue that the company is committing additional capital to an asset that the market has historically valued below its fair value, thus challenging accretion potential,” he wrote.

Dubreuil has a buy recommendation on Rogers, with an above-average risk rating and a target price of $70. Rogers shares closed Friday at $54.42, up 42 cents, with a market capitalization of $29.5 billion.

As the telco contemplates how to manage its expanded sports assets, analysts are watching to see how the company does so without further ramping up leverage, which it has pledged not to do.

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Most expect Rogers to reduce its 75 per cent stake in MLSE by bringing in private investors to help foot the bill — some estimates have Rogers ending up with just over 51 per cent of the equity though possibly higher voting control.

Shine, in his analysis, lays out two scenarios for Rogers to combine the sports properties. In one, MLSE could purchase the Jays and related assets from Rogers. In another, the Jays properties could be tucked in to MLSE in exchange for Rogers increasing its stake.

“The latter would be preferable if subsequent dilution was to naturally occur in an IPO of MLSE,” Shine wrote.

Vince Valentini, a telecom analyst at TD Securities, declined to speculate on an IPO value for Rogers’ sports franchises. However, he, too, sees Rogers taking on partners who could, in turn, list part of their holdings. In a note to clients, Valentini suggested that this scenario would allow Rogers to pay for the assets and help the telco get recognition for the sports holdings in its share price.

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In Valentini’s scenario, Rogers buys out both partners in MLSE for about US$5.8 billion and folds in the Blue Jays, which Valentini pegs at a valuations of US$2.4 billion. Then, the telco sells 49 per cent of the combined MLSE assets, valued at US$11.73 billion, to private interests for US$5.75 billion.

“Rogers ends up with 51 per cent control of an entity that owns all the key Toronto sports teams, plus they potentially have a publicly-traded vehicle to keep the valuation visible … going forward,” the analyst wrote.

Buying out BCE and then selling to other partners makes sense, he said, because it gives Rogers control of the ultimate ownership structure, as well as the visibility on the underlying asset value.

“For example, the Jays can be folded into MLSE without haggling with BCE over what the Jays are worth,” he wrote.  “Also, simple two-party negotiations can take place with a private investor to buy a stake, as opposed to that buyer having to worry about BCE and Rogers agreeing on deal terms.”

• Email: bshecter@postmedia.com

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