Good Morning. In this newsletter, we explore the Canadian Economy, where inflation and interest rates are pressing issues as of September 2024. Then, we transition to the Outlook for September, focusing on the pivotal role inflation plays in shaping economic policy and the impact on borrowing costs. Shifting gears, we examine the American Economy, revealing the Federal Reserve’s unexpected decision to implement a 50-basis-point cut. Next, we detail the $4.7 billion acquisition of BCE's stake in MLSE by Rogers Communications and the strategic implications of this transaction. Finally, we break down the intricacies of Enterprise Value, contrasting it with equity value and exploring its practical applications in financial analysis.

ECONOMIC UPDATE

THE CANADIAN ECONOMY

In September 2024, inflation and interest rates will continue to be a pressurizing factor on the economy. The Bank of Canada has shifted their focus to lower rising prices for the year; however, inflation has still been a persistent issue. Inflation reached the bank's target last month of 2%; however, the officials aren't celebrating just yet.

The Bank of Canada just made its latest interest rate cuts, taking the policy rate down to 4.25%, marking the third successive rate cut. With many economists forecasting the government's actions, exports and housing growth have begun to cool down. The housing market is making a stronger-than-expected comeback, which may influence the Bank to reconsider their timing of further rate cuts. As such, if home prices continue to rise, inflation in this category may again begin to creep up.

Outlook for September

For the rest of September, it's all about how the rate of inflation unfolds. It's under control for the time being, but policymakers will be keeping a close eye on both the labour market and household spending levels. Another significant increase in reported expenditure could hint at further inflation over the coming months and make it harder for the Bank to cut rates later this year.

Impact on Borrowing Costs

For now, Canadians should expect borrowing costs to remain higher than they might have hoped. Mortgage rates and loan costs are likely to stay elevated to keep demand in check and prevent inflation from overheating. The next significant development is expected in October, with much depending on new data regarding jobs, consumer spending, and overall economic activity.

THE AMERICAN ECONOMY

Meanwhile in the US, headlines are focusing on the Federal Reserve’s interest rate decision. While most analysts were anticipating starting the interest rate cut cycle with a 25bps decrease, the Fed made a surprise announcement that they’re making a super-sized cut of 50bps, to a range of 4.75% to 5%. For comparison, the Fed has only initiated cutting cycles with a 50bps cut three times, which were in early 2001, 2007, and 2020. Each of these periods have been recorded as times with strong economic uncertainty, and have led some analysts to guess that the current environment is poorer than anticipated to require such strong action from the Fed.

However, this viewpoint ignores significant pretext regarding recent economic data. Most notably, during the Fed meeting in July, the committee was largely split, as key unemployment data wasn’t yet released that would dictate if a cut was necessary. However, when unemployment came in worse than expected at 4.3%, most analysts understood that the labor market was slowing faster than predicted. This sentiment was echoed by the FOMC, who mentioned during September’s meeting that they could have slowly started to reduce interest rates. However, since they missed their opportunity in July’s meeting, they’ve taken the initiative of starting with a larger 50bps cut and have signaled the potential for another 50bps cut to support the labor market towards the end of the year.

Overall Market and Investor Reactions
Financial markets responded positively to the news. The S&P 500 rose by over 2% following the announcement, with growth stocks and interest-sensitive sectors like real estate and technology leading gains. Bond markets also rallied, with the yield on the 10-year Treasury note dropping by 15 basis points, signaling investor confidence in the Fed's ability to navigate the evolving economic landscape. However, some analysts warn that the Fed may face challenges balancing support for growth with lingering inflation risks, especially if energy prices or global supply chain disruptions flare up again.

Looking Ahead: Further Rate Cuts?
Once again, the September rate cut could be the start of a broader easing cycle, as the Fed has hinted at the possibility of additional cuts in the coming months if economic conditions warrant it. Market participants are now pricing in at least one more 25-basis-point cut by the end of 2024. The Fed’s evolving stance suggests that its focus has shifted from curbing inflation to ensuring that the U.S. economy avoids a sharp downturn. Investors and economists will be closely watching upcoming data on inflation, jobs, and GDP growth to gauge the Fed's next steps.

MERGER AND ACQUISITION

ROGERS - TORONTO'S NEW SPORTS POWERHOUSE

Rogers (Buyer)

Rogers Communications is Canada's leading communications and entertainment company, owning the Toronto Blue Jays, Rogers Centre, and Sportsnet. It also partners with the Vancouver Canucks, Edmonton Oilers, and Calgary Flames. Over the past decade, Rogers has invested CAD 14.5 billion in its sports portfolio, emphasizing its focus on live sports and media.

BCE Inc. (Seller)

BCE Inc. is the parent company of Bell Canada, offering wireless, internet, and TV services to residential and business customers. Its media arm, Bell Media, operates major networks like CTV, TSN, and RDS, along with streaming services Crave and iHeartRadio Canada, making it another media leader in Canada.

MLSE (Target)

Maple Leaf Sports & Entertainment (MLSE), one of the globes top sports companies, owns the Toronto Raptors, Maple Leafs, Marlies, Toronto FC, and Argonauts. It also operates Scotiabank Arena and is primarily owned by Rogers with a 75% stake, with minority stakes held by Larry Tanenbaum at 20% and OMERS at 5%.

Transaction Details

On September 18, 2024, Rogers Communications announced a $4.7 billion deal to acquire BCE's 37.5% stake in MLSE. This transaction is expected to close in mid 2025, increasing Rogers’ stake of the sports company to 75% ownership. The two companies initially acquired a joint 75% stake in MLSE back in August 2012. As part of the deal, BCE will retain 50% of the broadcasting rights to MLSE content, including Maple Leafs and Raptors games, for the next 20 years. The deal gives MLSE a $12.53 billion valuation and will undergo review by the Competition Bureau. However, the continuation of BCE's broadcasting rights is expected to reduce concern and any backlash from the Competition Bureau.

Implications

The deal between Rogers and Bell will involve financing from private investors, as to not impact Rogers’ current leverage capacity. Bell will remain a telecom sponsor for the Raptors and maintain sponsorships with the Argonauts and Toronto FC, upholding its presence in the sports industry. Bell has been selling off assets including the sale of Northwestel Inc for $1 billion, to restructure themselves as a tech-focused company. The divestment in MLSE aligns with their restructuring needs, better positioning them to make that shift to become a primarily tech-focused company. Additionally, there is speculation that Rogers could integrate the Blue Jays into MLSE before an initial public offering (IPO), potentially increasing MLSE’s overall valuation, while allowing Rogers to extract value from the Blue Jays, who have been operating at a loss for the past five years.

Strategic Rationale (BCE)

As previously mentioned, BCE is focused on restructuring to reduce its debt and focus on its transition to become more technologically facing. By doing so, Bell will focus on fiber, 5G, cloud services, and enterprise solutions. With its debt rating recently downgraded by Moody’s to one notch above junk, it is extremely important for Bell to pay off some debt principal on their balance sheet.

Strategic Rationale (Rogers)

For Rogers, the deal consolidates its control over MLSE, positioning them to control key business decisions, with the primary objectives of winning championships. The previous ownership structure made decision-making difficult, but with Rogers now holding a majority stake, it will have greater autonomy in shaping the future of Toronto sports. In addition, the increasing valuations of the Maple Leafs, valued at $2.8 billion, and the Raptors, valued at $4.1 billion, pave positive investment rationale behind MLSE. Moreover, there is speculation that Rogers is looking to eventually bring the Blue Jays under MLSE to complete the Toronto sports empire.

MONTHLY FINANCIAL CONCEPT

BREAKING DOWN EQUITY VS. ENTERPRISE VALUE

What is Enterprise and Equity Value?

Enterprise Value: Represents the value of the company’s core business operations to all investor groups

Equity Value: Represents the value of everything the company’s worth to solely to equity investors

A Deeper Dive into Enterprise and Equity Value

Enterprise Value = Equity Value + Net Debt + Preferred Stock + Minority Interest

First, you subtract Non-Operating Assets because Enterprise Value focuses solely on Net Operating Assets. Examples of Non-Operating Assets include cash and investments, but it also encompasses equity investments, assets held for sale, and assets related to discontinued operations.

Then, you add liability and equity line items representing other investor groups beyond common shareholders because Enterprise Value accounts for all investors. Debt and preferred stock are the most common examples, but underfunded pensions, capital leases, and noncontrolling interests also qualify.

Practical Use Cases

Enterprise Value

EV/ EBITDA: useful for comparing firms with different capital structures

EV/Revenue: useful for companies where margins vary significantly; good topline comparison without factoring expenses

EV/ # of scientists: EV can be used in various cases; in a scientific lab scientists are technically available to all investors so this would be a valid multiple

Equity Value

P/E: Price to earnings can be used to assess how much an investor is willing to pay for a dollar of earnings

P/S: Price to sales is useful for companies in industries of high growth that may not have positive Net Income figures

P/BV: Price to Book Value is a measure used commonly in asset-intensive industries like banks or insurance where these values are critical

Concerns

Equity Value can become more intricate to calculate and follow due to the potential dilution from convertible securities, stock options, or warrants.

To calculate fully diluted equity value, you must account for the potential issuance of new shares due to outstanding stock options or warrants. This involves adjusting for the number of new shares that would be created, as well as the cash that would be received from the exercise of these options (if in-the-money).

Convertible bonds, which can be converted into equity at the bondholder's discretion, also need to be factored in. Determining the impact on equity value requires understanding the conversion ratio and current stock price versus the conversion price.

Test Your Knowledge - Enterprise Value

BASIC

Could a company have a negative Enterprise Value? Could they have a negative Equity Value?

Negative Enterprise Value – YES. This would indicate that the company has an extremely large cash balance or an extremely low market capitalization (or both).

Negative Equity Value – NO. This is not possible because you can’t have a negative share count or a negative share price.

ADVANCED

How do convertible bonds impact equity value and enterprise value?

Convertible bonds are initially counted as debt, which affects enterprise value by increasing it due to higher debt levels. However, if they convert to equity, equity value increases due to the higher share count, while enterprise value decreases as debt is removed from the balance sheet.

What happens to equity value and enterprise value when a company raises debt to fund an acquisition?

Debt increases enterprise value because the company now has higher debt. However, equity value remains unchanged as it is unaffected by debt issuance