Wednesday, October 15, 2008

Debunking Jeff Blair's Rumor of an MLSE-Rogers Merger

As noted by Eyebleaf in the comments to my post yesterday, and by Torontosportsmedia, Jeff Blair wrote a blog piece about the hiring of Paul Beeston as the Jays "interim" President. More specifically, he threw out a pretty wild theory that Beeston's hiring could, eventually, lead to a merger (or acquisition) between MLSE and Rogers. Interesting theory, so let's slice into it a little further...

Problem 1: As recently reported by Forbes, the value of the Jays is $350M (all figures US $), with revenues of $160M and EBITDA of -$1.2M. I don't have to tell you that the Jays ain't exactly the New York Yankees. We here in Leafland often bemoan the fact that the owners of the Leafs are the dreaded suits over at MLSE (including significant ownership by the Ontario Teachers Pension Plan - "OTPP"), and part of the problem of having a corporate owned franchise (as opposed to a solo ego-driven owner like Mark Cuban), is that the corporation looks at possible deals from a strictly financial standpoint. Remember, OTPP are the caretakers of our province's teachers in this particularly crappy financial market. The Jays would likely be a drag on MLSE's balance sheet each year - and I seriously question whether OTPP would let Peddie go through with such an acquisition.

Problem 1a: The Jays hold certain intangible benefits to Rogers - namely the ability to cross promote the team on Rogers' cable/cell phone networks and TV stations - which gives Rogers a certain leeway to operate the Jays at a loss. Take it from a friend at Sportsnet who is "in the know," it goes a long way towards opening the wallets of current and prospective Rogers advertisers to be able to invite them onto the corporate jet and shuttle them off to a warm weather destination to hob knob with Jays players and Sportsnet personalities. MLSE wouldn't have that built-in advantage, and I just don't see how OTPP would let them do it. Hang on though, there's more...

Here's where it gets crazy... because Blair doesn't just suggest a merger of MLSE and the Jays. He suggests a merger of MLSE and Rogers Communications, Inc. (TSE:RCI)! He calls it a "seismic shift in the Toronto sports landscape." Folks, I have no particular beef with Blair, but this deal wouldn't just be felt in the Toronto sports world - it would instead be felt across the Canadian business community! Stay with me here...

Problem 2: Blair suggests that since Ted Rogers is getting old, they will need a new leader and that a Rogers-MLSE merger will help them find that leader. Well, I hate to burst the bubble here but Rogers, as alluded to above, is a publicly-traded communications company with a market cap of approx. $17.2 BILLION. How in the world is MLSE going to afford the purchase of Rogers? This would be a massive transaction, would costs BILLIONS, would require an army of lawyers, accountants and i-bankers, not to mention the fact that it would require MLSE to become a reporting company to the Ontario Securities Commission (and maybe the SEC). Furthermore, even if Peddie & The Leaf Fan Heartbreakers had the gall and savy to pull off a deal like this... how the heck would they finance it in these capital markets? Among the litany of problems with this concept, I just can't see how they could raise the cash to do a deal like that.

Problem 3: Once again, Rogers is a publicly traded communications business. On the other hand, MLSE is a sports empire, with holdings that include the Leafs, Raptors and TFC. Even if Rogers wanted to buy MLSE, I cannot imagine how Rogers could justify the purchase of these teams to its shareholders. I know I mentioned the benefits of Rogers' ownership of the Jays above, but this is a communications company - not a sports company. Owning a single team with certain synergies is one thing - but owning ALL of Toronto's sports teams??? Business have a strong predilection to failure when they diversify outside of their core competencies, and this would be a major leap for Rogers to take (example: The Chicago Trib's need to sell the Cubs). Furthermore, I seriously question whether Peddie and the OTPP would be willing to sell. MLSE is a cash cow with no expiration date in site. This is a group that can raise ticket prices at the same time they reduce the quality of their product. The premium that Rogers would have to pay would likely make any such deal too prohibitive.

Its an interesting theory that Blair floated out there - but I simply cannot see it happening for the reasons above, in additon to the many that I'm sure you readers can come up with. Oh, and if you've got a stronger financial background than me (not hard to do!) and can see holes in my theories, please fire away in the comments and let me know where I'm wrong in my assessment.


Billy Bee Absentee said...

While overall I agree that this "merger" is a pure fantasy. There is a major technical point that needs to be pointed out:.

OTPP already OWNS BELL CANADA. So the argument that OTPP couldn't pull of a multi-billion dollar acquisition of Rogers is not correct since they actually did pull off such a deal for Bell last year.

With that said, the deal might have been a possibility say 4 years ago, but the fact that Teacher's already owns Rogers main competitor makes the point moot. Does no one read Canadian buisness sections?

Tex said...

That's a totally different concept.

I'm not saying OTPP couldn't buy Rogers, I'm saying MLSE couldn't buy Rogers.

MLSE is just one of OTPP's many portfolio companies - a drop in the OTPP bucket, if you will. Maybe OTPP could pull off an M&A with Rogers, but MLSE could not.