Suspend disbelief for a moment and consider the odd trading pattern of Rogers Communications (NYSE:RCI) over the past year. To remind, there are two classes of shares there: the A’s [RCI.A:TSX] and the B’s [RCI.B:TSX]. One of Canada’s great entrepreneurs, Ted Rogers, controls the lion’s share of the voting stock of Rogers Communications. Those are the A’s.
For many, many years, back in the 90's when the B’s were trading at $12 or $14 (pre split), and even in this century, when the stock was in the $20's, the premium that one had to pay to buy a voting share was generally below 10%. When the B’s were at $12, you had to pay $13 or so for the A’s. That’s an 8.3% premium.
When the stock was in the $20s, it never got much higher than a 10% premium for the A’s. At times, the lack of liquidity has presented the market maker with the chance to ream the buyer of the illiquid A’s; but, year after year, there has always been the chance to buy a chunk of voting shares in the range of consistent 8%-10% premium to the highly liquid RCI.B non-voting shares.
Something curious has been happening this year, however. To buy a share of the A’s costs a lot more than any historical pattern [at least since I began watching in 1996]. This past Friday, for example, the A’s closed at $53.93 and the B’s at $46.55, a whopping 15.9% premium to buy the A’s versus the B’s.
While the ranges bounce around, they are still substantially higher than they’ve been for a decade. Why, one wonders, is a voting share now demanding almost twice the premium it did five or ten years ago?
Just do some research into what happened with Oshawa Foods to understand how differently voting shares can be treated in a takeover versus non-voting shares. First of all, a takeover of a controlling shareholder is always very friendly to that party, whether it be National Trust [safe income drove the cash/stock consideration choice there] or the Oshawa deal. But, when there are dual class shares, the voters almost always go for a substantial premium to the non-voting shares. A drag along right generally gives the non-voting shareholders the chance to sell their shares along with whatever deal the shareholder that controls the votes can get for himself/herself. But that doesn’t mean they get the same price per share — far from it.
The theory is pretty simple, the voters are worth more to a buyer of a company than the non-voters, even if they represent most of the share capital of the company. At Oshawa Foods, for example, the voters went for a huge premium to the non-voters in that 1998 takeover.
Having established that, why, then, are the Rogers’ voting shares worth more than a few years ago on a relative basis? What has happened to suggest that Ted Rogers is more likely to sell now than five years ago?
It is possible that the shares have been quietly consumed by a single buyer or two over the past number of months, making them less liquid, more in demand and therefore more valuable as compared to the non-voting Class B’s [They could be playing the longstanding 'buy the A’s and short the B’s' approach that was patented by a certain Nesbitt Burns branch manager in the 90's].
Additionally, there may have been a change in the macro environment for telecom stocks, as the BCE (NYSE:BCE) takeover may have reminded investors that these big deals do happen from time to time. As such, it may well be possible for Rogers to do a massive strategic deal of sorts, which could make owners of the A’s incremental profits versus the B’s.
Finally, some might think that Ted Rogers is ten years closer to retirement than he was in 1997, for example. With retirement could come a sale of the business [at least some might think he’s 10 years closer, even if he has extended his own contract with the Rogers board of directors to 2035 or whatever the most recent amended deal is].
The takeaway is simple.
No investor could possibly have any specific insight into Mr. Rogers' plans for a sale of his company. There cannot possibly have been any leaks [which usually account for takeover spec] for the simple reason that Ted Rogers is, by all appearances, as full of vim and vigor as ever before. With his dreams bearing such wonderful and profitable fruit these days, why would he give up now, just as his firm is reaching its peak? Before hitting another one, as Rogers has done time and time again this century?
No one can buy Rogers if my Sigma Chi brother won’t sell. As he himself would say, “Ted Rogers is a buyer, not a seller.” Which begs the question, why does the market think the voting shares at Rogers are worth twice the premium they commanded a few years ago?
Disclosure: I own Rogers Class A’s.