Rogers and the Blue Jays, part 2: the present

See also: Part 1: Background and history

When we left off a few weeks ago, Ted Rogers and Rogers Communications had purchased the Blue Jays at a low point in franchise history after a number of external headwinds converged to threaten the competitive viability. After spending their first 18 years inside a larger corporate entity for whom they were a strategic asset, it was once again the case as the Blue Jays were cornerstone of Rogers getting heavily into the media business and marrying content with the distribution thereof.

Over the last 20 years, it has proved to be a very successful financial investment, and even moreso given that Rogers stuck with the underlying strategy when media convergence fell out of vogue in the dot-com fallout before Convergence 2.0 came back 10 years ago. Within a couple years the tide of red ink was stemmed, the headwinds had lessened, and the Jays looked to make a push. That didn’t work out, but it finally came to fruition nearly a decade later in 2015-16.

Along the way, there have been plenty of changes, but chief among those would be the passing of Ted Rogers. In the short run, it was mostly status quo as the Rogers family maintained control and the CEO role passed to Nadir Mohamed, who had been essentially his right hand man.

He retired after five years and was replaced by an outsider in Guy Lawrence who came over from Vodafone in Europe. Ultimately Lawrence was ousted less than three years later in October 2016 after clashing with the Rogers family. Multiple reasons were cited for the change — a brash approach that didn’t fit, declining core operating performance, the fallout from the NHL broadcast megadeal — but fundamentally it came down to alienating the Rogers family.

It was in this period that Edward Rogers became chairman of the Blue Jays (and MLSE vice-chair) and he spearheaded the whole Beeston succession fiasco. Coming after he and another sibling were pushed out of their managerial roles at the company by Lawrence, the implicit quid pro quo would appear to be that in exchange for keeping his nose out of the main businesses, he got to oversee the sports properties as his own little fiefdom.

That brings us squarely to the present and current CEO Joe Natale, brought in from Telus as a telecom operator similar to Mohamed to focus on the main businesses of wireless and cable. Moreover, there’s a big investment cycle coming in building a 5G network and the substantial capital investment that entails.

Natale made some waves in late 2017 when he talked about “surfacing embedded value” that wasn’t being recognized in the share price. Proceeds would fund some of those major investment needs, instead of taking on more debt and otherwise freeing up equity at the margin. One of those would be the Blue Jays, who if they fetched the estimated US$1.6-billion/$2-billion Canadian Forbes value make up over 6% of Rogers $30-billion market cap.

We don’t have any information about the specific Blue Jays financials, but given that the media division generally has very modest operating margins. and that in general those margins haven’t moved significantly with the ebbs and flows of the Blue Jays fortunes (ie, 2015-19), it’s probably safe to assume the basic premise is for the Jays to roughly operate at a breakeven level, where it doesn’t add much but doesn’t drag on earnings. Historically, that’s been a common way of operating MLB teams (and sports franchises broadly), where the major financial returns come from the appreciation of the asset.

That’s relevant in that if the Jays were sold for something like $1.5-billion Canadian net of taxes, those proceeds could repurchase about 25-million shares, reducing the share count of about 500-million by about 5%. Since you’re not taking any earnings out of the pie, then reducing that denominator in turn moves earnings per share up 5% (effectively, those wireless and cable profits are being spread over a smaller base). Given the same price/earnings multiple, the shares would be worth 5% more.

If this sounds like alchemy, to some extent it is. A perfectly efficient market would price in the fair market value of all assets. But markets are not that, and a stock like Rogers is valued primarily on those wireless and cable businesses and the profits the produce. That’s especially the case in the current investing environment, where bond yields have been pushed to record lows and investors seeking income have turned to higher yielding dividend stocks.

Which leads to a related point. Rogers is no longer the fast growing upstart challenger it was for most of its history and earlier this century, arguably up to even a decade ago. It is one thing for a crusading founder CEO to build a conglomerate of businesses, especially when the main selling point or the company to investors and financial markets is high growth and the promise of tomorrow.

But it’s another thing entirely to maintain it through cyclical ups and down once that person is no longer around to hold it together. For a mature company, the emphasis is on operational excellence to maximize margins and squeezing value out of current assets. That reality may prove quite significant for the future of the Blue Jays within Rogers.

This is where the recent reports of a bigger restructuring around Rogers Centre are particularly interesting. To the extent the Blue Jays are strategically superfluous to the main business of operating wireless and cable networks, then adding a further real estate businesses is actually a further distraction from that core mission and value proposition to investors. It’s more embedded value the market isn’t going to recognize.

On the other hand, it can be viewed as an attempt to surface value from a hidden asset on the Rogers balance sheet, entirely consistent with what Natale has discussed in the past. This would be particularly true if the value of the real estate can be directly monetized, resulting in either a significant payout and/or lack of having to plow a pile of Rogers capital into the existing stadium or a new stadium. It’s thus notable that a real estate heavyweight like Brookfield is involved, whose core mission is precisely this business.

Even further though is the broader strategic question of whether media should or will be a focus for Rogers. While it makes up over 10% of revenue, the bottom line impact is only a couple of percentage points. Even before the pandemic, the media segment had an operating margin under 10%, compared to 40-45% at wireless and cable. Even taking into account the much lower capital intensity, the cash margin (after capex) was about 5% compared to ~20% at cable and ~30% in wireless.

Granted, the business model of combining content and distribution shows no signs of obsolescence. Their prime competitor BCE essentially mirrors their structure. In the US, AT&T in recent years bought Direct TV and then Time Warner betting on that model being the future. Disney had done similarly, directly buying content to complement its ownership of ABC and ESPN.

But if Wayne Gretzky’s genius was famously in knowing where the puck was going as opposed to where it was, the question for Rogers is not what’s popular today but what the landscape looks like in 10 years. Those latter moves in the US were driven by the fundamental disruption of cord-cutting and over-the-top streaming in content distribution. Success in streaming requires scale and bundling, critically on an international as opposed to national level.

This puts into question the future value of a lot of media assets Rogers holds. They’ve already seen the magazine publishing division wound down after it became largely obsolete. Shomi, their streaming offering, flopped. If most of the best original content is retained elsewhere, what s the purpose of CityTV and most other cable assets?

Granted, sports might well be the exception to all this, in it’s largely based on local geographical loyalties and so scale is much less important. The Blue Jays could still fit in a future smaller, streamlined media segment where there might be some value bundling it with wireless and Internet/cable packages. But here again, ownership is not strictly necessary, and Rogers executives have spoken about the possibility of proverbially renting rather than owning the cow.

At some point, it becomes a call on whether owning sports teams is a good financial investment for the future. MLB teams, like sports teams generally and globally, have been a one way investment. Perhaps they don’t add to earnings, but if they go up 8% a year, then what’s $2-billion today will be $8-billion in 20 years.

For 40 years, each successive sale at staggering prices has been greeted by incredulous claims that it can’t keep going... and yet it has, defying the skeptics. But by the same measure, at some point it has to stop. Assets can’t keep appreciating at 10% forever (or at least, at 5% above economic growth and inflation).

For a generation, those increases were propelled by cable. Local sports was essential to a cable package, and the distributions paid higher and higher fees for stations who bid higher and higher amounts for rights. But in an over-the-top world, will sports economics be as lucrative and generate the same rights revenue? Can you charge a much smaller base much higher amounts?

More recently, franchise values have been driven by mega-billionaires buying teams, driven less by strict financial returns and more the status. But will sports — and especially baseball — continue to have that pull and relevance? At some level this was because people grew up playing baseball, but it and other sports no longer enjoy that hegemony. There are now entire generations who grew up on video games; “e-sports” is growing explosively, and there’s no reason in the future status will be attained by owning a MLB team as opposed to one of those.

If the future of the Blue Jays is not part of Rogers, then in the last segment I’ll examine what it could instead look like.