Headquartered in Montreal, Quebecor Inc. (TSX–QBR.B) focuses primarily—but not only—on the Quebec market. Its sprawling communications and media empire includes cell phone, cable and Internet services, as well as a number of broadcast and specialty cable TV channels and, at least for now, French- and English-language newspapers. The latter include scores of English-language papers published by Quebecor subsidiary Sun Media Corp.
However, that’s about to change. Quebecor has agreed to sell Sun Media’s English-language newspaper operations. The buyer is Postmedia Network Canada. Postmedia will pay Quebecor $316 million in cash.
Why Quebecor is selling
This transaction gets Quebecor out of a business that it no longer wants to be in. It also gives Quebecor cash to expand its wireless operations in its base of Quebec (Canada’s second-largest cell phone market) and into Ontario, British Columbia and Alberta (the country’s largest, third-largest and fourth-largest cell phone markets).
The transaction involves the sale of 175 newspapers and publications. And Quebecor is eager to sell. Pierre Dion, president and chief executive officer of Quebecor and Quebecor Media, says, “Newspaper revenues have been declining year by year. The transaction therefore comes at a time when the Canadian newspaper business absolutely needs consolidation to remain viable and to compete with digital media.” Indeed, this division is struggling.
Quebecor’s main business: Telecommunications
Quebecor’s core business is telecommunications. In the six months to June 30, this division generated $1.388 billion in revenue, close to two-thirds of the total revenue of $2.107 billion.
Quebecor subtracts employee costs as well as the purchase of goods and services to calculate its adjusted operating income. Telecommunications produced $665.7 million, or nearly 91 per cent, of total adjusted operating income of $732.4 million.
Where it’s likely to put the cash from selling Sun Media
We suspect that Quebecor will use the proceeds to expand its wireless communications operations into Ontario, Alberta and B.C. It recently argued that if roaming fees were low enough on its competitors’ assets, it could enter the market. This would go a long way towards satisfying the federal government’s objective of having four major wireless competitors in each province.
Two to watch: Debt and cash flow
Quebecor’s balance sheet looks somewhat stretched. Including $500 million of convertible debentures, total debt is $5.531 billion. Subtract cash of $194 million and net debt is $5.337 billion. That’s 5.1 times cash flow of $1.048 billion over the last four quarters, above our comfort zone of two times or less. Then again, telecommunications generates dependable recurring revenue.
We note, too, that in the first half of 2014, cash flow fell a little short of Quebecor’s investing and dividend payments, giving it little scope to significantly expand its wireless operations unless it’s willing to borrow even more. However, Quebecor could sell various assets to help further expand into telecommunications.
Quebecor Inc. remains a buy for long-term capital gains and token but stable dividends.
The MoneyLetter, MPL Communications Inc.
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The MoneyLetter •10/21/14 •