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Richard Croft
December 12, 2011
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Last week’s billion-dollar plus sale of the Ontario Teachers Pension Plan’s majority interest in Maple Leaf Sports & Entertainment to a couple of Canada’s largest telcos is an example of effective decision-point resolution.

It remains to be seen whether Canada’s Competition Bureau will approve the transaction. But that is secondary. What matters now is investor perception, which so far at least seems to be positive. While shares of both Rogers Communications Inc. (TSX: RCI.B, Friday’s close $36.76) and BCE Inc. (TSX: BCE, Friday’s close $40.74) lost ground in early Friday trading – shortly after the deal was announced – but bounced back by day’s end.

At present Maple Leaf Sports and Entertainment (MLSE) owns three (Maple Leafs, Raptors and Toronto FC) of the five professional sports teams in the Toronto market. Not to mention the Roger’s alliance with the NFL’s Buffalo Bills and the possibility of that franchise ultimately coming to Toronto. And I would not be surprised to see the Blue Jays eventually being rolled into MLSE within the next couple of years. Pity the Toronto Argonauts, as the only “professional” sports franchise left out in the cold.

The likely cause of the initial sell-off in the shares of BCE and Rogers was the acquisition cost. With a purchase price that translates into 17 times current earnings this venture will not be immediately accretive to the bottom line of either company.

There were some US private equity funds sniffing around, but when your financing costs are around 6% annually, none could make a deal work at a price the Teachers Pension Plan wanted. It works for the BCE / Rogers “unholy alliance” because they can finance this with their own capital, or through the capital markets at rates substantially below the 6% threshold. The point being that no matter the cost of financing, MLSE will likely have a slightly negative impact on the earnings of both companies.

That said, MLSE is a profitable marketing and development company that owns the only game in town – i.e. Leafs and Raptors – in Canada’s largest and most concentrated sports market. Any return to the telco’s bottom line will require MLSE to generate additional revenue from higher ticket sales, playoff appearances by the major franchises, or a territorial fee from an NHL expansion team that may well come to the Greater Toronto Area sometime in the next three to five years.

For now, this transaction is all about content for the high profile sports only brands that both BCE and Rogers own. As such, the early negative sentiment driven by earnings expectations may have been an over reaction. As the dust settles, there may be opportunities for option traders.

If you think about the pieces of this pie you have to focus on the biggest slice which is the Toronto Maple Leafs. If the Maple Leafs were to make the playoffs that would provide an earnings boost. But not likely enough to enhance shareholder value for those who own the telco giants. On the other hand, the excitement that such a story would generate could provide momentum to the share price of both companies. But that would be a sentiment induced spike which rarely has long term traction. And of course one has to ask what are the odds that the Maple Leafs make the playoffs anytime in the near future? More to the point the deal does not close until the summer, so any benefit from a Maple Leaf run to the cup will have little impact on 2012 earnings.

Given that view, an option trade should be designed to enhance cash flow – i.e. covered call writing. Only the most aggressive traders who believe that this purchase enhances the growth prospects for both companies would buy calls, and for those traders, focus on long term calls.

With that in mind, the covered call trade would require you to buy BCE and write the May 42 calls at 75 cents per share. With Rogers, buy the shares and write April 38 calls at $1.20 per share.

For the more aggressive trader – who may be dreaming of a Maple Leafs playoff run??? – look at buying the BCE January (2013) 40 calls at $2.25 per share or the Rogers July 38 calls at $1.80.

Richard Croft
Richard Croft http://www.croftgroup.com/

President, CIO & Portfolio Manager

Croft Financial Group

Richard Croft has been in the securities business since 1975. Since February 1993, Mr. Croft has been licensed as an investment counselor/portfolio manager, operating under the corporate name R. N. Croft Financial Group Inc. Richard has written extensively on utilizing individual stocks, mutual funds and exchangetraded funds within a portfolio model. His work includes nine books and thousands of articles and commentaries for Canada’s largest media channels. In 1998, Richard co‐developed three FPX Indexes geared to average Canadian investors for the National Post. In 2004, he extended that concept to include three RealWorld portfolio indexes, which demonstrate the performance of the FPX portfolio indexes adjusted for real-world costs. He also developed two option writing indexes for the Montreal Exchange, and developed the FundLine methodology, which is a graphic interpretation of portfolio diversification. Richard has also developed a Manager Value Added Index for rating the performance of fund managers on a risk adjusted basis relative to a benchmark. And In 1999, he co-developed a portfolio management system for Charles Schwab Canada. As global portfolio manager who focuses on risk-adjusted performance. Richard believes that performance is not just about return, it is about how that return was achieved.

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