RCI's Share Buyback Financed with High-Interest Debt Raises Deleveraging Concerns

What happened

Rogers Communications Inc. acquired 821,000 of its own shares from ADW Capital Partners for $30 million, using $8 million in cash and $22 million in seller financing at a 12% annual interest rate. This transaction reduces the outstanding share count by approximately 9.5% to around 7.85 million shares, which the company claims expedites its strategic initiatives. According to the DeepValue report, RCI is focused on deleveraging from a net debt to EBITDA ratio of about 3.6x while investing in 5G-Advanced and satellite-to-mobile technologies. However, the use of expensive seller financing contradicts the emphasis on reducing leverage and could increase interest expenses. This move may be an attempt to portray financial engineering positively, but it risks undermining the credibility of RCI's deleveraging path.

Implication

The reduction in shares could slightly increase earnings per share if operational metrics hold steady, providing a short-term positive. However, the 12% interest on seller financing elevates interest costs, which may pressure free cash flow and delay debt reduction. Given RCI's already high leverage, this transaction signals a departure from prudent capital allocation, raising doubts about management's commitment to financial discipline. Investors should scrutinize upcoming financial statements for any deterioration in net debt to EBITDA or interest coverage ratios. If this pattern continues, it could erode confidence in the company's ability to execute its stated strategy and narrow the valuation discount.

Thesis delta

The share buyback does not fundamentally change the BUY thesis based on undemanding valuation and network advantages, but it introduces a negative shift by potentially increasing financial leverage and interest costs. This could slow the deleveraging trajectory emphasized in the DeepValue report, requiring closer monitoring of debt metrics in future disclosures. If leverage trends upward or FCF stagnates, it may weaken the investment case and prompt a reassessment of the rating.