TELUS CORPORATION

CAPITAL STRUCTURE MANAGEMENT

GROUP 1G
• AKASH GUPTA (2019PGP007)
• B S S PRAMOD (2019PGP012)
• RAKSHA SHETTY (2019PGP043)
• RISHABH AGRAWAL
(2019PGP044)
• SANYA SHARMA (2019PGP048)
• VIPUL BHATIA (2019PGP066)
PROLOGUE

 Protagonist: Robert McFarlane, CFO of TELUS Corporation (TELUS)

 Moody’s, a bond rating agency rates TELUS from Baa2 to Ba1 (two notches from investment grade to
speculative grade)

 McFarlane with his team had been working on a contingency plan to mitigate the effects of a possible
downgrade

 But downgrade had already occurred, which made McFarlane to decide on a course of action to
recommend to his audit committee.

 There was no time left to stay idle

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INTRODUCTION: CANADIAN TELECOM INDUSTRY
 Dominated by incumbents of two types:

1. large provincially or regionally based (accounted for 78% market share), and
2. small incumbents which served municipal areas located in less densely populated regions

 The Canadian Radio-television and Telecommunications Commission (CRTC), which was the
independent agency responsible for regulating Canada’s telecom industry, tried to increase competition
in the 1990s.
This led to fall in revenues and market shares for incumbents

 The wireless segment, however was growing. New potential products, applications were at the forefront.
Also, Voice over Internet Protocol (VoIP) was emerging area

 Industry analysts were predicting bundling of TV, internet and telephony services in one subscription.
This could have provided an edge to operators having more than one of these capabilities
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INTRODUCTION: MOODY’S BOND RATING SYSTEM

 Moody’s rated more than 200 debt issuers accounting to US$620 billion in debt in the global
telecommunications industry

 Moody’s determined the rating based on a risk assessment following meetings with company
management, analysing confidential long-term company projections, and thorough assessment of the
industry

 Moody’s ratings used by major investors around the world, which helped the issuers of debt with stable,
flexible access to debt

 Three credit rating agencies covered TELUS –

1. Moody’s
2. Standard and Poor’s Rating Services
3. Dominion Bond Rating Services

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THE COMPANY: TELUS (1/3)

 TELUS formed in Feb 1999: merger of TELUS and BC Telecom

 Firm organised in four wireline customer facing segments:

1. Wholesale
2. Large Business,
3. Small and Medium Enterprises
4. Consumer

 Wireless subsidy: TELUS Mobility was managed as separate division

 TELUS’s president and CEO, Darren Entwistle, in 2000, established new strategic intent for TELUS:
To unleash the power of the Internet and to deliver the best solutions to Canadians at homes, workplaces
and on the move.
The strategic intent was supported by six strategic imperatives
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THE COMPANY: TELUS (2/3)

 In pursuit of the strategy, TELUS began to invest significantly in a national fibre optic network and in
building local access networks in urban areas of Ontario and Quebe

 TELUS accelerated expansion with $6.6 billion acquisition of Clearnet Communications Inc., and
acquired 30% stake in QuebecTel.
For the former, TELUS arranged $6.25 billion from a consortium of Canadian and international bank

 TELUS made small acquisitions in 2001 like Arqana Technologies Inc., Rebel.com and other notable
companies

 During 2000-01, TELUS made capital investments to enhance and expand network infrastructure

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THE COMPANY: TELUS (3/3)

 TELUS sold its Advertising Services Directory Business to Verizon for $810 million in 2001, to focus on
its business, as it had spent heavily on capital and investments

 TELUS also started a phased Operational Efficiency Program (OEP) in 2001

 First phase of OEP was to complete merger related restructuring activities.

Second phase of OEP continued to focus on reducing staff.
In 2002, TELUS announced details about future OEP initiatives like streamlining of business processes,
optimising use of real estate, etc.

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EVENTS LEADING TO MOODY’S REVIEW (1/2)

 In 2001, TELUS had arranged $2.5 billion bank credit with number of Canadian, US and offshore
banks. During the same time, TELUS raised more thanCdn$6.4 billion in multi year public debt to
replace short term debt borrowed to finance acquisition of ClearNet

 In Oct 2001, it indicated quarterly dividend cut from $0.35 to $0.15 from Jan 2002

 Its net debt over total capital raised to 58.6% by June 2002

 From Apr to July 2002, TELUS’S stock price fell from $16.67 to $10.40 and participation in its
dividend reinvestment program (DRIP) fell from 47% to 10%

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EVENTS LEADING TO MOODY’S REVIEW (2/2)

 TELUS, in April 2002, increased its accounts receivable securitisation program from $150 million to $500
million, which increased its liquidity.
Net sale proceeds of $350 million were used to pay bank debt

 However, DBRS requires at least BBB (low) rating for accounts receivable securitisation agreement.
TELUS would ideally have to reserve capacity in its credit facility

 DBRS in July 2002 downgraded TELUS’s rating from BBB (high) to BBB and S&P downgraded the same
from BBB+ to BBB

 To upgrade to BBB, S&P asked for evidence of execution of OEP and general operating performance for
next 12 months

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MOODY’S REVIEW AND DOWNGRADE

 Moody’s stated that one downgrade to Baa1 would not occur if ratio of debt to EBITDA exceeded 3.8.
Few months later, Moody’s stated the TELUS’s ratings are stable

 In July 2002, Moody’s downgraded ratings from Baa2 to Ba1, the top non-investing grade.
Statement comes two minutes before planned release Q2 results

 Stock Price fell from $96 to $66

 Market surprised as the major credit rating agencies have very different ratings for TELUS (Moody’s
rating was an outlier)

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NEXT STEPS…(1/2)

 TELUS’s D/E ratio could be enhanced in three ways:

1. issue equity to public markets

2. institute enhanced DRIP program by offering investors a small discount if they choose to reinvest
dividends
3. reduce the dividends

 More importantly, McFarlane felt the need to regain confidence of capital markets

 McFarlane wondered if anything can be done regarding Cdn$6.4 billion worth TELUS bonds downgraded
by Moody’s

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NEXT STEPS… (2/2)

 Bond prices falling gave an idea of repurchasing bonds at significant discount to McFarlane.
However, it would be aggressive to use up liquidity to repurchase debt

 Equity issue would be controversial.

Disadvantages like low EPS to Verizon (largest shareholder of TELUS) and advantages like
signalling that TELUS is serious in achieving good D/E ratio

 Unusual deal from a New York based hedge fund which asked for TELUS bonds in exchange for
TELUS shares. McFarlane contacted an investment bank regarding the same

 Final choice: WAIT AND WATCH, as cash reserves were adequate for operations

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THANK
YOU