(BMO NESBITT BURNS LOGO) INVESTMENT & CORPORATE BANKING
1 First Canadian Place
4th Floor, P.O. Box 150
Toronto, ON M5X 1H3
Tel.: (416) 359-4001
November 22, 2004
The Independent Committee of the Board of Directors
Rogers Wireless Communications Inc.
One Mount Pleasant Road
Toronto, Ontario
M4Y 2Y5
Dear Sirs:
BMO Nesbitt Burns Inc. ("BMO Nesbitt Burns") understands that Rogers
Communications Inc. ("RCI") has proposed a share exchange take-over bid for all
of the outstanding Rogers Wireless Communications Inc. (the "Corporation) Class
B Restricted Voting shares ("RWCI Restricted Voting Shares") not owned by RCI on
the basis of 1.75 RCI Class B Non-Voting shares ("RCI Non-Voting Shares") for
each RWCI Restricted Voting Share held (the "Transaction"). BMO Nesbitt Burns
also understands that RCI intends to take up and pay for any and all of the
publicly held shares that are tendered to the offer regardless of the actual
number of shares tendered, and that if a sufficient number of shares are
acquired under the offer, it is RCI's current intention that it would acquire
the remaining publicly held Corporation shares pursuant to a subsequent
compulsory acquisition or going private transaction. RCI currently owns 100% of
the Corporation's Class A Multiple Voting shares and approximately 81% of the
RWCI Restricted Voting Shares, representing an approximate 89% equity interest
and an approximate 98% voting interest in the Corporation.
BMO Nesbitt Burns further understands that further details of the Transaction
will be provided in the take-over bid circular to be mailed to the holders of
RWCI Restricted Voting Shares (the "Circular") and in the Directors' Circular of
the Corporation (the "Directors' Circular"). BMO Nesbitt Burns also understands
that the Transaction is an "Insider Bid", as such term is defined in Rule 61-501
of the Ontario Securities Commission ("Rule 61-501") and Policy Q-27 of the
Quebec Autorite des marches financiers (collectively, the "Rules"), and that the
Circular will be prepared by RCI in compliance with applicable laws,
regulations, policies and rules (including the Rules).
A member of BMO [LOGO] Financial Group
________________________________________________________________________________
All insurance products are offered through
BMO Nesbitt Burns Financial Services Inc.
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BMO Nesbitt Burns understands that a committee of members of the Board of
Directors of the Corporation (the "Board"), who are independent of RCI and its
principals (the "Independent Committee"), has been constituted to supervise the
preparation of a formal valuation and to report to the Board with its
recommendations in respect of the Transaction.
The Independent Committee has retained BMO Nesbitt Burns to prepare and deliver
to the Independent Committee a formal valuation (the "Formal Valuation") of the
RWCI Restricted Voting Shares in accordance with the requirements of the Rules
and the Minority Shareholder Protection Agreement (the "MSPA") dated August 7,
1991 entered into by RCI and the Corporation, and to provide its opinion (the
"Fairness Opinion") as to the fairness, from a financial point of view, of the
consideration offered under the Transaction to the holders of RWCI Restricted
Voting Shares other than RCI (the "Minority Shareholders").
ENGAGEMENT OF BMO NESBITT BURNS
The Independent Committee first contacted BMO Nesbitt Burns on September 30,
2004 regarding a potential advisory assignment in connection with a possible
transaction involving a formal valuation of the Corporation. BMO Nesbitt Burns
was formally retained by the Independent Committee to prepare, if requested, an
independent formal valuation in respect of such possible transaction, which at
the time was contemplated to be a possible substantial issuer bid by the
Corporation, pursuant to a letter agreement dated October 19, 2004 (the
"Original Engagement Agreement"). On November 11, 2004 an amending letter dated
November 10, 2004 amending the Original Engagement Agreement to reflect the
Transaction (the Original Engagement Letter, as so amended, being the
"Engagement Agreement") was executed. The terms of the Engagement Agreement
provide that BMO Nesbitt Burns is to be paid a total fee of $1,300,000 for the
services to be rendered thereunder. In addition, BMO Nesbitt Burns is to be
reimbursed for its reasonable out-of-pocket expenses, including fees paid to its
legal counsel in respect of advice rendered to BMO Nesbitt Burns in carrying out
its obligations under the Engagement Agreement, and is to be indemnified by the
Corporation in certain circumstances. No part of BMO Nesbitt Burns' fee is
contingent upon the outcome of the Transaction or any other transaction.
On October 25, 2004, BMO Nesbitt Burns met with the Independent Committee to
present BMO Nesbitt Burns' update on the process with respect to the assessment
of the value of the RWCI Restricted Voting Shares. On November 1, 2004, BMO
Nesbitt Burns provided the Independent Committee with a further update on the
status of the valuation work, advising the Independent Committee that BMO
Nesbitt Burns had completed a series of meetings with the Corporation's senior
management ("Management") and had received access to all required information.
After further due diligence and analysis, BMO Nesbitt Burns met again with the
Independent Committee on November 9, 2004 to review its subsequent work and
orally communicated BMO Nesbitt Burns' preliminary view that the value of the
RWCI Restricted Voting Shares was in a range of $46.00 to $54.00 per share. BMO
Nesbitt Burns submitted
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to the Independent Committee a written valuation presentation on November 11,
2004. On November 11, 2004, RCI publicly announced that it had proposed the
Transaction. On November 16, 2004 BMO Nesbitt Burns conducted a due diligence
question and answer session with senior officers of RCI. On November 18, 2004,
BMO Nesbitt Burns met with the Independent Committee and reviewed the
consideration offered under the Transaction, confirmed the preliminary valuation
range of the RWCI Restricted Voting Shares and preliminarily confirmed that the
proposed share exchange ratio was fair from a financial point of view, all
subject to completion of due diligence. On November 22, 2004, having completed
its updating diligence and internal review and approval processes, BMO Nesbitt
Burns met with the Independent Committee and reconfirmed, and delivered its
final valuation report setting forth, its formal valuation range of $46.00 to
$54.00 per share for the RWCI Restricted Voting Shares and opined that the
consideration offered under the Transaction is fair, from a financial point of
view, to the Minority Shareholders.
CREDENTIALS OF BMO NESBITT BURNS
BMO Nesbitt Burns is one of Canada's largest investment banking firms, with
operations in all facets of corporate and government finance, mergers and
acquisitions, equity and fixed income sales and trading, investment research and
investment management. BMO Nesbitt Burns has been a financial advisor in a
significant number of transactions throughout North America involving public
companies in various industry sectors and has extensive experience in preparing
valuations and fairness opinions.
The Formal Valuation and the Fairness Opinion as of November 22, 2004 expressed
herein represent the opinions of BMO Nesbitt Burns and the form and content
hereof have been approved by a group of BMO Nesbitt Burns' directors and
officers, each of whom is experienced in mergers and acquisitions, divestitures,
valuations and fairness opinions.
INDEPENDENCE OF BMO NESBITT BURNS
BMO Nesbitt Burns acts as a trader and dealer, both as principal and agent, in
major financial markets and, as such, may have had, and may in the future have,
positions in the securities of the Corporation, Microcell Communications Inc.
("Microcell"), RCI or their respective associates or affiliates and, from time
to time, may have executed, or may execute, transactions on behalf of such
companies or clients for which it received or may receive compensation. As an
investment dealer, BMO Nesbitt Burns conducts research on securities and may, in
the ordinary course of its business, provide research reports and investment
advice to its clients on investment matters, including with respect to the
Corporation, RCI or their respective associates or affiliates or the
Transaction.
In addition, in the ordinary course of its business, BMO Nesbitt Burns or its
controlling shareholder, Bank of Montreal (the "Bank") or any of their
affiliated entities may have extended or may extend loans, or may have provided
or may provide other financial services, to the Corporation, Microcell, RCI or
their respective associates or affiliates. Except as
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expressed herein, there are no understandings, agreements or commitments between
BMO Nesbitt Burns and the Corporation or RCI or any of their respective
associates or affiliates with respect to any future business dealings.
None of BMO Nesbitt Burns, the Bank or any of their affiliated entities (as such
term is defined for purposes of the Rules:
(a) is an associated or affiliated entity or issuer insider (as such terms
are defined for purposes of the Rules of the Corporation or RCI or
their respective associates or affiliates;
(b) is an advisor to RCI in connection with the Transaction;
(c) is a manager or co-manager of a soliciting dealer group formed in
respect of the Transaction (or a member of such a group performing
services beyond the customary soliciting dealer's functions or
receiving more than the per security or per security holder fees
payable to the other members of the group); or
(d) has a financial incentive in respect of the conclusions reached in the
Formal Valuation or the Fairness Opinion or has a material financial
interest in the completion of the Transaction.
There are no agreements or understandings between BMO Nesbitt Burns and any
interested parties in the Transaction concerning future business relationships.
Affiliates of BMO Nesbitt Burns have (non-lead) roles in the underwriting
syndicate for the proposed high yield debt offerings by the Corporation and its
affiliates which roles are not, to the knowledge of BMO Nesbitt Burns, related
in any manner to the engagement hereunder and do not affect BMO Nesbitt Burns'
view as to its independence as expressed above. The Corporation and the
Independent Committee have acknowledged that such roles do not affect their
assessment of BMO Nesbitt Burns' independence for purposes of this engagement.
BMO Nesbitt Burns is of the view that it is "independent" of all interested
parties in the Transaction for the purposes of the Rules.
SCOPE OF REVIEW
In connection with the Formal Valuation and the Fairness Opinion, BMO Nesbitt
Burns reviewed, considered and relied upon (without attempting to verify
independently the completeness or accuracy thereof) or carried out, among other
things, the following:
o November 22, 2004 drafts of the Circular and Directors' Circular;
o audited consolidated financial statements of the Corporation,
Microcell and RCI for the five years ended and as at December 31,
1999, December 31, 2000, December 31, 2001, December 31, 2002, and
December 31, 2003;
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o unaudited consolidated interim financial statements of the
Corporation, Microcell and RCI for the period ended and as at March
31, 2004, June 30, 2004 and September 30, 2004, with comparative
figures for the period ended and as at March 31, 2003, June 30, 2003
and September 30, 2003;
o management's discussion and analysis of the financial condition and
results of the operations of the Corporation, Microcell and RCI for
the five years ended and as at December 31, 1999, December 31, 2000,
December 31, 2001, December 31, 2002, and December 31, 2003 and for
the period ended March 31, 2004, June 30, 2004 and September 30, 2004;
o annual reports of the Corporation, Microcell and RCI for the fiscal
years ended December 31, 1999, December 31, 2000, December 31, 2001,
December 31, 2002, and December 31, 2003;
o annual information forms of the Corporation, Microcell and RCI for the
fiscal years ended December 31, 1999, December 31, 2000, December 31,
2001, December 31, 2002, and December 31, 2003;
o notices of annual meetings of shareholders and management information
circulars of the Corporation dated March 5, 2001, April 19, 2003 and
April 19, 2004;
o information circular and proxy statement pertaining to a plan of
reorganization under CCAA for Microcell dated February 17, 2003;
o press release issued by the Corporation on November 11, 2004
concerning the Transaction;
o Support Agreement dated September 19, 2004 between Microcell and the
Corporation;
o the Corporation's take-over bid circular for Microcell dated September
30, 2004 and Microcell Director's Circular dated September 30, 2004;
o Telus Corporation's take-over bid circular for Microcell dated May 17,
2004 and Microcell's Director's Circular rejecting the bid dated May
28, 2004;
o the offering memorandum dated February 17, 2004 for Rogers Wireless
Inc., an operating subsidiary of the Corporation, relating to the
issuance of senior notes;
o the preliminary offering memorandum dated November 15, 2004 for Rogers
Wireless Inc., an operating subsidiary of the Corporation, relating to
the issuance of senior notes;
o 2004-2006 Corporation strategic plan (the "Strategic Plan") dated
February 3, 2004, presented to the Board;
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o document presented by the Corporation to credit rating agencies during
the week of October 25, 2004;
o Board presentation regarding Microcell acquisition (dated September
16, 2004);
o selected projected financial information for the Corporation dated
October 29, 2004 for the fiscal year 2005 (the "2005 Budget") prepared
by Management;
o projected financial information for the Corporation for the fiscal
years ending December 31, 2004 through to December 31, 2009 prepared
by Management (the "Management Forecast") and confirmed as at November
11, 2004 and re-confirmed as at November 22, 2004;
o discussions with Management with respect to the information referred
to above and other issues considered relevant, including the outlook
for the Corporation (pro forma the Microcell acquisition);
o representations contained in a certificate addressed to BMO Nesbitt
Burns dated November 10, 2004 from senior officers of the Corporation
(and confirmation of such certificate dated and delivered as of the
date hereof, as so confirmed the "Certificate") as to, among other
things, the completeness and accuracy of the information upon which
the Formal Valuation and the Fairness Opinion are based;
o discussions with members of the Independent Committee;
o discussions with Ogilvy Renault, legal counsel to the Independent
Committee;
o discussions with management and counsel of RCI;
o various research publications prepared by equity research analysts and
independent market researchers regarding the wireless industry, the
Corporation, Microcell, RCI and other selected public companies
considered relevant;
o public information relating to the business, operations, financial
performance and stock trading history of the Corporation, Microcell,
RCI and other selected public companies considered relevant;
o public information with respect to transactions of a comparable nature
considered relevant;
o such other corporate, industry and financial market information,
investigations and analyses as BMO Nesbitt Burns considered necessary
or appropriate in the circumstances.
BMO Nesbitt Burns has not, to the best of its knowledge, been denied access by
the Corporation to any information requested by BMO Nesbitt Burns. BMO Nesbitt
Burns had a due diligence discussion with senior officers of RCI and was not
denied any information. As
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the auditors of the Corporation declined to accept responsibility for any
reliance that BMO Nesbitt Burns might place upon information provided by them as
a part of any due diligence review, BMO Nesbitt Burns did not meet with the
auditors and has assumed the accuracy and fair presentation of and relied upon
audited financial statements of the Company and the reports of the auditors
thereon.
PRIOR VALUATIONS
The Corporation and RCI have represented to BMO Nesbitt Burns that there have
not been any prior valuations (as defined in the Rules) of the Corporation,
Microcell or RCI or their respective material assets or securities in the past
24-month period.
ASSUMPTIONS AND LIMITATIONS
In accordance with the Engagement Agreement, BMO Nesbitt Burns has relied upon,
and has assumed the completeness, accuracy and fair presentation of, all
financial and other information, data, advice, opinions and representations
obtained by it from public sources or provided by the Corporation, RCI,
associates, affiliates, consultants, advisors and representatives including
information, data, and other materials filed on SEDAR and on EDGAR
(collectively, the "Information"). The Formal Valuation and the Fairness Opinion
are conditional upon the completeness, accuracy and fair presentation of the
said information. Subject to the exercise of its professional judgment, BMO
Nesbitt Burns has not attempted to verify independently the completeness,
accuracy or fair presentation of the Information.
BMO Nesbitt Burns has assumed that the forecasts, projections, estimates and
budgets of the Corporation (pro forma the Microcell acquisition) provided to us
and used in our analyses have been reasonably prepared on bases reflecting the
best currently available estimates and judgments of the Management and their
respective associates and affiliates as to matters covered thereby.
Senior officers of the Corporation have represented to BMO Nesbitt Burns in the
Certificate that, among other things:
i. With the exception of forecasts, projections or estimates referred to
in paragraph (ii) or except as disclosed in writing by the Corporation
to BMO Nesbitt Burns in connection with its engagement, the
Information, provided by or on behalf of the Corporation or any of its
subsidiaries to BMO Nesbitt Burns in connection with its engagement
is, or in the case of historical information was, at the date of
preparation, to the best of each of the senior officer's knowledge,
true and accurate in all material respects and does not or did not, as
the case may be, contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements therein
not misleading in light of the circumstances in which such statements
were made.
ii. With respect to any portions of the Information that constitute
forecasts, projections or estimates provided to BMO Nesbitt Burns in
connection with its engagement, such
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forecasts, projections or estimates (i) were prepared using the
probable courses of actions to be taken during the period covered
thereby and the assumptions identified therein, which in the
reasonable belief of the Management of the Corporation are (or were at
the time of preparation) reasonable in the circumstances; and (ii) are
not, in the reasonable belief of the Management of the Corporation,
misleading in any material respect in light of the assumptions used or
in light of any developments since the time of their preparation.
iii. To the extent that any of the Information is historical, there have
been no changes or occurrences since the respective dates thereof that
render, or could reasonably be expected to render, any of that
Information untrue or misleading in any material respect that have not
been generally disclosed and reflected in documents filed on SEDAR or
disclosed in writing by the Corporation to BMO Nesbitt Burns in
connection with its engagement or updated by more current information,
data or other materials provided to BMO Nesbitt Burns in writing.
iv. Since the dates on which the Information was provided to BMO Nesbitt
Burns, no transaction material to the engagement of BMO Nesbitt Burns
has been entered into or contemplated by the Corporation, and there is
no plan or proposal for any restructuring of, or material changes in,
the business or affairs of the Corporation or any of its divisions,
subsidiaries or other material interests, which has not been disclosed
to BMO Nesbitt Burns or otherwise publicly disclosed and reflected in
documents filed on SEDAR.
v. The Corporation and its divisions, subsidiaries and other material
interests have no material contingent liabilities or assets other than
as disclosed in the Information.
vi. Except as publicly disclosed and reflected in documents filed on SEDAR
or as disclosed to BMO Nesbitt Burns by the Corporation in writing in
connection with its engagement, to the best of the Corporation's
knowledge,
a) the Corporation has no plans, and Management is not aware of any
circumstances or developments, that could reasonably be expected
to have a material effect on the assets, liabilities, financial
condition, prospects or affairs of the Corporation;
b) there are no appraisals or valuations known to Management
relating to the Corporation or any of its securities or material
assets or subsidiaries, including Microcell, that have been
prepared in the preceding 24 months, and no valuation or
appraisal relating to any of the foregoing has been commissioned
by or on behalf of the Corporation or any of its subsidiaries or
is known to Management to be in the course of preparation;
c) no offers or negotiations relating to the purchase or sale of any
material assets of the Corporation or with respect to all or a
material portion of the securities of the Corporation have been
made or received in the preceding 24 months;
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d) neither the Corporation nor any subsidiaries of the Corporation
has any material contingent liability or contingent asset on a
consolidated or non-consolidated basis; and
e) there are no actions, suits, proceedings or inquiries pending or
threatened against or affecting the Corporation or any of the
subsidiaries of the Corporation at law or in equity or before any
federal, state, provincial, municipal or other governmental
department, court, commission, bureau, board, agency or
instrumentality, which could reasonably be expected to materially
and adversely affect the Corporation or any of its subsidiaries.
vii. There are no facts regarding the Corporation or any of its
subsidiaries, assets, liabilities, affairs, prospects or condition
(financial or otherwise) that have not been disclosed to BMO Nesbitt
Burns in the Information that could reasonably be expected to
materially affect the Corporation or any of its subsidiaries, the RWCI
Restricted Voting Shares or the Formal Valuation and the Fairness
Opinion.
viii. There is no fact regarding RCI or any of its subsidiaries, assets,
liabilities, affairs, prospects or condition (financial or otherwise)
that have not been disclosed to BMO Nesbitt Burns in the Information
that could reasonably be expected to materially affect RCI, the RCI
Shares or the Fairness Opinion.
ix. The Corporation has complied in all material respects with the terms
and conditions of the Engagement Agreement.
The Formal Valuation and the Fairness Opinion are rendered on the basis of
securities markets, economic, financial and general business conditions
prevailing as of November 22, 2004, and the condition and prospects, financial
and otherwise, of the Corporation, subsidiaries and other material interests as
they were reflected in the Information reviewed by BMO Nesbitt Burns. In its
analyses and in preparing the Formal Valuation and the Fairness Opinion, BMO
Nesbitt Burns made numerous judgments with respect to industry performance,
general business, market and economic conditions and other matters, many of
which are beyond the control of any party involved in the Transaction. All
financial figures herein are expressed in Canadian dollars except where
otherwise noted. Certain figures have been rounded for presentation purposes.
The Formal Valuation and the Fairness Opinion are provided as of November 22,
2004, and BMO Nesbitt Burns disclaims any undertaking or obligation to advise
any person of any change in any fact or matter affecting the Formal Valuation or
the Fairness Opinion of which it may become aware after November 22, 2004.
Without limiting the foregoing, in the event that there is any material change
in any fact or matter affecting the Formal Valuation or the Fairness Opinion
after such date, BMO Nesbitt Burns reserves the right to change, modify or
withdraw the Formal Valuation or the Fairness Opinion.
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The Formal Valuation and the Fairness Opinion have been prepared and provided
solely for the use of the Independent Committee and the Board and for inclusion
in the Circular and the Corporation's Director's Circular relating to the
Transaction ("Director's Circular"), and may not be used or relied upon by any
other person without our express prior written consent. Subject to the terms of
the Engagement Agreement, BMO Nesbitt Burns consents to the publication of the
Formal Valuation and the Fairness Opinion in their entirety and a summary
thereof (in a form acceptable to BMO Nesbitt Burns) in the Circular and
Director's Circular relating to the Transaction and to the filing thereof, as
necessary, by the Corporation with the securities commissions or similar
regulatory authorities in Canada and the U.S.
We express no opinion herein concerning the future trading prices of the
securities of the Corporation or RCI and make no recommendation to the Minority
Shareholders with respect to the Transaction.
BMO Nesbitt Burns has based the Formal Valuation and the Fairness Opinion upon a
variety of factors. Accordingly, BMO Nesbitt Burns believes that its analyses
must be considered as a whole. Selecting portions of its analyses or the factors
considered by BMO Nesbitt Burns, without considering all factors and analyses
together, could create a misleading view of the process underlying the Formal
Valuation and the Fairness Opinion. The preparation of a valuation is a complex
process and is not necessarily susceptible to partial analysis or summary
description. Any attempt to do so could lead to undue emphasis on any particular
factor or analysis.
OVERVIEW OF THE CORPORATION
The Corporation is a leading Canadian wireless communications service provider,
serving more than 4.2 million customers at September 30, 2004, including over
4.0 million wireless voice and data subscribers and approximately 211,000
one-way messaging (paging) subscribers. The Corporation operates both a
GSM(1)/GPRS(2) network, with EDGE(3) technology, and a seamless integrated
TDMA(4) and analog cellular network. The GSM/GPRS/EDGE network provides coverage
to approximately 93% of Canada's population. The seamless TDMA and analog
network provides coverage to approximately 85% of the Canadian population in
digital mode, and approximately 93% of the population in analog mode. The
Corporation estimates that its more than 4.0 million wireless voice and data
subscribers represent approximately 13.6% of the Canadian population residing in
its coverage area and approximately 28% of the wireless voice and data
subscribers in Canada. Subscribers to its wireless services have access to these
services in the United States through the Corporation's roaming agreements with
various U.S. wireless operators. The Corporation's subscribers also have
wireless access internationally in over 140 countries, including throughout
Europe, Asia and Latin America, through roaming agreements with other wireless
providers. The
- ------------
(1) GSM - Global System for Mobile Communication
(2) GPRS - General Packet Radio Service
(3) EDGE - Enhanced Data for GSM Evolution
(4) TDMA - Time Division Multiple Access
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Corporation is a public company, and was 89.2% owned by RCI at October 31, 2004,
with the balance publicly held.
On September 20, 2004, the Corporation announced an agreement with Microcell to
make an all cash offer of $35.00 per share to acquire Microcell, Canada's fourth
largest wireless communications provider. The Corporation announced the
successful completion of that acquisition on November 11, 2004. The Corporation
expended approximately $1.6 billion in connection with its acquisition of
Microcell, including the repayment of Microcell's bank debt and swap
obligations, prepayment penalties, investment banking advisory fees and other
related costs, net of Microcell's cash on hand. On a pro forma basis with the
acquisition of Microcell, the Corporation became the largest wireless operator
in Canada with more than 5.5 million customers, including approximately 5.3
million wireless voice and data customers.
For the twelve months ended September 30, 2004, the Corporation (excluding
Microcell) had revenue of $2,560.0million, earnings before interest,
depreciation, amortization and taxes ("EBITDA") of $891.0 million and net income
of $162.6 million. At September 30, 2004 the Corporation (excluding Microcell)
had total assets of $3,201.2 million and net debt of $1,947.2 million.
HISTORICAL FINANCIAL INFORMATION
The following table summarizes the Corporation's consolidated operating results
for the five fiscal years up to and including the fiscal year ended December 31,
2003 and for the nine months ended September 30, 2004 and September 30, 2003:
Unaudited
-------------------------
NINE MONTHS NINE MONTHS
FISCAL YEAR ENDED ENDED
-------------------------------------------------------------- Sept. 30, Sept. 30,
1999 2000 2001 2002 2003 2003 2004
---------- ---------- ---------- ---------- ---------- ----------- -----------
FINANCIAL PERFORMANCE ($ thousands)
Postpaid (voice and data)............. $1,171,471 $1,350,587 $1,464,423 $1,628,095 $1,911,073 $1,408,324 $1,678,470
Prepaid............................... 23,849 42,530 71,068 91,151 91,255 64,013 75,211
One-way messaging..................... 51,793 55,992 43,632 35,238 27,565 21,123 18,652
---------- ---------- ---------- ---------- ---------- ---------- ----------
Network revenue....................... 1,247,113 1,449,109 1,579,123 1,754,484 2,029,893 1,493,460 1,772,333
Equipment revenue..................... 107,252 95,774 61,766 137,030 177,901 124,735 197,564
Total operating revenue............... 1,354,365 1,544,883 1,640,889 1,891,514 2,207,794 1,618,195 1,969,897
Operating profit (1).................. 412,477 400,550 401,261 516,681 716,236 552,149 727,535
Operating Margin...................... 30.5% 25.9% 24.5% 27.3% 32.4% 34.1% 36.9%
Net income (loss)..................... 8,582 (90,667) (224,692) (90,705) 137,841 136,490 161,202
Cash flow from operations (2)......... 318,960 262,870 211,773 310,641 521,957 402,591 573,216
PP&E expenditures (excluding spectrum
licence costs) (3)................. 400,959 525,993 654,457 564,552 411,933 292,865 305,790
Per share
Weighted average outstanding shares -
diluted (000s)..................... 103,902 122,366 135,652 141,608 141,773 141,957 143,672
Net income (loss) per share - basic... 0.08 (0.74) (1.66) (0.64) 0.97 0.96 1.13
- ------------
1. Operating profit is defined as net income before depreciation and
amortization, interest expense, income taxes, non-operating items and
special charges and is often referred to as EBITDA
2. Cash flow from operations before changes in non-cash operating items
3. Spectrum licences for the deployment of next generation wireless services
across Canada were acquired in February 2001 at a total cost of $396.8
million
Source: Corporation's public filings.
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The following table summarizes the Corporation's consolidated balance sheet
statements as at the end of the fiscal years 1999 to 2003, and as at the end of
the nine months in fiscal years 2004 and 2003:
Unaudited
------------------------
AS AT THE END OF FISCAL YEAR AS AT AS AT
----------------------------------------------------------------- SEPT. 30, SEPT. 30,
($ thousands) 1999 2000 2001 2002 2003 2003 2004
---------- ---------- ---------- ---------- ---------- ---------- ----------
Cash................................ - - - 10,068 - - $111,291
Other current assets................ 179,564 215,696 258,293 289,907 363,829 369,950 401,856
Property, plant and equipment....... 1,778,545 1,972,110 2,252,328 2,371,133 2,299,919 2,302,200 2,249,063
Other............................... 194,069 221,481 716,040 631,604 443,595 467,851 439,020
---------- ---------- ---------- ---------- ---------- ---------- ----------
TOTAL ASSETS........................ $2,152,178 $2,409,287 $3,226,661 $3,302,712 $3,107,343 $3,140,001 $3,201,230
========== ========== ========== ========== ========== ========== ==========
Current liabilities................. $396,969 $394,876 $367,033 $507,789 $437,813 $484,319 $366,765
Long-term debt...................... 1,483,215 1,540,013 2,471,287 2,472,620 2,070,761 2,111,654 1,946,308
Other long-term liabilities......... 284,450 - 21,847 155,689 105,015 256,798
Shareholders' equity................ 271,994 189,948 388,341 300,456 443,080 439,013 631,359
---------- ---------- ---------- ---------- ---------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY................ $2,152,178 $2,409,287 $3,226,661 $3,302,712 $3,107,343 $3,140,001 $3,201,230
========== ========== ========== ========== ========== ========== ==========
Source: Corporation's public filings
The following table summarizes Microcell's consolidated operating results for
the five fiscal years up to and including the fiscal year ended December 31,
2003 and for the nine months ended September 30, 2004 and September 30, 2003:
PRE-RE- POST-RE-
ORGANIZA- ORGANIZA-
TION TION UNAUDITED
--------- --------- --------------------
FOUR EIGHT FIVE NINE
MONTHS MONTHS MONTHS MONTHS
AS AT THE END OF FISCAL YEAR ENDED ENDED ENDED ENDED
------------------------------------------ Apr. 30, Dec. 31, Sept. 30, Sept. 30,
1999 2000 2001 2002 2003 2003 2003 2004
--------- --------- --------- --------- --------- --------- --------- ---------
FINANCIAL PERFORMANCE ($ thousands)
Services .......................... $ 228,375 $ 365,665 $ 509,082 $ 566,706 $ 170,196 $ 357,483 $ 222,866 $ 445,935
Products .......................... 32,091 40,321 32,408 24,356 7,498 35,610 18,793 36,168
Total operating revenue ........... 260,466 405,986 541,490 591,062 177,694 393,093 241,659 482,103
Operating profit (1) .............. (162,982) (112,332) (9,803) 91,012 38,556 48,021 49,690 90,386
Operating Margin .................. -62.6% -27.7% -1.8% 15.4% 21.7% 12.2% 20.6% 20.3%
Net income (loss) ................. (393,637) (268,427) (498,485) (570,501) 45,517 4,959 16,207 (22,998)
Cash flow from operations (2) ..... (189,098) (136,693) (69,951) (71,020) (12,148) 36,938 34,411 41,411
PP&E expenditures ................. 133,572 257,191 277,395 124,683 5,500 67,318 30,648 198,159
Per share
Weighted average outstanding shares
- diluted (000s) ............... 82,861 97,244 112,524 240,457 240,470 22,899 263,358 24,236
Net income (loss) per share ....... (4.75) (2.76) (4.43) (2.37) 0.19 0.22 0.06 (0.95)
- -----------
1. Operating profit is defined as net income before depreciation and
amortization, interest expense, income taxes, non-operating items and
special charges and is often referred to as EBITDA
2. Cash flow from operations before changes in non-cash operating items
Source: Microcell's public filings
12
The following table summarizes Microcell's consolidated balance sheet statements
as at the end of the fiscal years 1999 to 2003, and as at the end of the nine
months in fiscal years 2004 and 2003:
POST-
REORGINIZATION Unaudited
--------------- -------------------------
AS AT THE END OF FISCAL YEAR AS AT AS AT AS AT
------------------------------------------------------ DEC. 31, SEPT. 30, SEPT. 30,
($ thousands) 1999 2000 2001 2002 2003 2003 2004
----------- ----------- ----------- ----------- --------------- ----------- -----------
Unaudited
Cash ........................ $ 125,932 $ 87,378 $ 19,005 $ 26,979 $ 43,094 $ 147,037 $ 110,977
Short-term investments ...... 24,377 196,667 159,524 83,345 60,927 -- 22,804
Other current assets ........ 103,235 153,677 146,963 121,032 148,028 120,381 200,425
Property, plant and equipment 515,645 662,411 764,048 655,646 318,041 296,456 462,161
Other ....................... 45,949 109,093 305,719 15,062 238,616 233,591 264,178
----------- ----------- ----------- ----------- ----------- ----------- -----------
TOTAL ASSETS ................ $ 815,138 $ 1,209,226 $ 1,395,259 $ 902,064 $ 808,706 $ 797,465 $ 1,060,545
=========== =========== =========== =========== =========== =========== ===========
Current liabilities ......... $ 110,121 $ 191,499 $ 161,417 $ 166,612 $ 149,608 $ 118,783 $ 197,109
Long-term debt .............. 1,499,456 1,680,699 1,887,048 2,032,678 315,164 323,500 385,356
Other long-term liabilities . 4,310 4,589 73,519 -- -- -- --
Shareholders' equity ........ (798,749) (667,561) (726,725) (1,297,226) 343,934 355,182 478,080
----------- ----------- ----------- ----------- ----------- ----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY ....... $ 815,138 $ 1,209,226 $ 1,395,259 $ 902,064 $ 808,706 $ 797,465 $ 1,060,545
=========== =========== =========== =========== =========== =========== ===========
Source: Microcell's public filings
PRO FORMA FINANCIALS
The following table summarizes select unaudited pro forma (including Microcell)
consolidated operating information for the nine months ended September 30, 2004
and year ended December 31, 2003 and balance sheet data for the period ending
September 30, 2004.
13
UNAUDITED PRO FORMA CONSOLIDATED DATA
YEAR ENDED 9 MONTHS ENDED
DEC 31 2003 SEPT 30 2004
------------- --------------
STATEMENT OF INCOME DATA:
Operating revenue............................... $2,761,713 $2,429,950
Cost of equipment sales ........................ 497,739 440,568
Sales and marketing expenses.................... 446,860 348,695
Operating, general and administrative expenses.. 1,006,925 837,557
Management fees................................. 11,336 8,756
---------- ----------
Operating profit................................ $ 798,853 $ 794,374
Other........................................... - 9,668
Depreciation and amortization................... 637,660 426,995
---------- ----------
Operating income................................ $ 161,193 $ 357,711
Interest expense, net........................... 491,171 321,278
Foreign exchange loss (gain).................... (285,721) 62,126
Loss on repayment on long-term debt............. 9,046
Change in the fair value of derivative
instruments.................................. 2,313
Other expense (income), net..................... (4,357) (1,532)
---------- ----------
Loss before income taxes........................ $ (39,900) $ (35,520)
Income taxes.................................... 4,776 6,905
---------- ----------
Loss for the period............................. $ (44,676) $ (42,425)
========== ==========
Basic and diluted loss per share................ $ (0.44) $ (0.33)
AS AT
SEPT 30, 2004
--------------
BALANCE SHEET DATA:
Property, plant and equipment, net................................. $ 2,418,263
Goodwill........................................................... 893,425
Total assets....................................................... 6,810,571
Long-term debt..................................................... 5,194,444
Shareholder's equity (deficiency).................................. 631,359
Source: The Corporation
RWCI RESTRICTED VOTING SHARES TRADING INFORMATION
The RWCI Restricted Voting Shares are listed on the Toronto Stock Exchange (the
"TSX") under the symbol RCM.NV.B and on the New York Stock Exchange ("NYSE")
under the symbol RCN. The following table sets forth, for the periods indicated,
the low and high closing prices of the RWCI Restricted Voting Shares and the
volumes traded on both the TSX and NYSE:
14
RWCI RESTRICTED VOTING SHARES RWCI RESTRICTED VOTING SHARES
----------------------------- -----------------------------
TSX CLOSING PRICE NYSE CLOSING PRICE
PERIOD (C$) VOLUME (US$) VOLUME
- --------------------------- ----------------- ------- ------------------ ------
High Low (000's) High Low (000's)
------ ------ ------ ------ ------ ------
2003
January ................... $17.35 $14.14 1,076 $11.39 $ 9.08 81
February .................. 17.00 14.87 533 11.30 9.85 101
March ..................... 16.30 13.61 959 10.99 9.17 78
April ..................... 19.30 15.85 648 13.56 10.85 60
May ....................... 21.00 18.50 740 15.29 13.05 123
June ...................... 23.28 20.76 552 17.36 15.20 86
July ...................... 24.15 22.25 334 17.17 16.36 77
August .................... 23.85 20.72 447 16.98 14.90 61
September ................. 21.74 20.70 603 15.92 14.97 55
October ................... 25.85 21.92 1,846 19.65 16.33 354
November .................. 28.24 25.50 1,302 21.45 19.15 304
December .................. 28.95 26.30 960 22.28 20.27 239
January 1 to December 31 .. 28.95 13.61 10,001 22.28 9.08 1,617
2004
January ................... $36.53 $28.25 1,643 $28.15 $21.88 677
February .................. 36.27 33.75 1,267 27.16 25.32 327
March ..................... 34.90 32.30 985 26.45 24.35 230
April ..................... 36.75 33.30 1,752 27.14 24.42 334
May ....................... 37.20 31.06 2,108 27.30 22.42 420
June ...................... 36.66 34.91 1,232 27.16 25.59 165
July ...................... 39.25 35.76 1,368 29.57 27.05 649
August .................... 39.99 39.00 695 30.59 28.84 439
September ................. 40.00 36.05 1,735 31.42 27.97 406
October ................... 46.10 39.69 695 37.55 31.44 189
November 1 to November 10 . 45.60 42.75 211 38.02 35.29 187
November 11 to November 19 52.50 49.30 3,509 43.96 41.17 233
January 1 to November 19 .. 52.50 28.25 17,200 43.96 21.88 4,256
The closing price of the RWCI Restricted Voting Shares on the TSX on November
10, 2004, the trading day immediately prior to the announcement of the
Transaction, was $43.17.
VALUATION OF THE RWCI RESTRICTED VOTING SHARES
DEFINITION OF FAIR MARKET VALUE
For the purposes of the Formal Valuation, fair market value means the highest
price, expressed in terms of money or money's worth, available in an open and
unrestricted market between informed and prudent parties, each acting at arm's
length, where neither party is under any compulsion to act.
In accordance with the Rules and the MSPA, BMO Nesbitt Burns has made no
downward adjustment to the fair market value of the RWCI Restricted Voting
Shares to reflect the liquidity of the RWCI Restricted Voting Shares, the effect
of a transaction pursuant to which the controlling shareholder would acquire all
of the RWCI Restricted Voting Shares not owned by the controlling shareholder or
the fact that the RWCI Restricted Voting Shares held by individual shareholders
do not form part of a controlling interest. A valuation prepared on the
foregoing basis is referred to as an "en bloc" valuation.
APPROACH TO VALUE
The Formal Valuation is based upon techniques and assumptions that BMO Nesbitt
Burns considered appropriate in the circumstances for the purposes of arriving
at an opinion as to the range of fair market values of the RWCI Restricted
Voting Shares. The fair market value of
15
the RWCI Restricted Voting Shares was analyzed on a going concern basis, which
included the acquisition of Microcell and is expressed on a per share basis.
The Formal Valuation and the Fairness Opinion have been prepared in accordance
with the Disclosure Standards for Formal Valuations and Fairness Opinions of the
IDA, but the IDA has not been involved in the preparation or review of either
the Formal Valuation or the Fairness Opinion.
VALUATION METHODOLOGIES AND ANALYSIS
For the purposes of determining the value of the RWCI Restricted Voting Shares,
BMO Nesbitt Burns relied on three methodologies:
o discounted cash flow ("DCF") approach;
o comparable trading approach; and
o precedent transaction approach.
DISCOUNTED CASH FLOW APPROACH
BMO Nesbitt Burns considered the DCF approach in determining the fair market
value of the RWCI Restricted Voting Shares. The DCF methodology reflects the
growth prospects and risks inherent in the Corporation's business by taking into
account the amount, timing and relative certainty of projected unlevered free
cash flows expected to be generated by the Corporation. The DCF approach
requires that certain assumptions be made regarding, among other things, future
unlevered free cash flows, discount rates and terminal values. The possibility
that some of the assumptions will prove to be inaccurate is one factor involved
in the determination of the discount rates to be used in establishing a range of
values. BMO Nesbitt Burns' DCF approach involved discounting to a present value
the Corporation's projected unlevered after-tax free cash flows from November 9,
2004 until December 31, 2009 in the Management Forecast (defined below) and the
terminal value determined as of December 31, 2009. The Management Forecast and
the resulting cash flow forecasts were all pro forma the acquisition of
Microcell.
MANAGEMENT FORECAST
As a basis for the projected future cash flows developed for the DCF analysis,
BMO Nesbitt Burns received from Management a set of assumptions for the period
2004 - 2009 underlying the Management Forecast. After review of those
assumptions and discussion of the same with Management, BMO Nesbitt Burns
concluded that the Management Forecast formed a satisfactory basis for the DCF
analysis. The only exception was Management's forecast of a sale of certain
spectrum in 2006. BMO Nesbitt Burns was not convinced as to the likelihood or
marketability of this asset sale, and therefore, chose to remove it from the
Management Forecast in developing the final assumptions for the DCF analysis.
16
\
ASSUMPTIONS AND KEY DRIVERS
The following is a summary of the assumptions for the Management Forecast, which
was prepared by Management as of November 9, 2004 (and confirmed as at November
22, 2004), and deemed reasonable by Management.
Corporation and Microcell Forecasts: Management provided separate assumptions
regarding the Corporation's and Microcell's separate subscriber bases for the
years 2005 and 2006. However, by 2007 most of the assumptions were applied
equally to the combined pro forma subscriber base, excluding some assumptions
for the legacy Microcell subscribers assumed to be retained (e.g. ARPU, defined
below). Microcell customers assumed to be lost and subsequently reacquired by
the Corporation were treated as new customers and the appropriate cost of their
acquisition was accounted for.
Market Penetration: Canadian wireless market penetration was forecasted to rise
from 51.1% in 2005 to 65.0% in 2009. Various third-party analysts produced a
range of penetration forecasts. BMO Nesbitt Burns was comfortable that
Management's forecasts were reasonable when compared to these ranges and to
penetration and growth rates achieved in other countries of greater maturity,
most notably the United States.
Market Share of Net Subscriber Additions ("Net Adds"): Management's forecast for
the Corporation's market share of net postpaid subscriber additions ("net adds")
was based on a three participant expectation with respect to the market, and
declined from 35.2% in 2005 to 32.0% in 2009. For prepaid net adds the figures
were 23.0% to 28.3% respectively. The prepaid market share of Net Adds was less
than the postpaid's on account of the Corporation's overall greater strategic
focus on the postpaid market and the potential for new entrants.
Monthly Churn(5): Monthly churn for the Corporation's postpaid subscribers was
forecasted by Management to be 1.7% in 2005 and 1.8% in 2006 (the increase
reflected an assumed introduction of wireless number portability in 2006),
declining to 1.4% in 2009. For the Corporation's prepaid subscribers the
forecast was 3.1% in 2005, declining to 2.7% in 2009, reflecting the higher
churn rates experienced in the prepaid market.
Postpaid Microcell subscriber churn was forecast to be 3.5% and 2.5% in 2005 and
2006 respectively, reflecting aggressive targeting of Microcell subscribers by
competitors immediately following Microcell's acquisition by the Corporation.
Prepaid Microcell subscriber churn was forecast to be 4.0% and 3.0% in 2005 and
2006 respectively. Of the Microcell 2005 and 2006 total subscribers assumed to
be lost, Management forecasted reacquiring 66% and 42% respectively. Microcell
churn rates from 2007 onward were forecasted to match churn rates for the
Corporation.
Average Revenue Per User ("ARPU") Growth Rates: ARPU for the Corporation
subscribers and net adds was forecasted to change at a '05-'09 Compound Annual
Growth Rate ("CAGR")
- ------------
(5) Churn: The number of subscribers deactivating in a month divided by the
average number of subscribers for the month.
17
of -1.3% for postpaid and 3.1% for prepaid. For Microcell legacy subscribers
ARPU was forecast to decline at a '05-'09 CAGR of -1.6% for postpaid and 0.0%
for prepaid.
The ARPU forecasts did not include data revenue, which was forecasted separately
as a percentage of total network revenue climbing from 6.2% in 2005 to 14.5% in
2009. These are moderately higher proportions of net revenue than some
independent analysts forecasted for the overall market, but given the
Corporation's leadership position in this product category and the better than
expected growth rates the Corporation had experienced to date, BMO Nesbitt Burns
was comfortable with Management's forecast. Coinciding with this data revenue
growth were appropriate fixed and variable cost growth assumptions.
Capital Expenditures: Pro forma average capital expenditures over the '05-'09
period were $523 million with increases in 2007 and 2009 for specific forecasted
UMTS(6) spend. Gross capital expenditure savings from the combination with
Microcell were forecasted to be $270 million (un-discounted) over the '05-'09
period. The bulk of the savings represent reductions in the Corporation's
planned network spend no longer required given the cell sites acquired as part
of the Microcell acquisition.
Cost of Customer Acquisition: The cost of acquiring a new customer was kept
constant for both post- and prepaid subscribers throughout the forecast period
at a 2% discount to Management's 2004 forecast level.
Operating Costs: Operating cost assumptions were forecasted to experience flat
relative growth, i.e. variable costs were forecasted flat per subscriber and
fixed costs items generally grew in line with subscriber growth. Overall
operating costs were forecasted to grow at a '05-'09 CAGR of 6.0% relative to a
network revenue '05-'09 CAGR of 7.1%.
Tax Losses: BMO Nesbitt Burns determined the present value of the Corporation's
tax losses separately from the operating cash flows in the DCF analysis. Both
the Corporation's and Microcell's available tax losses were recognized: $1.0
billion for the Corporation and $1.8 billion for Microcell. Management provided
BMO Nesbitt Burns with details of both companies' pools of available tax losses
and forecast that all tax loss pools would be accessible to the Corporation
going forward, with no pools expiring unused.
UNLEVERED AFTER-TAX FREE CASH FLOW
For the purposes of deriving projected unlevered after-tax free cash flows for
use in the DCF analysis, BMO Nesbitt Burns reviewed the Management Forecast and
relevant underlying assumptions and considered the resulting revenue growth and
EBITDA margins. These assumptions were compared to the Corporation's Strategic
Plan, Budget, industry research reports, forecasts by equity research analysts
and other sources considered relevant. Based on such review, BMO Nesbitt Burns
concluded that the Management Forecast appeared
- ------------
(6) UMTS: Universal Mobile Telecommunications System
18
reasonable in the context of both historic trends, independent forecasts for the
industry and the experiences observed in other international wireless markets of
greater maturity.
BMO Nesbitt Burns believes that the assumptions underlying the Management
Forecast accurately reflected the prospects of the Corporation over the forecast
period, and further believes the Corporation will reach steady state by the end
of such forecast period. Therefore, BMO Nesbitt Burns's DCF analysis
incorporated a 5-year projection followed by a terminal value calculation based
on 2009 projected cash flows and a sustainable capital expenditure level,
indicated by Management to be $525 million.
BMO Nesbitt Burns applied the statutory tax rate of 36.3% and adjusted working
capital based on historically observed assumptions.
The following is a summary of the unlevered after-tax free cash flow projections
used in the DCF analysis:
FISCAL YEAR,
---------------------------------------------------------------
FREE CASH FLOW ($ millions) 2005(1) 2006(1) 2007 2008 2009 Terminal
- ----------------------------------- ------- ------- ------- ------- ------- --------
Network revenue ................... $ 3,308 $ 3,594 $ 3,863 $ 4,131 $ 4,351 $ 4,438
EBITDA(1) ......................... 1,000 1,436 1,619 1,806 1,929 1,968
Unlevered cash taxes .............. (152) (286) (370) (451) (481) (490)
Capital expenditures .............. (577) (457) (546) (425) (611) (525)
Increase in deferred taxes ........ 17 (13) (0) 7 (11) 0
Changes in non-cash working capital 12 (8) (7) (22) 0 2
------- ------- ------- ------- ------- -------
UNLEVERED AFTER-TAX FREE CASH FLOW $ 300 $ 673 $ 695 $ 915 $ 827 $ 954
- ------------
1. Includes forecasted one-time costs of $225 million in 2005 and $2 million
in 2006, relating to the Microcell acquisition
DISCOUNT RATES
Projected unlevered after-tax free cash flows for the Corporation developed from
the Management Forecast were discounted based on the estimated weighted average
cost of capital ("WACC") for the Corporation. The WACC was calculated based upon
the Corporation's after-tax cost of debt and equity, weighted based upon an
assumed optimal capital structure. The assumed optimal capital structure was
determined based upon a review of the capital structures of comparable companies
and the risks inherent in the Corporation's business and in the North American
wireless industry generally. The cost of debt for the Corporation was calculated
based on the risk free rate of return and an appropriate borrowing spread to
reflect credit risk at the assumed optimal capital structure. BMO Nesbitt Burns
used the capital asset pricing model ("CAPM") approach to determine the
appropriate cost of equity. The CAPM approach calculates the cost of equity with
reference to the risk-free rate of return, the risk of equity relative to the
market ("beta") and the market equity risk premium. BMO Nesbitt Burns reviewed a
range of unlevered betas for the Corporation and a select group of comparable
companies that have risks similar to the Corporation in order to select the
appropriate unlevered beta for the Corporation. The significance of the observed
betas was limited due to i) there being few comparable companies in North
America; and ii) the low
19
statistical significance of the individual betas as measured by the R-squared of
their regressions. The selected unlevered beta was re-levered using the assumed
optimal capital structure and then used to calculate the cost of equity. BMO
Nesbitt Burns also reviewed and considered levered betas generated by an
independent third party financial consultant for the comparable companies and
North American wireless industry.
The assumptions used by BMO Nesbitt Burns in estimating the WACC for the
Corporation were as follows:
COST OF DEBT
Risk free rate (10-Year Government of Canada Bond) ................ 4.5%
Borrowing spread .................................................. 3.3%
Pre-tax cost of debt .............................................. 7.7%
Tax rate .......................................................... 36.3%
After-tax cost of debt ............................................ 4.9%
COST OF EQUITY
Risk free rate (10-Year Government of Canada Bond) ................ 4.5%
Equity risk premium ............................................... 6.0%
Levered beta ...................................................... 1.3
After-tax cost of equity .......................................... 12.3%
WACC
Optimal capital structure (% debt) ................................ 40.0%
WACC .............................................................. 9.3%
Based upon the foregoing and taking into account sensitivity analyses on the
variables discussed above and the assumptions used in the Management Forecast,
BMO Nesbitt Burns determined the appropriate WACC for the Corporation to be in
the range of 9.5% to 10.5%.
TERMINAL VALUE
BMO Nesbitt Burns developed terminal enterprise values at the end of the
forecast period by calculating the present value at the selected WACC of
terminal period unlevered after-tax free cash flows growing in perpetuity at
1.5% to 2.5% per annum. In selecting the range of growth rates, BMO Nesbitt
Burns took into consideration the outlook for long-term inflation and the growth
prospects of the Corporation beyond the terminal year. The terminal year
EV/EBITDA multiples implied by the 1.5% to 2.5% unlevered after-tax free cash
flow growth rates into perpetuity, assuming discount rates of 9.5% to 10.5%,
were considered by BMO Nesbitt Burns to be reasonable based on its review of
trading and transaction multiples.
PRESENT VALUE OF TAX LOSSES
The tax losses were modeled separately through an integrated financial model of
the Corporation (including Microcell) to derive the appropriate uses of the tax
losses as suggested by Management. The cash savings were discounted at an
effective cost of equity of 12.3% to
20
yield a value of $4.20 per RWCI Restricted Voting Share. This amount was added
to the Corporation's DCF analysis results to arrive at a full DCF value.
SUMMARY OF DCF APPROACH
The following is a summary of the value of the RWCI Restricted Voting Shares
resulting from the DCF analysis:
VALUE RANGE
--------------------
Low High
-------- --------
ASSUMPTIONS
WACC .............................................. 10.5% 9.5%
DCF APPROACH ($ millions, except per share amounts)
Net present value
Unlevered after-tax free cash flows ............ $ 2,606 $ 2,673
Terminal value ................................. 7,060 8,346
-------- --------
Enterprise value .................................. 9,666 11,019
Less: Net obligations value(1) .................... (3,396) (3,396)
-------- --------
EN BLOC EQUITY VALUE .............................. $ 6,269 $ 7,623
EN BLOC EQUITY VALUE PER SHARE(2) ................. $ 42.98 $ 52.26
PRESENT VALUE OF TAX LOSSES ....................... 4.20 4.20
-------- --------
TOTAL EN BLOC EQUITY VALUE PER SHARE .............. $ 47.18 $ 56.46
======== ========
- ------------
1. Net obligations include net debt and proceeds from option issuance.
2. Based on 146 million fully diluted shares outstanding.
SENSITIVITY ANALYSIS
The DCF analysis is sensitive to several of the assumptions used. BMO Nesbitt
Burns performed sensitivity analyses on certain key assumptions, representing
step changes to all forecast years for each assumption as outlined below:
IMPACT ON
VARIABLE SENSITIVITY SHARE VALUE
- -------- ----------- -----------
Market penetration.............................. + 2.5% $5.21
-2.5% (5.21)
Market share of net adds........................ + 4.0% 3.18
-4.0% (3.18)
Monthly churn................................... + 0.2% (1.80)
-0.2% 1.80
Monthly ARPU.................................... + $1.00 4.56
-$1.00 (4.56)
Capex........................................... + 10% (3.60)
-10% 3.60
21
COMPARABLE TRADING APPROACH
BMO NB also considered the comparable trading approach. BMO Nesbitt Burns
limited its list to North American companies on the basis that European and
Asian companies, while engaged in similar businesses, operate under regulatory
regimes very different from the Corporation's and in local markets that are much
further advanced than the Canadian market. With few comparable publicly traded
companies in the North American wireless industry, BMO Nesbitt Burns has placed
limited amount of emphasis on this approach. For the purposes of its analysis,
BMO Nesbitt Burns identified and reviewed 20 public companies in the wireless
industry. From those BMO Nesbitt Burns considered the five specific companies
listed below, which were deemed to be the most comparable to the Corporation.
The market capitalizations for Microcell and AT&T Wireless were adjusted to
reflect trading values prior to announcement of their initial takeover bids.
EBITDA YOY
EV/EBITDA GROWTH RATES EBITDA MARGINS
MARKET -------------------- -------------------- --------------------
($ million) CAPITALIZATION(1) 2005E(3) 2006E(3) 2004E(3) 2005E(3) 2004E(3) 2005E(3)
- -------------------------- ----------------- -------- -------- -------- -------- -------- --------
CANADIAN COMPARABLES (C$)
Microcell (Pre-Bid)(2)........ $ 854 5.1 3.6 35% 69% 18% 25%
Telus......................... $ 10,759 5.4 5.3 8 6 41 41
US COMPARABLES (US$)
Nextel........................ $ 30,730 6.7 5.9 17% 15% 40% 41%
AT&T Wireless (Pre-Bid)(4).... 32,519 7.9 8.0 (5) 10 25 28
Western Wireless.............. 2,876 6.9 6.1 44 13 33 35
US Cellular................... 3,622 5.9 5.2 4 17 24 26
HIGH............................. 7.9 8.0 44% 69% 41% 41%
LOW.............................. 5.1 3.6 (5) 6 18 25
- ------------
1. As of November 8, 2004.
2. Microcell share price is as of May 30, 2004 prior to Telus's takeover bid.
3. Estimates for calendar years sourced from recent research reports and IBES.
4. AT&T Wireless was acquired by Cingular Wireless on October 26, 2004. The
original bid was announced on February 17, 2004.
While none of the companies reviewed was considered directly comparable to the
Corporation, based on the comparable company trading analysis summarized above,
BMO Nesbitt Burns selected what it considered to be reasonably representative
public trading multiples, before making any adjustment to reflect an "en bloc"
valuation of the RWCI Restricted Voting Shares. BMO Nesbitt Burns considered
EV/EBITDA for 2005E and 2006E to be the most appropriate trading multiples to
evaluate the Corporation.
In selecting the multiple ranges shown below, BMO Nesbitt Burns gave
consideration to several factors, including differences in business mix, growth,
profitability and size between the Corporation and the companies reviewed.
SELECTED MULTIPLE RANGE
--------------------------
Low High
----- ------
EV / EBITDA
Fiscal 2005E........................... 7.0 8.0
Fiscal 2006E........................... 6.0 7.0
22
The following is a summary of the value of the RWCI Restricted Voting Shares
resulting from the selection of trading valuation multiples above, before making
any adjustment to reflect the "en bloc" valuation of the RWCI Restricted Voting
Shares:
SELECTED
MULTIPLE RANGE VALUE RANGE
---------------- --------------------
($ millions) BENCHMARK Low High Low High
- --------------------------- --------- ------ ------ ------- ---------
EV / EBITDA
Fiscal 2005E(1)............. $ 1,225 7.00 8.00 $ 8,572 $ 9,797
Fiscal 2006E(1)............. 1,438 6.00 7.00 8,627 10,065
------- -------
Enterprise trading value.... Average 8,600 9,931
Less: net obligations(1).... (3,539) (3,539)
------- -------
Equity trading value........ 5,060 6,392
- ----------
1. Adjusted for one time costs of Microcell acquisition.
Market trading prices generally do not reflect "en bloc" values. To adjust for
en bloc value, BMO Nesbitt Burns considered and reviewed take-over premiums paid
in precedent Canadian public company transactions. For the purposes of this
analysis, premium is defined as the amount (expressed in percentage terms) by
which the price paid per share under the precedent transaction exceeded the
closing price of the shares one week and one month immediately prior to the
announcement of the transaction. BMO Nesbitt Burns identified 69 such
transactions announced since January 1, 2000. Of those transactions BMO Nesbitt
Burns further identified 8 transactions since January 1, 2002, which had no
synergy component to them in order to find premiums most applicable to an "en
bloc" value of RWCI Restricted Voting Shares (please refer to "Benefits to RCI
of Acquiring RWCI Restricted Voting Shares Held by Minority Shareholders" for
details). The mean premiums were as follows:
TRANSACTION PREMIUMS WITH NO ANTICIPATED SYNERGIES
MEAN
------
1 week premium.................................................... 21%
1 month premium................................................... 20%
Based on the take-over premiums paid in precedent Canadian public company
transactions, as described above, BMO Nesbitt Burns selected and applied a
premium of 20% to the equity trading value of the RWCI Restricted Voting Shares
to determine an "en bloc" equity value per share.
VALUE RANGE
-------------------
($ millions, except per share data) Low High
- ----------------------------------- ------- -------
Equity trading value average............................... $ 5,060 $ 6,392
Take-over premium.......................................... 20% 20%
EN BLOC EQUITY VALUE....................................... $ 6,072 $ 7,670
EN BLOC EQUITY VALUE PER SHARE(1).......................... $ 41.63 $ 52.58
======= =======
- ------------
1. Based on 146 million fully diluted shares outstanding.
23
PRECEDENT TRANSACTION APPROACH
BMO Nesbitt Burns also considered the precedent transaction approach and
reviewed precedent acquisition transactions involving companies in the wireless
industry which were comparable and for which there was sufficient public
information to derive multiples. Only recent transactions with purchase prices
greater than $500 million principally in North America and Europe were reviewed.
Given differences in the business size and mix, market dynamics and economic
environment at the time of the transaction, growth prospects and other factors
inherent in the comparable precedent transactions identified, BMO Nesbitt Burns
did not consider any specific precedent transaction to be directly comparable to
the Corporation and, as a consequence, placed less emphasis on this methodology
than on either the DCF approach or the comparable trading approach in
determining the value of RWCI Restricted Voting Shares.
While BMO Nesbitt Burns did not consider any specific transaction to be directly
comparable to the acquisition of the Corporation, BMO Nesbitt Burns identified
three precedent transactions to be considered:
1. Cingular's purchase of AT&T Wireless
2. The Corporation's purchase of Microcell Inc.
3. Bell Canada's purchase of BCE Mobile Communications Inc.
CORE PRECEDENT TRANSACTIONS - ADJUSTING FOR SYNERGIES AND TAX LOSS ASSET VALUE
- --------------------------------------------------------------------------------------------------------------------------
PREMIUM TO
UNAFFECTED SHARE PRICE EV / EBITDA
COMPLETION/ OFFER -------------------------------- -------------------------
TERMINATION DATE ACQUIROR TARGET PRICE 1 - DAY 1 - WEEK 4 - WEEKS LTM FY + 1 FY + 2
- ---------------- ---------------------------- ------ ------- -------- --------- ----- ------ ------
11-Nov-04 Rogers Wireless $35.00 66.7% 37.3% 47.7% 14.0 10.7 6.3
Microcell
26-Oct-04 Cingular $15.00 75.4 80.9 109.5 6.6 6.6 6.0
AT&T Wireless
25-Oct-99 BCE $58.75 19.9 29.4 30.6 16.0 14.7 12.0
BCE Mobile Communications
BMO Nesbitt Burns makes the following observations:
1. The AT&T Wireless transaction was the most comparable transaction
given that both AT&T Wireless and the Corporation are national
operators and the transaction occurred recently in 2004. However, the
transaction was highly synergistic and the premium paid on the
unaffected share price reflected these synergies (announced annual
synergies of approximately $1 billion in 2006 and in excess of $2
billion beginning in 2007).
2. The Corporation's recently completed acquisition of Microcell was also
considered a relevant transaction. All figures used in determining the
multiples were based on information available in public announcements
and research analysts' reports. In order to make the transaction
comparable we adjusted the transaction multiple to recognize the
present value of the tax loss assets as estimated by several research
analysts.
3. The BCE / BCE Mobile going private transaction was considered only
from the point of view of the premium paid to the unaffected share
price due to the dated nature of the transaction (October 1999).
24
In arriving at our range for the precedent transaction approach, BMO Nesbitt
Burns primarily relied on its professional judgment and experience analyzing the
wireless industry. BMO Nesbitt Burns applied the Enterprise Value to the two
year forward fiscal EBITDA multiple, adjusted for the announced synergies and
premia paid, to the Management Forecast for fiscal year 2006 EBITDA.
Based on the above, BMO Nesbitt Burns believes that for the purposes of the
precedent transaction approach the appropriate EV to fiscal year 2006 EBITDA
multiple would be in the range of 6.0x to 7.0x.
SELECTED MULTIPLE RANGE
-----------------------
Low High
----- ------
EV / EBITDA
Fiscal 2006E............................ 6.0 7.0
The following is a summary of the value of the RWCI Restricted Voting Shares
resulting from the selection of precedent transaction valuation multiples above:
SELECTED
MULTIPLE RANGE VALUE RANGE
--------------- -------------------
($ millions) BENCHMARK Low High Low High
- ------------------------------- --------- ----- ------ ------- --------
EV / EBITDA
Fiscal 2006E(1)(2)............. $ 1,438 6.00 7.00 $ 9,240 $ 10,678
Less: Net Obligations(2)....... (3,539) (3,539)
------- --------
5,701 7,138
Equity trading value per share..... $ 39.08 $ 48.90
- ------------
1. Includes $4.20 per share of NOLs.
2. Adjusted for one-time costs of Microcell acquisition
REDUNDANT ASSETS
BMO Nesbitt Burns considered in arriving at its opinion as to the value of the
RWCI Restricted Voting Shares whether there were any redundant assets of the
Corporation that would add value over and above the values derived from the
three approaches considered. With regard to the Rogers Campus of buildings that
the Corporation owns, BMO Nesbitt Burns reviewed their treatment in the
historical financials and forecasts of Management and were satisfied that their
value was already imbedded in the values derived by either of the two comparable
multiple approaches and the DCF approach. As described above, BMO Nesbitt Burns
valued separately the available tax losses of both the Corporation and
Microcell.
BENEFITS TO RCI OF ACQUIRING THE RWCI RESTRICTED VOTING SHARES HELD BY MINORITY
SHAREHOLDERS
In arriving at our opinion of the value of the RWCI Restricted Voting Shares,
BMO Nesbitt Burns also reviewed and considered whether any material value would
accrue to a purchaser of
25
100% of the Corporation's common shares. Management indicated that it did not
foresee any net positive or negative synergy benefits from combining the
Corporation with RCI from a financial point of view as the inter-company
transfer pricing of shared expenses such as call centres, back-office
management, accounting, legal, and investor relations, was generally reflective
of arm's-length pricing. BMO Nesbitt Burns concluded that no material additional
synergy value should be assigned to the RWCI Restricted Voting Shares.
VALUATION SUMMARY
The following is a summary of the range of fair market values of the RWCI
Restricted Voting Shares resulting from the DCF approach, the comparable trading
approach, and the precedent transaction approach:
EQUITY VALUE PER
RWCI SHARE
-----------------------
Low High
--------- ---------
Discounted cash flow approach............................. $ 47.18 $ 56.46
Comparable trading approach (2005E & 2006E average)....... $ 41.63 $ 52.58
Precedent transaction approach............................ $ 39.08 $ 48.90
In arriving at its opinion as to the fair market value of the RWCI Restricted
Voting Shares, BMO Nesbitt Burns attributed proportionately more weight to the
DCF approach than to the comparable trading approach and the least amount of
weight to the precedent transaction approach for the reasons expressed above.
VALUATION CONCLUSION
Based upon and subject to the foregoing, including such other matters as we
considered relevant, BMO Nesbitt Burns is of the opinion that, as of November
22, 2004, the fair market value of the RWCI Restricted Voting Shares is in the
range of $46.00 to $54.00 per share.
FAIRNESS OPINION
In considering the fairness, from a financial point of view, of the
consideration offered under the Transaction to the Minority Shareholders, BMO
Nesbitt Burns reviewed, considered and relied upon or carried out, among other
things, the following:
o a comparison of the value of the consideration offered under the
Transaction to the fair market value range of the RWCI Restricted
Voting Shares determined in the Formal Valuation; and
o such other information, investigations and analyses considered
necessary or appropriate in the circumstances.
26
VALUE OF THE CONSIDERATION
Pursuant to the Transaction, Minority Shareholders will receive 1.75 RCI
Non-Voting Shares for each RWCI Restricted Voting Share held. The RCI Non-Voting
Shares received by the Minority Shareholders will represent a minority position
in RCI and will not allow the Minority Shareholders to affect control of RCI. As
such, and because based on the analyses undertaken by and information made
available to it, BMO Nesbitt Burns has no reason to believe that the market
price of the RCI Non-Voting Shares is not indicative of value, BMO Nesbitt Burns
concluded that it was not appropriate to consider methodologies that utilize an
"en bloc" approach, and that an "en bloc" valuation is not required, in
assessing the value of RCI Non-Voting Shares. As noted above, the reference to
"en bloc" valuation herein means a valuation where, in accordance with the
Rules, no downward adjustment is made to reflect the liquidity of the
securities, the effect of the transaction or the fact that the securities do not
form part of a controlling interest. In considering the value of the RCI
Non-Voting Shares being offered, BMO Nesbitt Burns has relied upon the market
trading approach. The value range expressed herein in respect of the RCI
Non-Voting Shares constitutes a formal valuation of the RCI Non-Voting Shares in
accordance with the MSPA based upon assumptions specified by the Independent
Committee.
The market trading approach was deemed by BMO Nesbitt Burns to be an appropriate
basis for valuing the consideration offered to the Minority Shareholders under
the Transaction after considering the following factors:
i. Liquidity: The last 90 day trading volume of the RCI Non-Voting Shares
was approximately 63.9 million shares, representing an aggregate
traded value of $1.68 billion;
ii. Market Float: The aggregate value of RCI's publicly traded equity
securities (excluding insiders and holders of greater than 10% of
shares outstanding) is approximately $5.0 billion;
iii. Market Familiarity: The business and affairs of RCI are carefully
scrutinized by market professionals, with more than 15 analysts
providing research in respect of its equity securities;
iv. Size of the Transaction: The maximum number of RCI Non-Voting Shares
to be issued in connection with the Transaction (assuming that all of
the Minority Shareholders tender for the consideration offered,
specifically 1.75 RCI Non-Voting Shares) is 27.0 million (excluding
any options exercised for RWCI Restricted Voting Shares), which
represents approximately 12.5% of the RCI Non-Voting Shares
outstanding after giving effect to such issuance; and
v. Public Disclosure: BMO Nesbitt Burns conducted discussions with RCI
senior management and was advised that there is no material
information regarding RCI, the Corporation and Microcell which has not
been publicly disclosed that would otherwise reasonably be expected to
affect the market price of the RCI Non-Voting Shares
27
vi. Trading Comparables: As RCI has no direct trading comparables, BMO
Nesbitt Burns reviewed publicly traded comparable companies for each
of RCI's three principal businesses - cable, wireless and media, and
concluded that RCI's current trading value was not inconsistent with
the implied aggregate value from the trading comparables.
LIQUIDITY AND PRICE ANALYSIS OF RCI NON-VOTING SHARES
BMO Nesbitt Burns considered the trading history of RCI Non-Voting Shares on the
Toronto Stock Exchange ("TSX") over the last twelve months and 90 days. The
volumes and trade-weighted average prices are summarized below:
Days to
Trade Shares
to be Issued
Average Trade Weighted High Low Pursuant to
Period Ending November 19, 2004 Volume on TSX Average Price Price Price Transaction(1)
- ------------------------------- ------------- -------------- --------- --------- --------------
1 Day........................... 922,289 $ 29.11 $ 29.60 $ 28.65 29
10 Days......................... 1,606,387 $ 29.01 $ 30.37 $ 27.95 17
20 Days......................... 1,123,374 $ 28.68 $ 30.37 $ 27.01 24
30 Days......................... 953,578 $ 28.33 $ 30.37 $ 26.53 28
60 Days......................... 900,974 $ 27.60 $ 30.37 $ 22.82 30
90 Days......................... 725,941 $ 26.94 $ 30.37 $ 22.82 37
- ----------
1. Based on 27.0 million shares owned by Minority Shareholders and the average
volume for the period.
For the purposes of this Fairness Opinion, BMO Nesbitt Burns concluded that it
was most appropriate to consider a range of trading levels for the RCI
Non-Voting Shares as observed from recent trading activity as presented below:
RCI Non-Voting Shares Implied
Trade Weighted Value of
Period Ending November 19, 2004 Share Price(1) Consideration(2)
- ------------------------------- --------------------- ----------------
1 Day.................................... $ 29.11 $ 50.94
10 Days.................................. $ 29.01 $ 50.76
20 Days.................................. $ 28.68 $ 50.19
30 Days.................................. $ 28.33 $ 49.58
- ------------
1. Highest price traded in last 10 trading days was $30.37.
2. Based on 1.75 RCI Non-Voting Shares per RWCI Restricted Voting Share.
Based on the market trading analysis, BMO Nesbitt Burns determined a value range
for RCI Non-Voting Shares of $28.00 - $30.00 per RCI Non-Voting Share.
COMPARISON OF THE CONSIDERATION OFFERED TO THE FORMAL VALUATION
Under the terms of the Transaction, the Minority Shareholders would receive
$49.00 - $52.50 per RWCI Restricted Voting Share, which is within the range of
fair market value of the
28
RWCI Restricted Voting Share as of November 22, 2004, as determined by BMO
Nesbitt Burns.
FAIRNESS OPINION CONCLUSION
Based upon and subject to the foregoing and such other matters as we considered
relevant, BMO Nesbitt Burns is of the opinion that, as of November 22, 2004, the
consideration offered under the Transaction is fair, from a financial point of
view, to the Minority Shareholders.
Yours very truly,
/s/ BMO Nesbitt Burns Inc.
- -----------------------------------
BMO Nesbitt Burns Inc.
29