The Canadian telecommunications industry faces a decisive year in 2025. Competitive headwinds, a pro-consumer regulatory framework, and high leverage have induced companies to pursue different strategic plans as they strive for healthy balance sheets. Effectively deploying such strategies will not only determine their performances for 2025, but also shape the companies' success in lowering leverage--failing which, ratings pressure could increase.
What's Happening
Competitive intensity in Canada has increased. This stems from the Rogers-Shaw and Videotron-Freedom mergers in 2023, which added Videotron as the fourth national wireless player. Wireless average revenue per unit (ARPU) has been declining consistently and churn is at an all-time high. Telcos' fiber offerings and Videotron's expanded internet service through third-party internet access (TPIA) has also increased competition in the broadband market. At the same time, population growth is slowing down following the Canadian government's decision to limit immigration. As such, we forecast 2025 telecom service revenue will expand 1%-2%.
We don't expect organic growth to vary considerably between the three largest telecom players (Rogers Communications Inc. [RCI], BCE Inc., and Telus Communications Inc.) given competitive intensity, market maturity, service bundling, and regulatory headwinds. As such, in 2025, we forecast that operators will focus on base management and cost efficiency to expand EBITDA as overall revenue growth through subscriber loading or increased pricing remains subdued.
Why It Matters
We forecast major players to exit 2024 with leverage at the higher end or exceeding the ranges appropriate for our ratings on them. The three incumbents have lowered their targets for 2024 revenue. The intense competitive environment will test how well telecoms can protect earnings and strengthen balance sheets in 2025 while consumers remain highly sensitive to price.
RCI's deleveraging has been marginal since it accelerated restructuring and realized synergies earlier in 2024, while Telus and BCE continue to make substantial dividend payments. Even though the capex intensities (as a percentage of revenue) continue to improve, increasing shareholder distributions have pressured the telcos' balance sheets. Dividend reinvestment programs (DRIP) have reduced pressure on discretionary cash flow but not enough to offset pressure on leverage.
What Comes Next
Amid increasing market saturation, Canadian operators are pursuing diverse strategies to expand and strengthen credit metrics. To further support balance sheet, Canadian operators are pursuing different strategies:
- BCE (BBB/Stable/A-2) is using proceeds from its Maple Leaf Sports and Entertainment (MLSE) sale to expand into the U.S. through Ziply acquisition, an asset with a higher revenue growth profile. BCE has paused dividend growth while a new DRIP will limit additional debt. We forecast 2025 leverage to peak close to 3.75x (our downgrade trigger for the rating) before improving in 2026.
- RCI (BBB-/Stable/A-3) is looking to enter a structured joint venture (JV; owned and operated by RCI) with proceeds of $7 billion. It aims to fully consolidate MLSE in the next few years. Leverage in 2025 and 2026 will range between low- to high-4x (downgrade trigger is 4.25x); if JV proceeds are treated as equity, leverage will be at the lower end of the range.
- Telus' (BBB/Stable/A-2) 2025 EBITDA is improving as high restructuring costs roll off. Increased product intensity and the expansion of its health and agriculture businesses, including potential monetization, could lead to some deleveraging. However, leverage still remains elevated above 3.75x (downgrade trigger) in the absence of any other transactions.
- Videotron Ltd.'s (BBB-/Stable/--) expansion of revenue and EBITDA will likely slow down, instead focusing on costs and a manageable dividend program to support its balance sheet. We expect the company's leverage to remain below mid-3x (downgrade trigger).
- Cogeco Communications Inc.'s (BB+/Negative/--) has limited headroom given its leverage above 3.75x (downgrade trigger). However, we expect geographic diversity to stabilize its revenue and any forecasted leverage improvement to stem from organic EBITDA growth and cost control in 2025.
Telecom operators will need to balance customer acquisitions and promotions while facing a slow economy, price-sensitive consumers, and an increasingly pro-competition CRTC. If both subscriber adds and average revenue per unit (ARPU) trends reflect major headwinds, deleveraging will be slower than our base-case expectations and ratings pressure could spike. Along with 2025 guidance, we will continue to monitor operational performance and the success of strategic plans. In the absence of any transactions, under our base case, Telus has limited flexibility at the 'BBB' rating. Similarly, Rogers could also face ratings pressure on its 'BBB-' ratings if S&P Global Ratings treats the $7 billion JV proceeds as debt.
Related Research
- Industry Credit Outlook 2025: Telecommunications, Jan. 14, 2025
- Tear Sheet: Telus Corp., Nov. 19, 2024
- Bulletin: BCE Inc.'s Proposed Acquisition Of Ziply Fiber Is Neutral For The Rating, Nov. 4, 2024
- Research Update: BCE Inc. Downgraded To 'BBB' From 'BBB+'; Outlook Stable; Debt Ratings Lowered, Sept. 12, 2024
- The Canadian Telco Squeeze--The Need To Compete Will Lower Returns, July 30, 2024
- Research Update: Videotron Ltee Upgraded To 'BBB-' From 'BB+' On Expected Deleveraging; Outlook Stable, May 6, 2024
- Research Update: Rogers Communications Inc. Outlook Revised To Stable From Negative On Expectation For Sustained Deleveraging, Feb. 21, 2024
- Research Update: Cogeco Communications Inc. Outlook Revised To Negative On Heightened Leverage, Ratings Affirmed, Dec. 11, 2023
This report does not constitute a rating action.
Primary Credit Analyst: | Aniki Saha-Yannopoulos, CFA, PhD, Toronto + 1 (416) 507 2579; aniki.saha-yannopoulos@spglobal.com |
Secondary Contacts: | Ron C Charbon, Toronto + 1 (416) 507 2516; ron.charbon@spglobal.com |
Archana S Rao, Toronto + 1 (416) 507 2568; archana.rao@spglobal.com |
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