Rogers has taken much heat from fans for refusing to jack up the Blue Jays’ player payroll in order to sign top free agents.Fred Lum/The Globe and Mail
Ever wonder why Rogers Communications Inc. is a bit thrifty when it comes to the Toronto Blue Jays but doesn't scrimp on the Toronto Maple Leafs, Toronto Raptors and Toronto FC, the teams it owns with rival telecom BCE Inc.?
The reason, according to business experts familiar with the finances of both companies, is a quirky accounting rule.
Rogers has taken much heat from fans for refusing to jack up the Blue Jays' player payroll in order to sign top free agents such as David Price. But the experts say the accounting rule means the profit or loss of any majority-owned asset such as the Blue Jays has to be included in Rogers' earnings before interest, taxes, depreciation and amortization (EBITDA), which can directly affect the company's share price.
The same rule also works to the advantage of Rogers and BCE, joint owners of Maple Leaf Sports and Entertainment, to spend freely on that company's hockey, basketball and soccer teams.
Under this rule, known as the equity accounting method, publicly traded companies can combine the profits or losses of any subsidiary companies in which they own less than a 51-per-cent interest and keep those results separate from their annual EBITDA. Results from subsidiaries are grouped together and are recorded as "other income," which does not count toward a company's EBITDA.
But wholly owned subsidiary companies such as the Blue Jays are subject to strict internal budgets within Rogers Media, the division that operates the team along with the company's broadcast properties. According to a source familiar with the finances of both Rogers and BCE, if Rogers were to sign Price for $30-million a season, then that $30-million would have to come from the budgets of other Rogers Media companies.
It also does not help that market analysts point out how any increase in the Blue Jays' payroll drives up Rogers Media's quarterly expenses. There are no such remarks about the Leafs, Raptors and TFC, because their expenses do not affect their companies' EBITDA.
The flip side of the equity accounting rule, however, means ownership by public companies can be a good thing for teams such as the Leafs, Raptors and Toronto FC fans. The financial results from those teams do not appear on the EBITDA of BCE and Rogers, which each own 37.5 per cent of MLSE.
Rogers owns the national NHL broadcast rights in Canada, which gives Sportsnet more Maple Leafs games to broadcast than BCE's TSN. But the companies split the team's regional broadcasts evenly, and they do the same with the Raptors and TFC. So if those teams win more games, the networks get higher ratings, can charge more for advertising and see their profits jump, which, in turn, gooses the telcos' bottom lines.
This is why MLSE is allowed to hang on to a good chunk of its estimated $100-million in annual profit, which it spends on things such as hiring the Leafs' new head coach Mike Babcock and general manager Lou Lamoriello, a state-of-the-art practice facility for the Raptors and a few high-priced international soccer stars for TFC. Even if those expenses eat into MLSE's profit, they can produce profits for TSN and Sportsnet.
"If TSN's [advertising] rates go up by, say, more than $1-million, well, [BCE] gets to count that as part of their profit because they own more than 51 per cent [of TSN]," said a source familiar with the company's financial plans, who requested anonymity because he is not authorized to speak on behalf of BCE.
Blue Jays fans can argue the team's estimated $140-million (U.S.) payroll for 2016 is small beer compared to Rogers' 2015 revenue of $13.4-billion. However, even a relatively small profit or loss by the team affects the bottom line.
"You say, 'yeah, but they're a billion-dollar company,'" the source said. "But they're a billion-dollar company owned by the shareholders. Shareholders don't want a division that is some ego play for a president of a division or even [Jays chairman] Edward Rogers that will lose $20-million a year."
Neither George Cope, president and chief executive officer of BCE, nor his counterpart at Rogers, Guy Laurence, could be reached for comment. Stewart Johnston, president of TSN, said, "It would be very inappropriate for me to comment on that."
However, the annual financial statements of both Rogers and Bell show MLSE and its teams do not figure in their EBIDTA. They are grouped with joint ventures and what both companies refer to in their financial statements as "associates." The results from those companies are added together and are considered part of the companies' "other income."
Rogers's 2014 statement notes that MLSE "is a joint venture and is accounted for using the equity method." BCE's statement says "Our financial statements incorporate our share of the results of our associates and joint ventures using the equity method of accounting …"
BCE's list of associates and joint ventures includes MLSE, Cirque du Soleil Media Ltd. and The NHL Network Inc. Some of these companies were not nearly as successful as MLSE, since BCE recorded a net loss of $12-million on those operations in 2014.
Rogers recorded an $11-million loss on its similar 2014 operations. Among Rogers' associates and joint ventures was shomi, the video-on-demand service formed to compete with Netflix.
Shomi is a joint venture with Shaw Communications Inc., so Rogers was able to keep its considerable startup costs out of its EBITDA, which was good for the company's share price.
Bell also formed a streaming service, CraveTV. However, BCE owns 100 per cent of CraveTV and its startup costs put a dent in the company's EBITDA. Cope acknowledged this in a conference call with stock analysts last November to announce BCE's third-quarter results.
"We want to make sure everyone is clear," Cope said. "That is, while we are absorbing the operating costs for CraveTV, our two largest competitors [Rogers and Shaw] on the media side of course do not have their [video] service in their EBITDA of their media business. It is below the line through a consolidation in equity accounting. So there is a difference."