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Corporate Finance
WACC

TELUS Corporation (Dividend Policy)

Submitted to:
Sir Asim Ilyas
Submitted by:
Ali Raza

13233002

Corporate Finance

TELUS
Corporatio
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TELUS Corporation: Dividend Policy

INTRODUCTION:
TELUS Corporation case is written by Ken Mark, fundamentally
there are two characters in this case, the one is Robert Gardner is the vice president
&treasurer of TELUS and the second is Robert McFarlane the chief financial officer. Robert
Gardner realized that company dividend policy was shaped partly by

TELUS future prospects

leverage policy
state of the telecommunication industry
expectation of the investor

There was a contradiction implied by a growth oriented company with a high payout
ratio.

Canadian Telecommunication Industry

TheCanadiantelecommunicationsindustrybegantoseerapidgrowthandchangeseversincethe
introductionofcellularservicein1985.Recorded services revenue of 29.9 billion, Industry dominated
by incumbents local exchange carriers, Provide a full range of both wire line and wireless services ,
Large ILECS accounted 78 % of industry revenue

Wireline competitors:
There are two types of Wireless competitors
Facility based providers:
They owned much of their physical transmission facilities include companies like AT&T
Canada, Call Net, GT Group.
Resellers:
They did not own their facilities but utilized ILECS or other networks to deliver services
include Primus, Distribute Communication& IPS.
Wireless Market:
Four national carriers.
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Rogers Wirless
TELUS
Microcell
Bell wireless

From 1998 to 2000, Wireline revenue compounded annual growth rate 7.4%,Wireless CAGR
was 12.3%, resulting in Canadian real GDP growing from 1.8% to 2.4%.

CRTC:
CRTC is an independent agency responsible for regulating Canadas broad casting &
telecommunication increase competition in the industry. They began deregulating long
distance & service in the wire line market in 1997 CRTC opened local service to competition
this eliminated the traditional local phone service monopoly, opened the opportunity for
ILECS to pursue competition & growth against incumbent telecommunication companies.
Both bell & TELUS beginning large, long distance market was becoming increasingly
commoditized, declining industry revenue as the revenue loss associated from reduces prices
in recent years ,long distance competitors generate volume on their networks &offered lower
prices.
Problem Facing By TELUS Corporation:
TELUS Corporation was formed in 1999 with the merger of two carriers; Alberta based
TELUS and BC telecom. Following the appointment of a new CEO, TELUS created a new
strategic intent for the company. These six strategies were to build national capabilities,
provide integrated solutions, Partnering, Acquiring, and Investing. Other strategies included
focuses on Data, IP and investing in internal capabilities. In pursuit of attainting these
strategies TELUS started to invest in state-of-the art national fiber optic IP network in
building local access networks. With a new strategy a divided recommendation was too
made in the coming weeks to decide a new policy. The dividend policy is formed by future
prospects, leverage policy, the state of the art telecommunications industry, and the
expectations of investors. When it comes to making the policies

KEY CHALLENGES:

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Challenges for ILECS to establish a variable business model

High startup capital requirement
Negative cash flow
Long technology provisioning times.
Falling prices in both long distance and local services as well as burst of dot.com
Bubble, resulted in large number of ILECS failure including AXXENT.CI
communication, norigen.

In contrast wireless segment growing at rapid pace since the introduction of cellular service.
Since the introduction of cellular service.

Wireless penetration in Canada was just under 35%.

As it approaches penetration rates of 70%.
Despite of growth wireless industry was still in investment phase.
Internet access market was another growth area
With average annual retail revenue growth rate was more than 70%
Nationally market was split equally among ILECS , cable incumbents & non

incumbents
An emerging thread to the local and long distance business was VoIP.
CRTC was considering new prices cap regulations that prevent incumbents carriers from
raising the prices.CRTC was considering modifying the subsidies or contribution, that
incumbents could receive for providing basic residential service at below cost rate in high
cost service area. TELUS estimated projected impact of these two regulatory decisions to be a
reduction in annual EBITDA of between 250 million to 300 million.

TELUS:
Formed in 1999 with the merger of two carriers Alberta based TELUS & BC telecom
TELUS accelerated its national expansion plans & exposure to the high growth
wireless market with 6.6 billion.
To finance Clearnet acquisition, TELUS arranged short term bridging loan of 6.25
billion, thereby increasing the leverage of the firm.
Dominion bond rating service downgraded TELUS debt rating to BBB (high) &R2(high) from A and R-1 (middle).
TELUS successfully raised 9.2 billion in offering of unsecured notes bank syndicated
credit facility
Divested its directories business for 810 million
TELUS acquired the remaining 30% stock in Quebec tel for 285 million.

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With respect to OEP in 2002 TELUS expected to recorded an additional expense of

12.5 million

TELUS Dividend Policy:

Four key choices with regard to earning

reinvests them for organic growth or acquisition

reduce debt increase cash
repurchase its shares
pay a dividend to share holders (Alberta, BC)

TELUS annual dividend were 0.92 & 1.40 per share ,Exchange ratio for BC telecom is
1:1,TELUS share holder realized 18% increase in dividend ,TELUS had 298.4 common
voting and nonvoting shares outstanding,47.4 million voting and nonvoting TELUS shares
were held by mutual funds The focus of these mutual funds was as follow:

growth oriented 50%

incomes oriented 36%
balance fund 7%
Index fund 7%

TELUS had a dividend reinvestment plan (DRIP).TELUS offers 5% discount to share holders
to the existing market price for reinvested dividends. Monthly purchase of up to 20,000 per
investor was allowed. Participation in TELUS drip was 44.1 % in October 2001.Cash flow
statement for nine months ended Sep 2001 showed that 66.9 millions of shares had been
issued compared to 13.7 million in the same period a year earlier. TELUS current dividend
per share was 1.40 or 0.35 per quarter. Clearnet generated negative free cash flow 158.9
million in 9 months ended sep 30 ,2002.TELUS issued almost 50 million shares in addition to
issuing and assuming 4.7 billion of debt. TELUS paying 70 million of incremental dividends
per annum as a result of acquisition. Retain the dividend payout at the level existing prior to
the Clearnet purchase .in order to indicate to the investors that the Clearnet purchase was
financially manageable. TELUS chief executive stated that we are committed on
maintaining an investment credit rating, our balance sheet shows that after acquiring Clearnet
net debt is 7.6 billion and total share holder equity of 6.8 billion.

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In 2000 annual report stated current dividend levels may be in consistent with the growth
strategy of talus. The debt of talus is currently rated investment grade and talus plans to
maintain this status. The business plan of talus contemplates increased capital expenditures in
the growth area of wireless, data and IP as well as expansion on a national basis. TELUS
review its dividend policy quarterly
By October 2001 for four quarters TELUS had held its dividend at 0.35 per quarter. With a
closing share price of 23.65 on Monday, Oct 22, 2001, was down from 42.65 at end of Jan
2001.TELUS dividend yield was 5.9 percent .TELUS debt was rated as investment grade
BBB+ by standards & poors
BBB (HIGH) by dominion bond rating
Baa2 by moodys
If talus wanted to raise cash without incurring further debt if equity was sold dividend would
be payable on new shares and transaction cost would be four percent to six percent. On Sep
30 2001 TELUS net debt was 54.5 percent above its leverage policy target of 50 %.In 1998 it
was 33% and in 1999 it was 32.2%.Dec 20, 2000 announcement by AT&T to reduce it fourth
quarter dividend by 83 % from 0.22 to 0.0375.Jan 15, 2001 announcement by cogoco cable
that it would cancel its dividend of 0.03 per quarter.Dec 8, 1999 Trans Canada pipe lines
announced that it would reduce its annual dividend from 1.12 per share to 0.80per share. In
contrast to the alternative of cutting TELUS dividend, holding the dividend at its current level
could send a strong signal to the market; TELUS management was confidence about its
future financial performance. Some companies also had active share repurchase programs,
share repurchase were another way of returning capital to share holder and in the process
reinforcing investor confidence and perhaps bolstering the price of the stock in the market
On Nov 8 2008, BCE indicated its intention to repurchase for cancellation up to 440
million common shares between Nov 10, 2000 to Nov 9, 2001.
By dec 31, 2000, BEC had purchased and cancelled 9.2 million common shares for an
aggregate price of 384 million.
In 2000, MTS repurchased 2.5 million shares at an aggregate cost of 59.5 million.
The possibility of solving this problem through debt issuance is not a feasible option because
of our recently issued $9.2 billion in debt, which downgraded our debt rating to the lowest
investment grade of BBB (high);both Moodys and Standard and Poors evaluated our current
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debt structure with a negative outlook credit rating. Telus Corporation has a policy, which
does not support a lower debt rating and does not wish to be downgraded further. Our current
net debt to capitalization ratio is above our target long-term leverage policy, which makes
issuing debt an inadequate option. The other alternative is to issue additional equity, which
could be financed with an issuing cost of 4-6%.Telus target net debt to capitalization ratio is
50% and is currently at 58.8% (as of the June 2001 Statement of Financial Position).This
provides us with an incentive to issue more equity to raise funds while also improving upon
our target ratios. If we were to set this ratio equal to our target of 50%, then our shareholders
equity would have to be increased by $2,863,052,632 (after floatation costs) to
$9,126,700,000, which is consistent with issuing approximately 121 million shares at
$23.65.Although this would cover our negative free cash flows for the upcoming year, this in
a 40.6% increase in total equity, which is inconsistent with managements strategy. The
relevant calculations are as follows:

Financial Calculation:
LongtermDebt/(Shorttermdebt+LongtermDebt+ShareholdersEquity)=50%
(1200.4+7926.3)/[(1200.4+7926.3)+6406.8]=58.8%
0.50=9126.7/(9126.7+SHE)
SHE=9126.7
ChangeinSHE=9126.76406.8
ChangeinSHE=2719.9Million
Accountingforfloatationcosts:
2719.9/(10.05)=2863.05
ChangeinnosofShares=2863.05/$23.65
ChangeinnosofShares=121.06MillionShares

Graphical Representation of TELUS shares Price:

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TELUS share price

50
45
40
35
30
25
20
15
10
5
0

Our first concern is to reduce negative free cash flow for 2001 by 50% (this being an arbitrary
number, but an attainable goal) and to be left with zero negative cash flow in 2002. Our reasoning
behind this is that by freeing up cash flow, it will increase our dividend paying flexibility, as well as
reduce our need to draw from retained earnings. Our next concern is that we do not wish to issue
more than 5% of our current number of shares outstanding to avoid a large fluctuation in price, as well
as heavy floatation costs. Our justifications for reducing the dividend include sufficient evidence that
our investors and shareholders will be supportive and accepting of our decision. Firstly, in an analysis
of our current shareholders, we concluded that 64% of our mutual fund investors were not income
oriented and therefore, we assume they will be lessimpactedbyadividendreduction.

InOctober2001,therewasa44.1%participationrateinthereinvestmentplan(DRIP).This
providesinsightintoourinvestorspreferences,showingusthatmanyofourinvestorsare
interested in capital gains and are willing to forgo a dividend income. Thirdly, in the
acquisition ofClearnet,50million additional dividend bearingshares wereissuedwhich
increasedTelusdividendspayableby$70millionayear.Thisissuancefurtherweakened
Telusfinancialpositionalongwithdebtfinancingcosts.Asafinalpoint,ourshareholders
werewarnedintheManagementDiscussionandAnalysisthatthecurrentdividendpolicy
wasinconsistentwithourgrowthstrategy.Loweringthedividendpayoutsupportsinternal
growthinTelus,whichprovidesastronginvestmentopportunityinthefastgrowingwireless
industry.

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[298.4millioncommonsharesoutstandingX$1.40$135million(reductioninnegativefree
CFinyear2)]/298.4millioncommonsharesoutstanding=$0.94dividendpershare
Thisisa32.9%decreasefromthecurrentdividendbeingpaid. Nextwelookatournew
equityissuinganddeterminehowmanynewsharesneedtobeissued.
Newequityissue=(425.4million135million)/(10.05)
Newequityissue=$305.6million
Numberofshares=$305.6million/$23.65
Numberofshares=12,925,336.6shares
Conclusion:
Eliminatingthedividendcompletelywillsendaverynegativesignalinthemarket.Itwilltriggerthe
saleofcompanyssharesandthesharepricewillfallfurther.Reducingthedividendmaybeanoption
butitisveryhardtodeterminethattowhatextentthedividendsshouldbereduced.Reducing
dividendshaveresultedindisastersforothercompaniesandisnotconsideredagoodsignevenifthe
companyis100yearsold.Residualmodelcanbeusedtodeterminethelevelofdividendstobe
distributed.

Recommendation:
Following our above recommendations we would like to reiterate our confidence in our suggestion of
a dividend reduction for Telus Corporation. Through various calculations and choosing a path of
minimal assumptions, we were able to set attainable goals, identify a variable for sensitivity analysis
and provide a sustainable dividend policy that will maximize shareholder value. It is our belief that in
an industry of declining revenues, based on recent regulatory changes, Telus has increasing EBITDA
forecasts that represent their operational efficiencies. This combined with many one-time restructuring
and financing costs in the upcoming years, provides Telus with a strong future cash flow position.
This could allow for a future dividend increase or reevaluation. We feel that our recommendation
places Telus in the strongest possible position given the circumstances.

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