Telus proposes buying back Telus Digital for more than US$400-million

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Telus Inc. T-T is proposing a more than US$400-million deal to take back control of its affiliate, Telus Digital TIXT-T, which has seen its share price plummet since it went public, locking in major losses as the company considers future spinout plans.

Telus has signed a non-binding indication of interest to acquire all outstanding multiple and subordinate shares of Telus Digital, which offers technology outsourcing, for US$3.40, the company said in a release Thursday morning.

Shares of Telus Digital on the New York Stock Exchange were up 26 per cent in morning trading, to US$3.73. The parent company’s shares rose 0.7 per cent.

Telus Digital’s share price debuted at US$25 after its initial public offer in 2021, but has since declined by more than 90 per cent in the wake of industry-wide pressures on customer-service businesses and the loss of major clients such as Meta Inc.

The offer represents a 15-per-cent premium to the share price before markets opened Thursday, and a 23-per-cent premium over the company’s 30-day volume-weighted average trading price.

The proposed acquisition represents a new cost for Telus, as it aims to pay down its nearly $25-billion in long-term debt, and looks to capitalize on its other business lines. Telus is proposing to pay cash, shares or a combination of both for the multiple and subordinate shares.

The company said that reacquiring its former spinout would allow it to accelerate its artificial-intelligence and software capabilities across all its business lines.

In a note to investors, Bank of Nova Scotia analyst Maher Yaghi called Telus’s bid “the logical thing to do.”

“We believe Telus is serious about this offer. It is possible a sweetener could be required to get this over the finish line, but we also have many investors in TIXT that would likely be happy to move on and see positively, the immediate benefit of a quick liquidity event,” Mr. Yaghi said.

Mr. Yagi said the price offered, if accepted, will require Telus to disburse around $550-million to acquire minority shareholders. However, Telus Digital still owes its parent company cash, meaning that Telus’s net disbursements could be half of that amount after netting out the debt.

The company said any financing that it undertakes in the near term will be designed to be neutral to its balance sheet net debt to EBITDA leverage ratio, as it maintains focus on deleveraging.

Richard Tse, analyst for the National Bank of Canada, said the deal values Telus Digital at about US$2.3-billion, calling that a reasonable valuation when compared with peers.

Tyler Tebbs, head of research company Tebbs Capital, said that the proposal likely leaves Telus ahead financially, given that it raised more than a billion dollars during the 2021 IPO, offloaded some financial risk and is now buying back the company at a steep discount.

While it leaves Telus’s reputation among investors with “a little bit of a black eye,” he said, the onus should be on shareholders who bought in at high prices to understand the risks inherent to the customer-experience sector.

“It was no secret that the space was facing all sorts of disruption,” he said.

The public listing of Telus Digital was celebrated as the first step in chief executive officer Darren Entwistle’s ambitions to spin off two other business lines, Telus Health and Telus Agriculture and Consumer Goods.

Some analysts have previously said that Telus Digital’s poor stock performance could have a dampening effect on investor appetite for the possible monetization of those assets, which Telus has said could come in the form of either the addition of a strategic partner or a public listing.

Mr. Tebbs said that while investors will assess these other divisions on their own merits, investors would likely “do more homework.”

Meanwhile, Mr. Yaghi saw the proposal as a positive step ahead of any such monetization.

“While it is too early to know if this deal will go through or not, putting this whole issue with TIXT behind it would be a good thing for Telus as it gears towards a possible liquidity event for its health care business possibly in 2026-2027,” he said.

Telus currently holds about 57 per cent of Telus Digital shares, and has asked Telus Digital’s board to form a committee of independent directors to evaluate the proposal.

Barclays is acting as exclusive financial adviser to Telus, and Stikeman Elliott LLP and A&O Shearman are acting as legal advisers.

Of the 20 technology companies that went public on the Toronto Stock Exchange during the height of the pandemic in an IPO boom, 12, not including Telus Digital, have since been taken private again, often at below-IPO prices.

With reports from Andrew Willis and Sean Silcoff