TELUS Corp.
(T-T, TU-N) C$27.46 | US$21.36
LifeWorks Deal Makes Strategic Sense; Upgrade on Price Weakness
Event
TELUS announced a definitive agreement to acquire LifeWorks, Inc. for $33.00 per LifeWorks share ($2.3 billion plus debt assumption of approximately $600 million puts the deal value at $2.9 billion). TELUS expects to finance the deal with an aggregate cash component totalling around $1.2 billion and approximately 37 million TELUS common shares (at a fixed price of $31.01 per T share), as outlined in exhibits 1 and 2. As of the end of Q1/22, TELUS had ~$2.6 billion in available liquidity and received incremental commitments of $1.9 billion from banks to finance the cash portion of the transaction. We do not expect any regulatory hurdles, given the complementary nature of TELUS Health and LifeWorks' businesses.
Impact: MIXED
TELUS has a good reputation as an operator in the healthcare segment and we believe this deal makes sense strategically as it adds scale and complementary capabilities, plus it could accelerate the time frame for a shareholder-friendly monetization of TELUS Healthcare (TH) via IPO or possibly a merger with TELUS International (TIXT). But TELUS is paying a meaningful premium versus what the current weak market valued LifeWorks at, and it could take two years or more for net synergies from the deal to exceed upfront integration costs. Adding LifeWorks to our model (assumptions are shown on page two) caused no change in our target price.
TD Investment Conclusion
We are upgrading TELUS to BUY from Hold, given the share-price decline and multiple contraction since we downgraded the stock in March (LINK). TELUS is currently down 18% since we downgraded and down 20% from its all-time high in April. Since the downgrade, its 2022E EV/EBITDA has contracted by approximately 1.5x to 8.8x from 10.3x. The return to target for TELUS justifies a BUY rating again, even after the TELUS target price was reduced last week to reflect higher interest rates (LINK). TELUS continues to be more expensive than its comparables, but not by enough to scare us anymore, given the quality of its assets and its defensive attributes (high and steadily growing dividend expected during 2023-2025).