Telus fails to deliver on Entwistle's IPO-based growth strategy
Would anyone buy another initial public offering promoted by long-serving Telus Corp. T-T chief executive officer Darren Entwistle?
If the answer to that question is no, Mr. Entwistle's growth strategy at Telus is dead in the water.
And it's hard to imagine investors stepping up for future Telus spinoffs after Tuesday's announcement that the parent company wants to put troubled offspring Telus International (Cda) Inc. TIXT-T out of its public market misery.
Telus is offering to buy out shareholders in its subsidiary at a steep 86-per-cent discount to the price of its IPO, done with considerable fanfare just four years ago.
Mr. Entwistle, a dominating personality who has been at the helm for 25 years, built Telus beyond its legacy phone networks by investing billions in subsidiaries focused on digital customer services, health care and agriculture. The idea was to incubate these businesses inside the Vancouver-based telecom, then launch them as public companies, with Telus shareholders reaping rewards from the value created on Mr. Entwistle's watch.
Telus International – rebranded in 2024 as Telus Digital Experience – was meant to be the first in a series of spinoffs. Telus Health is up next, with an IPO anticipated as early as 2026.
The incubator concept initially looked like a winner, as Telus Digital went public in 2021 at US$25 per share in what the parent company proudly heralded as the largest tech IPO in Toronto Stock Exchange history. At the time, Telus Digital's US$8.5-billion market capitalization rivalled that of the parent telecom.
Execution failed to match ambition.
Telus Digital proved a case study in value destruction. The company's challenges include a core business that runs call centres for clients such as retailers, hotels and banks. Artificial intelligence-based systems now dominate this space. Telus Digital proved slow to pivot, and customers moved on.
On Wednesday, Telus reversed field by making a 'non-binding indication of interest,' or IOI, to acquire the 42.6 per cent of Telus Digital shares it doesn't own for US$3.40 each.
Telus Digital shares promptly jumped 24 per cent Thursday to close at US$3.67 on expectations the parent company will be forced to goose its bid to get a deal done.
Mr. Entwistle put a brave face on Telus Digital's face plant. In announcing the IOI, he said reintegrating the unit's tech expertise will benefit all of Telus's businesses, including telecom.
While that may be true, buying back the subsidiary is an admission of failure. Telus set lofty goals for its diversification strategy, then failed to hit them.
Telus proposes buying back Telus Digital for more than US$400-million
Telus Health prepares to stand alone after years of acquisitions
'Today's rather dismal proposal has no 'congratulatory' terms that were to be found at the time of the IPO,' said analyst Tyler Tebbs at Tebbs Capital in a report. He said Telus is only offering to repurchase its subsidiary after failing to find a buyer for the business.
Memories are long in financial circles. Mr. Tebbs compared the Telus offer to the ill-fated M&A at Time Warner Inc. in the recent past. He said the buyback 'is yet another example of a telecom/media company reversing a transaction done in much better times at the expense of shareholders.'
In public markets, you're only as good as your last deal. Fund mangers got caught up in a craze for all things digital during the early days of the pandemic. That dynamic set the stage for a successful IPO at Telus Digital.
The second time around, institutional and retail investors will be far more skeptical about buying when Mr. Entwistle is selling. To get an IPO done at Telus Health or Telus Agriculture, the parent company will likely be forced to accept a steep discount to the underlying value of the business, which defeats the purpose of the incubator concept.
Yet without the ability to exit investments, Mr. Entwistle is running a debt-heavy conglomerate, anchored by a well-run but slow-growth telecom network that qualifies as critical infrastructure for the Canadian economy.
Outside of founder-run businesses, it's hard to name a domestic public company more identified with its CEO than Telus.
At Telus Digital, Mr. Entwistle's IPO-based growth strategy failed to deliver. The Telus board, chaired by former deputy prime minister John Manley, needs to ask hard questions about what comes next and who is best positioned to lead a business that has become the vision of a single executive.
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