DBRS Confirms Vidéotron Ltée at BB, Changes Trend to Positive

DBRS has today confirmed the rating of Vidéotron Ltée (Vidéotron or the Company) at BB and changed the trend to Positive from Stable. DBRS has also confirmed the ratings for both Sun Media Corporation at BB (Sun Media), and the parent of both companies, Quebecor Media Inc. (QMI), at BB (low)/B (high). The trends are Stable.

The trend change reflects Vidéotron’s strong EBITDA growth driven by improving Internet and cable telephony penetration rates and strengthening financial ratios. However, DBRS notes the Company’s rating continues to be constrained by ongoing support provided to QMI. DBRS expects Vidéotron to continue to support QMI through dividends and intercompany loans, which will continue to suppress Vidéotron’s credit rating.

DBRS notes that Vidéotron has experienced significant improvements in both its Internet and cable telephony segments due to subscriber additions and price increases. Additionally, growth in cable telephony subscribers has exceeded DBRS expectations over the year, and continues to help drive EBITDA growth, with penetration rates of over 22% of basic subscribers for the latest period. The Company’s quadruple play offering of video, broadband, telephony and a newly added wireless product (through an agreement with Rogers Wireless Inc.) continues to drive average revenue per unit (ARPU) and reduce customer turnover. Nevertheless, DBRS notes EBITDA margins remain slightly below that of the Company’s peers (which average around 40%) due to expenditures related to the deployment of telephony services, and price discounting to attract subscribers. In addition, while Vidéotron’s aggressive pricing strategy appears to have been successful in increasing penetration, DBRS notes increased competition with incumbent telco operators is likely going forward, as recent regulatory decisions are expected to lead to improved flexibility of pricing, bundling and “winback” strategies for the incumbent telcos.

Despite continued EBITDA growth, DBRS expects the Company’s free cash flow deficits to persist through 2007 as capital expenditures are expected to remain above historic levels, and as the Company is expected to continue to distribute a sizable dividend to QMI. However, recent refinancing at QMI has moderately reduced QMI’s funding needs, which should indirectly reduce the pressure on Vidéotron, Sun Media and other operating companies to support QMI’s funding requirements. Assuming dividends are held stable at current levels of approximately $120 million, DBRS expects Vidéotron to generate a free cash flow deficit of roughly $100 million in 2007. DBRS expects the Company to continue to fund the deficit through debt and with cash tax savings that it continues to derive from tax loss sharing arrangements with QMI.

The Positive trend also reflects DBRS’s expectations of continued improvement in Vidéotron’s key credit metrics through 2007, despite modestly higher debt levels, as EBITDA growth is expected to outpace increases in debt. However, should debt levels increase beyond DBRS’s expectations or QMI’s cash requirements increase causing pressure on Vidéotron’s risk profile, DBRS would consider removing the Positive trend.

Note:
All figures are in Canadian dollars unless otherwise noted.