DBRS Assigns Ratings of BBB and BBB (low) to Corus Entertainment

DBRS has today assigned a BBB Issuer Rating to Corus Entertainment Inc. (Corus or the Company), and a Senior Unsecured Notes rating of BBB (low). The trends are Stable. The Senior Unsecured Notes rating ranks behind the Issuer Rating, which represents the highest rating in the structure, which in this case would be Corus’s secured bank debt. The ratings are supported by Corus’s healthy business risk profile and reasonable financial risk profile. However, the greatest risk to the ratings is the fact that Corus remains acquisitive and has a tolerance for leverage higher than the current levels. While most of Corus’s acquisitions in recent years have been small and strategic in nature, a large transformational debt-financed acquisition could pressure these ratings.

DBRS believes that over the past decade Corus has established itself as a major player in the Canadian media market since being spun off from Shaw Communications Inc. in September 1999. While much of this growth has been through small and medium-sized acquisitions that have given it a strong presence in specialty and pay television and its position as the second largest radio operator in Canada, the Company has swiftly incorporated these businesses to become a vertically integrated media company.

Today, Corus has a strong presence in specialty television that caters to kids and women as well as in pay television, with an incumbent position held through its multi-channel movie network (e.g., Movie Central, Encore Avenue). Corus also engages in content creation through its Nelvana Limited (Nelvana) operations, which drives content for its children’s entertainment channels. Corus monetizes this content by selling it globally, along with other content-related pursuits such as merchandizing and book publishing. While content creation can be highly competitive and has to remain engaging to stay relevant, DBRS notes that the Company benefits from its ability to tap Canadian production funds, which can put it on par with larger international media companies. Corus also operates the second largest radio business in Canada, with 52 stations across the country and a strong presence in nine of Canada’s ten largest markets.

DBRS notes that Corus has adopted the best practices of its acquired operations and other businesses over the years to form a robust corporate culture. While culture is not normally a tier-one consideration for DBRS, in this industry it is an important factor as some of the world’s strongest media companies tend to derive their industry-leading performance from a strong creative culture. Clearly, this can be an important advantage in what is a highly competitive media market.

Some of the stability that Corus demonstrates stems from the inherent nature of its businesses, which feature recurring and growing subscriber-driven revenue to complement advertising revenue. While advertising accounts for just over 50% of its revenue, Corus has demonstrated an ability to be responsive in terms of seeking efficiencies in an economic downturn. Although this responsiveness did not fully offset the cyclical revenue pressure in its Radio segment, the growth in Television did offset this pressure. The combination of these factors has allowed Corus to deliver stable consolidated EBITDA and EBITDA margins since F2008, despite the sharp impact of the downturn in the economy on advertising revenue in F2009. DBRS believes that this was the result of cyclical ebbs and flows of advertising revenue, which remains a function of the economy, as opposed to structural changes in the radio business.

DBRS notes that specialty television continues to be one of the largest growth categories in the Canadian media market (after the Internet), while with significant local advertising (75% of total revenue), radio has tended to be less susceptible to the structural changes that have affected other forms of media. With Television margins of just below 40% and Radio in the low to mid-20% range, these are healthy EBITDA margins relative to Corus’s North American peers.

DBRS expects that revenue and EBITDA growth in F2010 and beyond will be driven by an improvement in the economy and in advertising revenue, as well as by the Company’s ability to monetize enhanced audience measurement tools and data (such as co-viewing in television). Other growth drivers will include new channels launched or acquired (e.g., Nickelodeon – launched on November 2, 2009) and the March 1, 2010 re-launch of newly acquired specialty channels under the W Movies and Sundance Channel brands.

From a financial perspective, Corus continues to generate sufficient cash flow from operations to cover its dividends and capex requirements. In general, it is Corus’s strong EBITDA margins and low capex levels that allow it to generate free cash flow yields (free cash flow-to-EBITDA) in the upper 20% level. While free cash flow is expected to be lower in F2010 as capital equipment and leasehold improvement spending on the new Corus Quay building peaks in F2010, DBRS expects the Company’s free cash flow to return to more normal levels in F2011.

While Corus currently has reasonable credit metrics, with cash flow-to-debt above 0.20 times and debt-to-EBITDA below 3.0 times, it has indicated that it could tolerate a higher leverage level (3.0 times to 3.5 times debt-to-EBITDA and possibly 4.0 times or above for a short period, given the right acquisition). DBRS believes that Corus is committed to maintaining a financial profile that is consistent with these assigned ratings. However, should the Company add leverage for a large transformational acquisition, the potential result could be downside risk for its credit profile.

Barring any transformational acquisition, DBRS believes that Corus will continue to licence or acquire small, strategic media operations that leverage its position in television and radio. Corus has indicated that it is not interested in expanding into other forms of media, especially those that are likely to continue to face ongoing structural challenges.

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

As of the date of publication of this report, no senior unsecured notes were outstanding. However, on January 22, 2010, Corus filed a preliminary shelf prospectus under which it may issue senior unsecured debt.

The applicable methodology is Rating Media and Entertainment, which can be found on our website under Methodologies.

This is a Corporate rating.