DBRS Comments on Shaw’s Equity Investment in Restructured Canwest

DBRS notes today that Shaw Communications Inc. (Shaw or the Company) announced that it has entered into an agreement with Canwest Global Communications Corp. (Canwest or Restructured Canwest) and its Adhoc Committee representing its 8% senior subordinated noteholders regarding the acquisition of an equity interest in a Restructured Canwest. This acquisition would be for a minimum of 20% equity interest and 80% economic interest (effective control) of a Restructured Canwest. Shaw’s initial equity interest will exceed 20%, depending on the number of Canwest creditors that elect cash over shares.

DBRS notes that Canwest, Canwest Media Inc. and certain entities that include its conventional television operations and some specialty channels, sought creditor protection under the Companies’ Creditors Arrangement Act (CCAA) via a pre-packaged arrangement on October 6, 2009. The investment is subject to several conditions including court approval regarding the CCAA process, and regulatory approval by the Canadian Radio Television and Telecommunications Commission (CRTC). Closing is expected to occur once a Restructured Canwest emerges from the CCAA process.

Shaw’s investment: (a) includes Restructured Canwest’s 35.3% equity and 67% voting stake in CW Media Holdings Inc., a specialty television business; and (b) does not include an investment in the newspaper operations under Canwest Limited Partnership, which is seeking a comprehensive sale process under a separate CCAA filing on January 8, 2010.

DBRS notes that today’s announcement does not affect Shaw’s BBB Senior Notes rating given: (1) DBRS’s expectation of the size of the investment and Shaw’s cash position of $651 million at November 30, 2009; and (2) the fact that this investment would have no legal recourse to Shaw and would be run separately from Shaw and its current communications operations.

However, DBRS notes that any future transactions that could possibly add to Shaw’s position in Restructured Canwest or, indirectly, its interest in CW Media Inc., or commingle these assets with Shaw’s, could potentially have an impact on Shaw’s credit profile should these be significant. DBRS expects to view Shaw’s investment in Restructured Canwest as a separate credit from Shaw’s existing communications operations, which remain the basis of Shaw’s BBB credit rating. This assumes that a Restructured Canwest emerges from creditor protection with minimal leverage, remains non-recourse to Shaw and is self-financing.

In addition to bringing a number of benefits to the broadcasting system in Canada, DBRS believes this investment would help to give Shaw indirect benefits of being a vertically integrated content and distribution company with options for the future. DBRS believes that there is very little downside for Shaw, with some benefit from operating both content and distribution (including television, Internet and, in the future, wireless) in a world where media continues to seek new forms of distribution.

DBRS also notes that the hidden benefit of such an investment may be that it helps Shaw, a distributor, battle the threat of content/media companies possibly circumventing traditional forms of distribution for the Internet. DBRS believes that Shaw’s investment in Canwest may be about both seeking the benefits of vertical integration and, more defensively, about tackling the threat of disintermediation head on.

Furthermore, DBRS notes that Shaw’s investment in media is not unprecedented, given its media investments in the past, which ultimately formed Corus Entertainment Inc. (Corus), now a sister company to Shaw that is also controlled by the Shaw family. This business was spun out to Shaw’s shareholders in September 1999. DBRS believes that there could also be possible benefits in the future for Corus, given its position in specialty television. (DBRS has BBB and BBB (low) Issuer and Senior Unsecured Notes ratings on Corus, both with Stable trends.)

Finally, DBRS notes that with the relative ubiquity of the Internet – along with media seeking new forms of distribution – there seems to be a resurging trend toward vertical integration among content and distribution companies. Recently, U.S.-based Comcast Corporation (Comcast) entered into a similar agreement, which, through a series of transactions, will see Comcast acquire a 51% stake in NBC Universal, Inc., a US$37.5 billion joint-venture that Comcast will control. (See DBRS’s press release on Comcast/NBC dated December 4, 2009.)

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

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

This is a Corporate (Telecom/Media/Technology) rating.