DBRS Confirms Shaw’s Rating at BBB Following Its Announced Acquisition of a Restructured Canwest

DBRS has confirmed the rating of Shaw Communications Inc. (Shaw or the Company) at BBB, with a Stable trend, following the Company’s announcement today that it has increased its previously announced equity investment in a restructured Canwest Global Communications Corp. (Canwest or restructured Canwest) to a 100% acquisition of all of a restructured Canwest. This includes the acquisition of the 65% equity stake in CW Investments Co. – an entity that owns the majority of Canwest’s specialty TV stations. This transaction values Canwest and its conventional and specialty TV operations at roughly $2.0 billion.

The acquisition does not include Canwest’s newspaper operations under Canwest Limited Partnership, which is proceeding through a second round of bidding as part of its comprehensive sale process under a separate Companies’ Creditors Arrangement Act (CCAA) filing on January 8, 2010.

On February 12, 2010, Shaw announced an agreement to invest $95 million for a minimum 20% equity stake (with 80% voting interest) in a restructured Canwest. This transaction was subject to a number of conditions, including resolution of a shareholders agreement between Canwest and Goldman Sachs Capital Partners (Goldman Sachs Capital) regarding their ownership of CW Investments Co.

Of the $2.0 billion acquisition, Shaw plans to fund the approximate $1.2 billion equity value with cash on hand ($700 million at February 28, 2010) and borrowing under its undrawn $1 billion credit facility. The equity portion will be directed toward Goldman Sachs Capital ($700 million) and the unsecured creditors of Canwest ($478 million) as per agreements with both parties. The agreement with Canwest’s noteholders is pursuant to a plan under the CCAA that remains subject to certain conditions, including Canwest creditor and court approvals. The transaction remains subject to regulatory approvals from the Canadian Radio-television and Telecommunications Commission (CRTC) and the federal Competition Bureau.

Additionally, Shaw will assume the roughly $815 million of net debt (as of February 28, 2010) of CW Media Holdings Inc. (CW Media). While CW Media’s debt will be non-recourse to Shaw, DBRS believes that Shaw will possibly look to refinance this debt at the Shaw level at an appropriate time in the future. As such, this would create a consolidated credit profile, with Shaw’s cable, satellite and acquired TV operations supporting its borrowings.

When Shaw announced its equity investment in February 2010, DBRS had noted that a further investment and possible commingling of these assets could have an impact on Shaw’s credit rating; however, DBRS believes that, after a thorough analysis, the changes in Shaw’s business and financial risk profiles are manageable for its BBB rating. DBRS has estimated that following the acquisition of the restructured Canwest, cable and satellite operations will continue to generate the majority of Shaw’s EBITDA at roughly 90%, with TV operations generating the remaining 10%.

While the two businesses (cable and media) have similar business risk profiles, DBRS does note that Shaw’s credit metrics will weaken from current levels but will remain reasonable for a BBB rating. Specifically, DBRS expects gross debt-to-EBITDA to remain at about 2.65 times or less, while cash flow-to-debt is expected to remain at approximately 0.23 times or more (currently 2.48 times and 0.27 times, respectively, for the 12 months ending February 28, 2010).

In addition to bringing a number of benefits to the broadcasting system in Canada, DBRS believes this investment will give Shaw the indirect benefit of being a vertically integrated content and distribution company, with options for the future. DBRS believes that despite the increased upfront investment, there is very little downside for Shaw given the established nature of the Canwest assets along with the subscription-based nature of the specialty TV channels. Additionally, Shaw is expected to 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 companies possibly circumventing traditional forms of distribution for the Internet. DBRS believes that Shaw’s investment in the restructured Canwest may be about both seeking the benefits of vertical integration and, more defensively, 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 has a BBB Issuer Rating and BBB (low) Senior Unsecured Notes rating on Corus, both with Stable trends.)

Finally, DBRS notes that with the relative ubiquity of the Internet – along with media companies 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. (NBC), a US$37.5 billion joint-venture that Comcast will control. (See DBRS’s press release on Comcast and NBC dated December 4, 2009.)

For a detailed organizational chart of Canwest, please see page 4 of the DBRS rating report available at the link below.

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.