DBRS Confirms BCE and Bell Canada Ratings Following its Announced Acquisition of CTV

DBRS has today confirmed the long- and short-term ratings of BCE Inc. (BCE) and its wholly-owned operating subsidiary, Bell Canada, at A (low) and R-1 (low), following Bell Canada’s announcement today that it will acquire 85% of CTVglobemedia Inc. (CTV) and its television, digital media and radio operations (excluding The Globe and Mail) for $1.3 billion in equity value. The trend on all ratings is Stable. (A full list of both issuers’ ratings is in the table below.)

Combined with BCE/Bell Canada’s current 15% equity interest in CTV, the transaction values CTV’s total equity (excluding The Globe and Mail) at $1.5 billion. Along with $1.7 billion of CTV’s proportionate net debt, this transaction puts CTV’s enterprise value at $3.2 billion. With an EBITDA multiple of roughly 10 times (x) CTV’s proportionate EBITDA (excludes minority interests held by third parties), DBRS notes that this transaction is reasonable and consistent with other recent media transactions in Canada.

BCE/Bell Canada plans to fund the acquisition with a combination of new debt at Bell Canada, cash on hand, BCE shares (issued to Woodbridge Company Limited, or Woodbridge), and the assumption of some residual CTV debt. The current shareholders of CTV – Woodbridge, Ontario Teachers’ Pension Plan (OTPP) and Torstar Limited (Torstar) – will receive cash, with Woodbridge receiving both cash and $750 million in BCE shares for its CTV stake. The transaction is subject to customary regulatory approval, including Canadian Radio-television and Telecommunications Commission (CRTC) approval and approval by the federal Competition Bureau. BCE/Bell Canada expects the transaction to close by mid-2011.

DBRS notes that in a separate transaction, Woodbridge will purchase 45% of The Globe and Mail that it does not already own from OTPP and Torstar – taking Woodbridge’s stake to 85% – and BCE/Bell Canada will retain its 15% interest in the large national daily.

DBRS believes that the acquisition of CTV is fundamentally about a communications provider and television distributor – that is, Bell Canada – acquiring a content creator/wholesaler, CTV. This vertical integration comes at a time when Bell Canada is expanding its traditional platforms, which deliver voice, data and video services, by creating new platforms such as terrestrial television, Internet-based television and mobile broadband services that can carry voice, data and video services. By owning 100% of CTV, Bell Canada plans to use this content to leverage its broadband networks and accelerate the growth of its video service (currently 40% of Bell Canada’s total residential revenues) while continuing to pursue a cost structure that keeps it competitive.

As has been the case with similar acquisitions in which distributors have acquired content companies, DBRS believes there are both offensive and defensive benefits involved, even if the operating synergies between the two turn out to be modest. From an offensive perspective, Bell Canada is expected to benefit from operating both content and distribution in a world where media continues to seek out new platforms and new forms of distribution. This could also include Bell Canada gaining exclusive content that could help to make its bundle of communications services more competitive while boosting the loyalty of its communications subscribers. Additionally, DBRS notes that in an increasingly competitive industry that is both converging and changing as a result of regulatory developments, Bell Canada believes that this acquisition of CTV will level the playing field with competitors that already (or will shortly) benefit from this type of vertical integration. While DBRS notes that BCE/Bell Canada held a majority stake and consolidated the operations of CTV until 2006, technology, competition and regulatory developments have increased the strategic importance of owning a content creator/wholesaler.

In terms of defensive benefits, DBRS believes that for Bell Canada, as a distributor, owning a content creator/wholesaler will put it in a better position to: (1) control rising content costs, which constitute a large input cost for a television distributor; and (2) battle the threat of content companies circumventing traditional forms of distribution for the Internet (that is, disintermediation). As such, with this acquisition BCE/Bell Canada appears to be seeking the benefits of vertical integration while defensively controlling costs and battling the threats of disaggregation and disintermediation.

While DBRS believes that the business risk profile of CTV is slightly weaker than that of Bell Canada, it is still reasonable given its established business. If properly capitalized, CTV would likely be in the BBB range. Some of the stability is a result of a large portion of CTV’s EBITDA being driven by its specialty channels (such as TSN, RDS, Discovery Channel (Canada), The Comedy Network, Much Music, etc.) which benefit from a business model that is largely subscription-based. This model offers much more stability than CTV’s advertising-driven broadcasting and radio networks due to the cyclical nature of advertising revenue. DBRS also notes that while CTV has lower EBITDA margins (roughly 20%) than Bell Canada, which will reduce consolidated EBITDA margins slightly, these levels are reasonable for a media company that generates strong free cash flow with modest capex needs. Furthermore, DBRS notes that CTV will be relatively small as part of the larger Bell Canada, accounting for roughly 11% of its revenue and 6% of its EBITDA on a proforma basis.

From a financial perspective, while the acquisition of CTV will slightly weaken Bell Canada’s credit metrics, DBRS believes that the impact will be manageable. DBRS anticipates that while Bell Canada’s gross debt-to-EBITDA is expected to increase from roughly 1.52x (at June 30, 2010), this ratio is not expected to exceed 2.0x with the acquisition of CTV. DBRS does note that the financing of the acquisition of CTV, along with the refinancing of the majority of its existing debt, is expected to be carried out at the Bell Canada level. As such, CTV will support the credit profile of Bell Canada once the transaction closes.

Finally, DBRS notes that with the relative ubiquity of the Internet and content companies seeking new platforms to distribute their content, there seems to be a resurgent trend toward vertical integration among content and distribution companies. In May 2010, Shaw Communications Inc. announced its acquisition of a restructured Canwest Global Communications Corp. Also, in December 2009, U.S.-based Comcast Corporation (Comcast) entered into an 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.

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

The applicable methodologies are Rating Telecommunications, Rating Wireless and Rating Media and Entertainment, which can be found on our website under Methodologies.