DBRS Confirms Corus Entertainment at BBB and BBB (low), Stable Trends

DBRS has today confirmed Corus Entertainment Inc’s (Corus or the Company) Issuer Rating at BBB and its Senior Unsecured Notes rating at BBB (low). The trends are Stable.

The ratings are supported by Corus’s healthy business risk profile and reasonable financial risk profile. Both of these factors remained steady – even through the recent economic downturn – given the diversity and the cash-generative nature of the Company’s businesses. While Corus’s revenue mix includes 52% of advertising revenue, this advertising revenue is largely diversified, with the Company’s television businesses being more national in scope and its radio operations more local. Furthermore, 34% of revenue is generated from subscriptions (specialty and pay television) while the remaining 14% comes from content creation (Nelvana), publishing (Kids Can Press) and merchandizing. As such, Corus has continued to demonstrate the benefits of being a vertically integrated media company as it is involved in all three major portions of the media value chain: original content creation, aggregation of original and purchased content, and media distribution.

DBRS notes that Corus has maintained a robust corporate culture, which should be further aided by the consolidation of its operations into a new building in 2010: Corus Quay, located in downtown Toronto. While culture is not usually a tier-one consideration for DBRS, it is an important factor in the media industry, 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 both in Canada and globally.

This diversity and Corus’s ability to seek efficiencies (both on an ongoing basis and on a more temporary basis during the downturn), allowed the Company to generate stable consolidated EBITDA in F2009 at just over $250 million. This level improved in F2010 and continued to grow in the latest 12-month period to nearly $275 million. It is worth noting that this was not the experience of the majority of Corus’s media industry peers – indeed, most suffered meaningful EBITDA pressure during the downturn before stabilizing and returning to growth in 2010.

DBRS notes that Corus continues to add to its television segment, which focuses on kids and women, pay television and content creation. Specifically, Corus announced in September 2010 that it would be launching the Canadian version of OWN: Oprah Winfrey Network on March 1, 2011, with the reformatting and rebranding of its current VIVA channel. This launch should drive sufficient subscription and advertising growth to cover higher programming costs, in addition to advertising and subscription revenue growth throughout the rest of its channel portfolio. DBRS expects EBITDA margins for this segment to remain around the 40% level, which is strong for a television operator. While DBRS notes that technology such as the Internet has created some potential threats to the television business in Canada, the complexity and lack of content will likely preclude this from having a meaningful impact over the near to medium term. As such, Corus continues to work with both its suppliers and distributors to provide content to paying cable/satellite/telco tv subscribers on new platforms such as the Internet and mobile phones.

In its radio segment, Corus has returned to revenue growth in F2010 after the economic downturn pressured both revenue and EBITDA in F2009. DBRS believes that this was largely cyclical, with no major structural issues affecting this business, although new radio copyright tariffs introduced in F2011 will bring an additional expense. With the recent sale of Corus’s Québec radio stations to Cogeco Inc. for $75 million to $80 million, Corus will focus on its higher-EBITDA-margin Ontario and Western Canada stations. This should improve EBITDA margins for its radio segment from the current 25% level to the 30% level without the Québec stations. DBRS notes that EBITDA margins of 30% for a radio operator are healthy.

EBITDA improvement in F2011 to at least $280 million is expected to be driven by advertising and subscription revenue growth, while cost efficiencies continue to be realized. DBRS expects free cash flow (before working capital changes) to be at least $50 million as capex levels decline with lower investments in Corus Quay and higher cash flow from operations offset by higher dividend levels. This free cash flow, combined with proceeds from the sale of the Québec radio stations, will likely be used for higher program/film investments, small acquisitions and debt reduction after higher borrowing was incurred to finance acquisitions and the investment in Corus Quay in F2010. As such, DBRS expects Corus’s key credit metrics to improve in F2011 from current levels that include EBITDA interest coverage around 5.0 times, cash flow-to-debt of 0.21 times and gross debt-to-EBITDA of 2.65 times. These metrics are expected to remain supportive of the Company’s BBB Issuer Rating.

DBRS notes that 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 its ratings. Barring any transformational acquisition, however, DBRS believes that Corus’s ratings will remain stable as it continues to licence or acquire small, strategic media operations that leverage its television and radio segments.

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

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