DBRS Confirms Shaw Communications at BBB, Pfd-3, Stable Trends

DBRS has today confirmed its ratings on Shaw Communications Inc. (Shaw or the Company) at BBB and Pfd-3. The trends are Stable. The confirmation reflects a manageable business risk profile that now includes both cable/satellite (distribution) and the Company’s recently acquired media operations (Shaw Media). The ratings are also underpinned by a financial risk profile that, after weakening to acquire the television assets of a restructured Canwest Global Communications Corp. (Canwest) in October 2010, ended F2011 as adequate and within DBRS’s expectations.

In assessing Shaw’s business risk profile for its communications operations (cable and satellite – over 80% of total revenue EBITDA), DBRS focuses on five main factors: the competitive landscape, technology, networks, regulation and product diversification. In terms of the competitive landscape for fixed-line services such as video distribution, high-speed Internet and telephony, Shaw does face incumbent telcos throughout its territory, which can now better compete as a result of their more recent entry into the video distribution business. While competition has increased and resulted in basic cable subscriber losses for Shaw (approximately 50,000 in F2011), as well as a reduction in subscriber growth for other services, the Company still maintains healthy penetration and market share levels, with continued subscriber growth potential in its service territory in western Canada.

DBRS believes that the market for fixed-line services in Shaw’s territory should remain rational between the two principal players, cable and telco, while new market share equilibriums for each service are established. One other area of competition comes from technology substitution, which, while relatively embryonic, could play a larger role in the future in terms of subscribers substituting over-the-air (OTA) and video content over the Internet (over-the-top or OTT). Should this trend become more meaningful, it could affect Shaw’s video distribution businesses further and, potentially, its telephony business, while its high-speed Internet business would continue strong to support demand for these forms of substitution.

In terms of technology and networks, Shaw continues to pursue network upgrades to ensure its cable plant can support services that can give it a competitive advantage, especially in terms of video and high-speed Internet. Examples include the deployment of gateway boxes and the digitization of analogue channels (expected to reach completion in F2012), which brings more high-speed Internet network capacity supporting future speed and data allowances for its subscribers. However, DBRS notes that the Company’s telco competitors are also busy investing to reduce the network advantage Shaw has enjoyed for a number of years.

However, one area in which Shaw has decided not to invest further is the build-out of a traditional wireless network. DBRS believes that this September 2011 decision of Shaw’s was both prudent and rational, given the sizeable investment required and the degree of competition in the Canadian wireless market. The Company has instead announced that it will build a Wi-Fi network in the major cities within its territory to increase the utility and stickiness of its broadband service – a move that DBRS considers both practical, given the lower capital investment, and defensive, as high-speed Internet will increasingly become the anchor-tenant in the battle for fixed-line communications services.

From a regulatory perspective, DBRS believes that Shaw is on a fairly level playing field with its competitors, which have largely been deregulated themselves. However, there exist a number of broader regulatory possibilities that could affect not only Shaw but all communications operators in Canada. These possibilities include a final regulatory determination on value-for-signal and potential foreign ownership liberalization for the communications industry.

Shaw can provide a bundle of fixed-line services to its cable subscribers in western Canada, while its satellite services are typically sold on a stand-alone basis across the country (recent regulatory changes separating cable and satellite could allow for new bundle packages). Shaw’s recent decision not to enter the wireless market means that wireless will not be part of the Company’s service bundle, whereas most of its telco competitors can bundle this fourth service. Despite this apparent disadvantage, however, Shaw should not be overly affected as fixed-line services are typically sold on a household basis while wireless is sold to individual subscribers. DBRS believes that if Shaw were to eventually deem wireless as more strategic to its business, it could potentially look at a partnership with or potential acquisition of a new wireless entrant.

DBRS believes that Shaw Media’s television operations will benefit from being owned by a distributor, in addition to now being part of a larger Company that has a stronger financial position. This should permit stronger integration between the broadcast and specialty businesses and, potentially, between Shaw’s cable and direct-to-home (DTH) businesses (although the regulator recently precluded content exclusivity for vertically integrated players). DBRS notes that competitors in the industry are pursuing a similar strategy of greater vertical integration, which adds a new competitive element to the landscape – although Shaw’s direct telco competitors in its territory are generally not pursuing a strategy centred on content ownership.

In terms of Shaw’s financial risk profile, while the acquisition of a restructured Canwest in early F2011 weakened its credit metrics initially, they returned to reasonable levels by the end of F2011, with gross debt-to-EBITDA at 2.67 times, EBITDA interest coverage above 6.0 times and cash flow-to-debt at 0.25 times. This, along with growth in cash flow from operations (expected to cover higher capex and dividend levels in F2012 with free cash flow generation (including on a fully-taxed basis)), should give Shaw the flexibility to make small to medium-sized investments and/or to reduce its leverage to strengthen its financial risk profile within its current rating category.

DBRS believes that Shaw’s business risk profile remains manageable, even though the Company is now battling telcos that are able to compete service-for-service in fixed-line, in addition to offering wireless services. It would likely take a material deterioration in Shaw’s competitive position for DBRS to alter this view. Also, while Shaw retains a financial risk profile that is adequate for the ratings, the Company is currently weaker on this front than some of its peers. Any material changes in Shaw’s business or financial risk profile could result in pressure on the ratings.

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

The applicable methodologies are Rating the Communications Industry and Rating the Television Broadcasting Industry, which can be found on our website under Methodologies.