DBRS Confirms Corus Entertainment at BBB/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 Issuer Rating is on par with the most senior debt in Corus’s capital structure, which in this case is the implied rating of the Company’s secured bank debt. The ratings are supported by Corus’s healthy business risk profile and reasonable financial risk profile. Both of these factors remain steady, thanks to the diversity and cash-generative nature of the Company’s businesses.

Corus’s revenue mix includes a large proportion of advertising revenue (currently 46.3%), which can be both competitive and subject to economic cycles. However, this advertising revenue is highly diversified, with the Company’s specialty television businesses being more national in scope (with a portion sold well in advance) and its radio operations more local (and sold closer to the time of airing). This trend could be seen in Q1 F2012 as Corus’s Television segment advertising grew by 3% while Radio advertising experienced a 5% decline as economic confidence slumped in Q1 F2012. Furthermore, Corus’s revenue diversity is supported by over 35% of its total revenue being generated from relatively stable subscriber fees (specialty and pay television), while the remainder (roughly 18%) comes from content creation (Nelvana) and distribution, publishing (Kids Can Press) and merchandising.

Corus continues 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 also notes that Corus has a robust corporate culture, which was further aided by the consolidation of its operations into a new building in 2010: Corus Quay, located in downtown Toronto. This 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.

DBRS notes that Corus continues to add to its Television segment, which focuses on specialty channels, pay television and content creation geared toward kids, families and women. This has seen the launch of new specialty channels in recent years (including the upcoming launch of ABC Spark in F2012 and the Canadian version of OWN: Oprah Winfrey Network in F2011), while the Company adjusts programming on its existing channels to ensure it maximizes audiences and revenue growth. Although these efforts have driven higher investments in programming costs, advertising and subscriber revenue growth have typically followed this investment. The other two portions of this segment have seen contrasting results, however: pay-tv subscriber results have experienced some pressure in Q1 2012 following growth in F2011 (possibly economic and resulting from additional competitive forces), while merchandise, distribution and other revenue was driven by the strong sale of Beyblade merchandise and content (aimed at the boys demographic). Overall, DBRS expects EBITDA margins for this segment to remain at around the 40% level as growth should offset investment and competitive headwinds. This level of EBITDA margin 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 compelling content will likely preclude this from having a meaningful impact in the near to medium term. As such, Corus continues to work with both its content suppliers (by acquiring digital rights) and cable/satellite/telco television distributors to provide content to these subscribers on new platforms such as the Internet and mobile phones.

In its Radio segment, Corus experienced modest revenue and EBITDA growth in F2011 (versus F2010, excluding its Québec radio stations). This helped to boost EBITDA margins for this segment to the 30% level, which is healthy for a radio operator. However, cyclical forces caused pressure on both revenue and EBITDA in Q1 F2012 as the Company was not able to adjust a largely fixed-cost-based business to these short-term revenue fluctuations. DBRS believes that this was largely cyclical, with no major structural issues affecting this business. However, DBRS notes potential headwinds throughout F2012 stemming from uncertain economic conditions and confidence levels among local advertisers. DBRS also notes that Corus could gain some cost relief in F2012 as an amended copyright act is expected to reduce the copyright tariffs that Corus pays to recording artists.

DBRS expects Corus to continue to drive EBITDA improvement in F2012 (expected to surpass the $300 million level), driven by advertising and subscription revenue growth from both new and existing television channels and higher merchandising and distribution revenue growth from Nelvana. These factors should outpace higher costs while the degree of growth will partly depend on economic factors that determine the level of advertising and subscriber growth. DBRS expects continued free cash flow (before working capital changes) improvement in F2012 (likely to approach $100 million) as capex levels decline to normal following the multi-year investment in Corus Quay, and higher cash flow from operations is offset by higher dividend levels. This free cash flow will give Corus the flexibility to invest in organic growth and small acquisitions before exploring share repurchases. As such, DBRS expects Corus’s key credit metrics to improve incrementally in F2012 from current levels that include EBITDA interest coverage at around 6.5 times, cash flow-to-debt of 0.29 times and gross debt-to-EBITDA of 2.15 times. These metrics are expected to remain supportive of the Company’s BBB Issuer Rating.

DBRS notes that the greatest risk to Corus’s ratings is the fact that the Company remains open to large acquisitions on an opportunistic basis and has a tolerance for leverage higher than appropriate for its current rating levels. While most of Corus’s acquisitions in recent years have been small and strategic in nature (along with some asset sales such as its Québec radio stations), a large, transformational debt-financed acquisition could pressure its ratings. Barring any transformational acquisition, however, DBRS believes that Corus’s ratings should remain stable as it continues to licence or acquire small, strategic media operations that leverage its Television and Radio segments while it defends its businesses against current and new forms of competition.

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

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