DBRS Confirms BCE Inc. and Bell Canada’s Ratings Following its Announced Acquisition of Astral Media

DBRS has today confirmed the long- and short-term ratings of BCE Inc. (BCE) and its wholly-owned operating subsidiary, Bell Canada (the Company), at BBB (high)/R-1 (low) and A (low)/R-1 (low), respectively, following BCE Inc. and Bell Canada’s announcement today that they have entered into a definitive agreement to purchase the shares of Astral Media Inc. (Astral Media) for roughly $3 billion (valuing Astral Media at a total enterprise value of roughly $3.4 billion). The trend on all ratings is Stable.

With an EBITDA multiple of roughly 10 times (x) Astral Media’s F2012 EBITDA, DBRS notes that this transaction is reasonable and consistent with other recent media transactions in Canada. BCE/Bell Canada plans to fund the acquisition of the equity purchase price with cash/debt (for roughly three-quarters) and BCE Inc. common shares (for the remaining quarter, or $750 million). As part of the transaction, Ian Greenberg – one of the co-founders of Astral Media – will join the board of BCE Inc. upon closure of the acquisition.

DBRS notes that Astral Media will become part of Bell Media (formerly CTVglobemedia following the acquisition of CTV in April 2011) and provide Bell Canada with additional media and content businesses. Astral Media’s Television segment is highly focused on French-language specialty television channels (both subscription and advertising-revenue generating), while its Radio and Outdoor segments are more evenly spread across the country and are exclusively supported by advertising revenue. DBRS notes that this will enhance the vertical integration strategy of Bell Canada and Bell Media in Québec (against a competitor that is also vertically integrated) and in other markets. With the inclusion of Astral Media, Bell Media will generate $3 billion of revenue and $850 million of EBITDA. While DBRS believes that the media business has a weaker business risk profile than Bell Canada’s communications business (likely a BBB business risk profile), Astral Media is relatively small (roughly 5% of Bell Canada’s total revenue and EBITDA for 2011) and does have a good proportion of specialty television channels that have greater stability than advertising-only supported broadcast television channels. This mix has consistently driven good revenue and EBITDA growth for Astral Media over the past five or more years while generating healthy EBITDA margins of over 30% (very good for a media business) and with modest capex levels and good free cash flow.

From a financial perspective, DBRS notes that leverage is expected to increase for Bell Canada with the addition of Astral Media, from approximately 1.8x gross debt-to-EBITDA expected at the end of 2011 to roughly 2.0x expected at the end of 2013. However, the Company’s commitment to deleverage within 24 months of the close of the transaction gives DBRS greater comfort that Bell Canada’s leverage will improve to more historical levels (and back within its own target range).

As the communications and media industries evolve and remain dynamic, DBRS notes that maintaining a reasonable financial risk profile will be important for the Company, in view of the competitive, technology and regulatory changes affecting these industries and the investment required by Bell Canada and its peers to remain competitive.

DBRS notes that the confirmation of the ratings is based on the terms and conditions outlined by BCE/Bell Canada regarding the acquisition of Astral Media as per their announcement today. While Astral Media’s board and key shareholders have agreed to support the transaction, it remains subject to shareholder and regulatory approval. As such, DBRS may revisit its view should this transaction be materially altered from what was announced today.

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

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