DBRS Comments on Shaw’s Announced Asset Purchase and Sale Agreement with Rogers

DBRS notes that on January 14, 2013, Shaw Communications Inc. (Shaw or the Company; rated BBB, with a Stable trend, by DBRS) announced that it had entered into agreements with Rogers Communications Inc. (Rogers; rated BBB, with a Stable trend, by DBRS) to sell Rogers its Hamilton-based cable operations and Mountain Cablevision Limited (Mountain Cable), and to grant Rogers an option to acquire Shaw’s spectrum licenses. Shaw will purchase Rogers’ 33.3% partnership interest in the TVtropolis General Partnership (TVtropolis). The sale of wireless spectrum is subject to regulatory approval. The net proceeds to Shaw from the following transactions will amount to approximately $700 million.

1. The Mountain Cable assets will be acquired by Rogers for $400 million ($250 million as an upfront deposit).
2. The wireless spectrum licenses will be purchased by Rogers for approximately $350 million (including the $50 million price of the option received upfront). The final exercise price is subject to negotiation of other services, assets or rights to be provided by Shaw to Rogers, which is expected to occur over the next several months.
3. Shaw will pay $59 million for the remaining 33.3% interest in TVtropolis.

Shaw plans to use the proceeds for the completion of its Calgary data center, network improvements, bandwidth upgrades, the expansion of its WiFi network and additional product development relating to Shaw Go and other applications that are focused on an enhanced customer experience.

DBRS recognizes the strategic merit behind the transaction as we believe Shaw could stand to benefit from enhancing its network and service quality as competition continues to intensify in its core business lines. Proceeds from the planned divestures are intended for long-term strategic network investments; however, DBRS believes the resulting impact on operating income and cash flow growth over the near term is difficult to gauge. DBRS also notes the magnitude of the incremental investment is meaningful, but not momentous in terms of Shaw’s overall capital budget for the next couple years.

In terms of the transaction’s broader significance, DBRS appreciates a formal sale of the Company’s wireless spectrum as it will remove lingering concerns associated with the risk of wireless expansion in the future. DBRS also likes the fact that Shaw may be able to finance the acceleration of its capex program with the sale of non-core assets as opposed to raising debt. Although these factors have a one-time positive effect on Shaw’s credit risk profile, the broader forces at play on the Company’s core businesses generally remain the same.

As such, DBRS will continue to focus on Shaw’s ability to maintain and grow its subscriber base as it competes with IPTV and works to improve its product offerings. DBRS believes the trajectory of operating income and cash flow remain the key driver of the Company’s credit risk profile going forward, particularly since DBRS does not expect material debt reduction over the near to medium term, as Shaw’s free cash flow after dividends will likely be nominal over this time frame.

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

The applicable methodologies are Rating the Communications Industry (April 2011) and Rating the Television Broadcasting Industry (April 2011), which can be found on our website under Methodologies.