DBRS Places Corus Entertainment Inc. Under Review with Negative Implications

DBRS has today placed Corus Entertainment Inc.’s (Corus or the Company) Issuer Rating of BBB and Senior Unsecured Notes rating of BBB (low) Under Review with Negative Implications following the Company’s announcement that it would acquire certain television and radio assets from Bell Media Inc. (Bell Media) and Shaw Media Inc. (Shaw Media) for a combined net acquisition price of $494 million. The acquisitions are subject to regulatory approval and are expected to close in Q4 F2013.

Specifically, Corus has reached an agreement with Bell Media to acquire the 50% remaining ownership interest in TELETOON, along with two Ottawa-based radio stations. The Company has also reached an agreement with Bell Media and Shaw Media to acquire each of their respective 50% interests in the French-language specialty channels Historia and Séries+. Lastly, in a separate transaction, Corus has entered into an agreement with Shaw Media to acquire the remaining 49% interest in the successful specialty television service ABC Spark. As part of the agreement, Corus will sell its 20% interest in Food Network Canada to Shaw Media. Corus believes that these acquisitions provide opportunities for enhanced growth, will help bolster scale, and diversify the Company’s asset base.

The Negative Implications of the review status reflects DBRS’s concern that the acquisition would weaken Corus’s financial risk profile beyond levels appropriate for the current rating category. The net acquisition amount of $494 million could be financed through Corus’s revolving credit facility, which would result in Corus’s pro forma consolidated debt balance to be $1.05 billion (consisting of bank debt of approximately $500 million, and Senior Unsecured Notes of $550 million).

Should this be the final form of financing, DBRS estimates that Corus’s pro forma last-twelve-months (LTM) gross debt-to-EBITDA would increase to approximately 3.1 times (x) from 1.9x previously (not adjusted for operating leases) based on DBRS estimates of pro forma LTM EBITDA of approximately $340 million. DBRS is concerned the magnitude of leverage and the pace of any deleveraging will not enable Corus to maintain a financial profile that is commensurate with the current rating category despite the fact that the Company is expected to generate $110 million to $130 million of free cash flow after dividends in F2014 and F2015. In its review, DBRS will focus on the final form of financing and the Company’s financial management intentions going forward.

In our confirmation dated February 5, 2013, DBRS noted that Corus’s ratings continued to be supported by the Company’s established Canadian market positions in television and radio, while reflecting the cyclical and mature nature of the market, as well as the evolving competitive environment. DBRS also stated that it expects Corus’s earnings profile to remain relatively stable over the near term, while noting that the Company’s revenue and operating income growth over the long term will be heavily dependent on its ability to increase advertising revenue and pay-TV subscribers, given the less predictable nature of the Company’s merchandise sales. At the time of the confirmation, DBRS also noted that it expects Corus’s financial profile to remain stable over the near term, based primarily on the Company’s moderate financial leverage and strong free cash flow generating capacity.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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