DBRS Confirms Shaw Communications Inc.’s Ratings, Trend Stable Following Announced Acquisition of ViaWest

DBRS has today confirmed Shaw Communications Inc.’s (Shaw or the Company) Issuer Rating at BBB, Senior Notes rating at BBB and Preferred Shares rating at Pfd-3. The confirmation follows the Company’s announcement to acquire ViaWest for USD 830 million, financed with approximately CAD 500 million of cash on hand and approximately CAD 400 million from Shaw’s existing credit facility. Shaw will also assume USD 370 million of borrowings under committed non-recourse debt financing at ViaWest. The purchase price of USD 1.2 billion represents a multiple of approximately 13.0x adjusted EBITDA annualized for the three months ended June 30, 2014, which is consistent with recent market transactions. The acquisition is expected to close in September 2014 and is subject to U.S. regulatory approval.

ViaWest is a privately held provider of data centre infrastructure, cloud technology and managed IT solutions. The company employs over 350 people and services more than 1,300 customers across seven states. ViaWest operates 27 data centers in Colorado, Utah, Oregon, Nevada, Texas, Minnesota and Arizona.

DBRS believes the acquisition will enable Shaw to leverage ViaWest’s expertise in order to expand and improve the quality and depth of the Company’s data service offerings in Canada. ViaWest’s encouraging growth prospects in the United States may help supplant Shaw’s slowing growth and potential declines from a maturing Canadian cable segment subject to increased competition. DBRS notes that ViaWest is expected to finance its organic growth internally and that ViaWest will not generate meaningful free cash flow over the near term. The subsidiary may require Shaw to fund future acquisitions

In its report dated September 6, 2013, DBRS noted that Shaw’s earnings profile could come under pressure if the Company continues to lose subscriber share to the competition. DBRS also noted that Shaw’s financial management objectives include maintaining net debt-to-EBITDA in the 2.0x to 2.5x range, and that if Shaw’s credit metrics are challenged by weakness in operating income and/or higher debt levels, the Company’s ratings could come under pressure.

Although DBRS views the business profile impact of Shaw’s ViaWest acquisition as neutral to moderately positive, the transaction as a whole is viewed as modestly credit negative, due to the cash and debt financing. The acquisition of ViaWest increases Shaw’s consolidated pro forma total debt to $5.55 billion from $4.74 billion and its pro forma F2015 gross debt-to-EBITDA ratio to approximately 2.30x from 2.05x (approximately 3.20x from 3.00x lease adjusted). Although the increase in leverage is meaningful, it has no immediate impact on the Company’s credit ratings, as DBRS believes the Company retains the willingness and ability to de-leverage towards 2.0x over the next two to three years through a combination of EBITDA growth and the application of free cash flow after dividends to debt reduction (at least $200 million in each of F2016 and F2017). DBRS notes that Shaw followed through on its deleveraging commitments following the Canwest acquisition in early 2011, reducing the gross debt-to-EBITDA ratio to 2.0x from a high of 2.8x. In addition to its free cash flow and access to capital markets, Shaw will have approximately $600 million available under its credit facility post the transaction.

Going forward, DBRS will continue to focus on subscriber trends and the competitive landscape in Western Canada, as well as progress within Shaw’s business division and improvement in the Company’s media segment. DBRS notes that trends in both television subscriber declines and broadband customer growth improved over the past few quarters, which DBRS believes is due in part to Shaw’s improving customer service, the benefits of Shaw’s content-related initiatives and expiring promotions from competitors. The Company’s operating income also continues to benefit from the shift in revenue mix from lower-margin television customers toward high-margin internet subscribers.

The Stable trends reflect the recent improvements in Shaw’s operating metrics, the increased diversification as a result of the ViaWest acquisition and the Company’s free cash flow generating capacity. That said, weaker-than-expected operating performance and/or lower-than-expected debt reduction over the next two years could result in pressure on the ratings.

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.

This Rating is endorsed by DBRS Ratings Limited for use in the European Union.

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