DBRS Places Shaw Communications Inc. Under Review with Negative Implications

DBRS Limited (DBRS) has today placed the ratings of Shaw Communications Inc. (Shaw or the Company) Under Review with Negative Implications, following the Company’s announcement that it has entered into an agreement to acquire 100% of the shares of WIND Mobile Corporation’s (WIND) parent company, Mid-Bowline Group Corporation. The transaction is valued at approximately $1.6 billion, which the Company expects to finance with debt, asset sales and the issuance of preferred or common equity or a combination thereof. The transaction is expected to close in Q3 F2016, and it will require regulatory approval from the Competition Bureau and the federal Ministry of Innovation, Science & Economic Development (formerly Industry Canada).

WIND is Canada’s fourth-largest and last stand-alone wireless service provider after recent acquisitions of Public Mobile and Mobilicity by incumbents over the past two years. WIND offers wireless mobile services to roughly 940,000 subscribers primarily in Ontario (75% of the subscriber base), Alberta and British Columbia (with a combined 25% of the subscriber base) and has 50 MHz of spectrum in each of these regions. It has captured 300,000 net customer additions over the past two years and had a blended average revenue per user of $35.81 through the first nine months of 2015 (notably lower than that of the wireless incumbents). WIND is expected to generate revenues of $485 million and EBITDA of $65 million (an EBITDA margin of roughly 13%) in 2015.

Since its last rating review, DBRS believes that Shaw’s credit risk profile has deteriorated. The Company experienced greater-than-expected subscriber losses in F2015, reflecting continued technological substitution of phone and cable services, increased competition from Internet protocol television offerings, economic softness in Alberta and regulatory-driven headwinds (the removal of the 30-day cancellation notice requirement). Organic growth was weak, with much of the revenue and EBITDA gains in F2015 (4.7% and 5.2%, respectively) attributable to the full-year inclusion of ViaWest. Financial leverage (gross debt-to-EBITDA) rose to 2.38 times (x) in F2015 from 2.07x in F2014 because of the debt-financed acquisition of ViaWest. DBRS notes that when it last confirmed Shaw’s ratings, it was with the understanding that the Company would generate free cash flow after dividends of at least $200 million in each of F2016 and F2017 to carry out its deleveraging plan following the ViaWest acquisition.

Going forward, the risks to the core business are expected to persist and will likely be compounded by pending regulatory changes (including the regulatory-driven move to skinny basic and pick-and-pay TV offerings in 2016) and ongoing softness in the media segment. As a result, DBRS is concerned that growth in operating income and levels of free cash flow will not be sufficient to meet the debt reduction targets stated above. As such, DBRS believes that Shaw’s ratings were already under pressure independent of the WIND transaction.

In terms of the WIND transaction, DBRS recognizes its potential to improve the Company’s business risk profile, including access to the faster growing wireless services business, quad-play bundling opportunities and enhanced geographic scale (via WIND’s over 300 retail distribution points primarily in Ontario). Additionally, WIND’s wireless network and spectrum portfolio complements Shaw’s existing WiFi and wireline infrastructure. However, the Under Review with Negative Implications status reflects the aforementioned structural challenges combined with the debt requirements that will arise from this transaction, as well as the implementation risk, operational challenges and incremental investment that will be required to upgrade WIND’s 3G network to 4G LTE, amid an intensifying competitive environment.

In its review, DBRS will focus on (1) assessing the business risk profile of the combined entity, including the potential benefits and the risks associated with integration and realization of synergy potential; (2) the Company’s longer-term business strategy; (3) financial management intentions of the combined entity going forward, including the amount of equity used to finance the transaction; and (4) the impact that any additional dividend payments resulting from newly issued shares will have on free cash flow after dividends.

Upon its review, DBRS will likely downgrade Shaw’s ratings by one notch, in light of the current forces pressuring subscribers, EBITDA and free cash flow within its core operations. However, DBRS believes that if the proposed transaction is financed appropriately, the Company has the ability to maintain an investment-grade rating at the BBB (low) level.

DBRS will proceed with its review as more information becomes available and aims to resolve the Under Review status once financing details are known.

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 methodology is Rating Companies in the Communications Industry, which can be found on our website under Methodologies.

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