DBRS Places Corus Entertainment Under Review with Developing Implications

DBRS Limited (DBRS) has today placed the ratings of Corus Entertainment (Corus or the Company) Under Review with Developing Implications, following the Company’s announcement that it has entered into an agreement to acquire 100% of Shaw Communication’s (Shaw) wholly owned broadcasting subsidiary, Shaw Media. The total purchase price of $2.65 billion is expected to be financed through proceeds from the issuance of new debt and equity. As a result of the acquisition, Corus would own 45 specialty and 15 conventional television channels; 39 radio stations; a content studio, Nelvana; and digital assets. The transaction is expected to close in Q3 F2016, but is subject to a minority shareholder approval, as well as the customary regulatory approvals, including the Canadian Radio-television and Telecommunications Commission (CRTC).

On June 4, 2015, DBRS downgraded Corus’s ratings to BB (high), reflecting the mounting pressure on the Company’s earnings profile as a result of structural trends and the added uncertainty associated with pending regulatory changes (skinny basic and pick-and-pay) in 2016. DBRS noted that these risks would likely contribute to less predictable and potentially lower organic earnings over the near to medium term. At that time, DBRS expected gross debt-to-EBITDA to range between 3.0x and 3.5x, which was deemed adequate for the BB (high) rating category. Illustrative of these expectations, Corus’s earnings profile deteriorated in fiscal year 2015, with both consolidated revenues and EBITDA declining to $815 million and $277 million, respectively (declines of 2.1% and 4.3% year over year), and EBITDA margins contracting modestly. DBRS notes operating results improved modestly in Q1 F2016, due to the Disney Channel launch, higher merchandising sales and a number of subscription video on demand (SVOD) licensing deals for Nelvana content.

In terms of the proposed acquisition, DBRS acknowledges that the combined entity should benefit from materially enhanced scale and revenue diversification. On a pro forma basis, the combined entity generated revenues of approximately $1.9 billion and adjusted EBITDA of $619 million in 2015. The Company will have a market leading position in women, children and family programming (with an estimated 35% of domestic English TV viewership of specialty and conventional channels, second to Bell Media). Corus should have a stronger negotiating position with BDU affiliates, and an enhanced range of promotional opportunities and improved pricing power with advertisers. The combination should also help stave off some of the revenue pressures associated with the increasingly competitive advertising environment, ongoing structural shifts and elevated regulatory risk. Additionally, Corus’s exposure to the challenged radio segment would decrease from 20% of revenues to less than 10% on a pro forma basis. Furthermore, operating income should benefit from between $40 million to $50 million of annual cost synergies within 24 months and $15 million in immediate corporate overhead reductions.

Corus has secured $2.3 billion in committed credit facilities (including a $300 million revolving facility) and $560 million of bridge financing for the acquisition and to refinance existing bank debt. The entire bridge facility is expected to be replaced by equal amounts of new Senior Unsecured Notes and equity issuance. Upon closing of the financing, the Company intends to redeem early the existing 4.25%, $550 million Senior Unsecured Notes due February 2020. The deal also entails an equity takeback, whereby Shaw will receive 71 million Class B non-voting shares (Corus shares) as consideration for this deal (valued at $800 million), giving Shaw a roughly 39% ownership of Corus’s outstanding shares and three seats on Corus’s board of directors. Additionally, Shaw has agreed to participate in Corus’s dividend reinvestment program and a 100% lockup of the Corus shares for at least 12 months following the transaction close, with specific sale restrictions thereafter. DBRS notes that this provides the Company with additional flexibility over the near term to execute its de-leveraging plan.

Pro forma gross debt-to-LTM adjusted EBITDA is expected to climb to 4.0x at the closing of the transaction, up from 2.9x at F2015. The Company has indicated that it intends to de-lever to below 3.0x by the end of F2018, by directing the majority of free cash flow (after dividend payments) to debt repayment.

The Under Review with Developing Implications status reflects DBRS’s belief that Corus’s credit risk profile would likely remain commensurate with the BB (high) rating category, given the Company’s willingness and ability to de-lever toward 3.5x within 12 to 18 months, combined with an expectation that operating income will at least stabilize over the near to medium term.

In its review, DBRS will focus on (1) assessing the business risk profile of the combined entity, including the benefits and risks associated with integration and realization of operating synergies; (2) the impact that the newly issued shares will have on free cash flow after dividends; (3) execution of its de-leveraging plan following the transaction; and (4) the Company’s longer-term business strategy and financial management intentions.

DBRS will proceed with its review as more information becomes available and aims to resolve the Under Review status before the closing of the transaction.

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 Companies in the Television Broadcasting Industry, Rating Companies in the Radio Broadcasting Industry, and DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers, which can be found on our website under Methodologies.

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

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.