DBRS Comments on Shaw Communication’s Proposed Divestiture of Shaw Media

DBRS Limited (DBRS) today notes that Shaw Communications Inc. (Shaw or the Company) has agreed to sell its broadcasting subsidiary, Shaw Media Inc. (Shaw Media), to Corus Entertainment Inc. (Corus) for $2.65 billion. The transaction will require approval by Corus minority shareholders and is also contingent on receiving all the necessary regulatory approvals, including from the Canadian Radio-television and Telecommunications Commission (CRTC). The transaction is expected to close in Q3 F2016. The sale reflects Shaw’s renewed focus on becoming a pure-play broadband communications provider.

Upon closing of the transaction, Shaw expects to receive net cash proceeds of approximately $1.8 billion (net of taxes and fees) and 71 million Corus Class B Non-Voting Shares, valued at $800 million. This will result in Shaw owning approximately 39% of Corus’s total outstanding shares and the opportunity to appoint three members to Corus’s board. Additionally, Shaw has agreed to participate in Corus’s dividend reinvestment program, and has also agreed to a 100% lock-up of the Corus shares for at least 12 months following the transaction’s close, with specific sale restrictions thereafter.

Shaw intends to use net cash proceeds to fund the recently announced $1.6 billion acquisition of WIND Mobile Corp. (WIND), and will direct the remainder (~$150 million) toward upgrading WIND’s 3G network to 4G LTE.

On December 17, 2015, DBRS placed Shaw’s ratings Under Review with Negative Implications following the Company’s announcement that it has entered into an agreement to acquire WIND. DBRS indicated that, independent of that transaction, it believed that the Company was more appropriately placed in the BBB (low) rating category, due to mounting pressures on subscribers leading to less predictable and potentially more strained organic earnings over the near to medium term. Furthermore, DBRS believed that these risks would undermine the Company’s ability to successfully execute the de-leveraging plan set forth following the largely debt-financed acquisition of ViaWest. DBRS also noted that going forward, the risks to the core business are expected to persist and will likely be compounded by pending regulatory-driven moves to skinny basic and pick-and-pay TV offerings in 2016.

In terms of the proposed divestiture of Shaw Media, DBRS acknowledges that: (1) the sale addresses the uncertainty associated with the financing of the WIND acquisition; (2) the divestiture eliminates direct exposure to the low growth media business; (3) Shaw will retain its interest the joint-venture subscription video on demand service, shomi, which allows it to continue to participate in the structural shift toward over-the-top services and mitigate risks to its core cable business; and (4) Shaw’s equity stake in Corus provides optionality and improves the Company’s liquidity profile.

Following the divestiture, DBRS notes that the loss of Shaw Media’s operating income and substantial cash generating capacity, in conjunction with the inclusion of the negative free cash flow wireless and existing business infrastructure services segments, will result in free cash flow (after cash dividend payments) turning negative until F2018. This signals a meaningful, albeit temporary, loss in financial flexibility and places greater reliance on growth in operating income to achieve stated financial leverage targets.

In its review, DBRS will focus on (1) assessing the business risk profile of the new entity, including organic growth prospects in the remaining segments and risks associated with integration of WIND; (2) the Company’s longer-term business strategy; (3) financial management intentions of the new entity going forward and its free cash flow trajectory profile; and (4) the Company’s liquidity profile over the near to medium term.

The proposed asset sale and the WIND acquisition are proceeding through customary regulatory, concurrently, and are both expected to close by Q3 F2016. As previously announced, the Company has secured a $1.7 billion bridge facility, which would allow it to complete the WIND acquisition in the event of a delay in completing the proposed divestiture. The Company would then repay the bridge upon receipt of proceeds from the Shaw Media divestiture.

The previously instated Under Review with Negative Implications rating action will be resolved once DBRS becomes confident that the proposed transaction will close under the current terms, at which point DBRS will likely downgrade Shaw’s ratings by one notch, to the BBB (low) rating category.

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, Rating Companies in the Television Broadcasting Industry, and DBRS Criteria: Preferred Share and Hybrid Criteria for 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.

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