DBRS Confirms Shaw Communications Inc. at BBB (low) Following Agreements to Sell ViaWest, Inc. and Acquire Spectrum Licenses from Quebecor Media Inc.

DBRS Limited (DBRS) has today confirmed Shaw Communications Inc.’s (Shaw or the Company) Issuer Rating and Senior Notes rating at BBB (low) and its Preferred Shares rating at Pfd-3 (low), all with Stable trends. The confirmation follows the Company’s transactions announced today in which Shaw has agreed to sell 100% of its wholly owned subsidiary ViaWest, Inc. (ViaWest) and acquire 700 megahertz (MHz) and 2500 MHz wireless spectrum licenses from Quebecor Media Inc. (Quebecor).

Shaw has entered into a share purchase agreement with GI Partners L.P.’s portfolio company, Peak 10 Holding Corporation, to sell 100% of its wholly owned subsidiary ViaWest. The transaction is valued at approximately $2.3 billion and Shaw expects net cash proceeds of approximately $900 million following: (1) the repayment of ViaWest level indebtedness at approximately USD 580 million, (2) the repayment of Shaw’s USD 380 million credit facility borrowings associated with its original investment and subsequent INetU acquisition and (3) transaction expenses and taxes. The transaction is expected to close by the end of fiscal 2017.

The Company has also entered into a definitive agreement with Quebecor to acquire ten MHz licenses of 700 MHz wireless spectrum in each of British Columbia, Alberta and southern Ontario and 20 MHz licenses of 2500 MHz wireless spectrum in each of Vancouver, Edmonton, Calgary and Toronto. The transaction is valued at approximately $430 million. Shaw is expected to finance the transaction using cash on hand, as well as its existing credit facility. The transaction is expected to close in the summer of 2017.

On March 11, 2016, DBRS downgraded Shaw’s Issuer Rating and Senior Notes rating to BBB (low) from BBB and its Preferred Shares rating to Pfd-3 (low) from Pfd-3, with all trends remaining Stable, following the March 1, 2016, closing of the Company’s acquisition of Freedom Mobile (Freedom) for $1.6 billion and the announcement to sell its broadcasting subsidiary, Shaw Media Inc. (Shaw Media) to Corus Entertainment Inc. (Corus) for $2.65 billion. The rating actions resulted from a gradual erosion in the core cable business, owing to persistent subscriber weakness, which contributed to a financial leverage level that was viewed as elevated and inconsistent with a BBB rating. In addition, DBRS believed that the Shaw Media and Freedom transactions would result in a material weakening of Shaw’s free cash flow profile over the near to medium term. The revised ratings reflected the Company’s position as the incumbent cable operator in western Canada and its exposure to faster growing data services, while also considering intensifying competition and structural trends affecting wireline operations, as well as risks associated with technological and regulatory changes. DBRS notes that Shaw completed the divestiture of Shaw Media to Corus on April 1, 2016.

Fiscal 2016 Earnings and Financial Profile Summary

Shaw’s earnings profile posted modest top-line and EBITDA growth in F2016, reversing some of the earnings pressure the Company experienced in 2015. Consolidated revenues increased 8.9% year over year (YOY), to roughly $4.8 billion, largely reflecting the impact of the Wireless division that was acquired on March 1, 2016, but excluding the impact of Shaw Media from both periods, which was divested on April 1, 2016. Excluding the results of the Wireless division, revenue from the Shaw legacy divisions was up 2.6% YOY, to $4.6 billion. F2016 growth was led by Business Network Services and Business Infrastructure Services (ViaWest), which posted solid annual growth of 5% and 36%, respectively. Consumer revenue was flat YOY, as a 5.3% decline in wireline subscribers was offset by a 3.3% increase in revenue per Consumer revenue-generating unit (RGU). F2016 EBITDA margin declined by 214 basis points (bps) YOY to 43.3%, primarily reflecting the impact of the lower margin Wireless division on consolidated results. Despite the margin compression, F2016 EBITDA increased 3.7% YOY, to $2.1 billion. The modest improvement in Shaw’s F2016 earnings profile translated into a slight improvement in financial metrics. F2016 gross debt-to-EBITDA, cash flow-to-debt and EBITDA interest coverage was 3.08 times (x), 24.1% and 6.0x, respectively, compared to 3.55x, 21.8% and 5.4x, respectively, in F2015.

H1/F2017 Earnings and Financial Profile Summary

First half F2017 revenue of $2.6 billion was up 14.1% YOY, reflecting the impact of the Wireless division and also supported by a ~2.0% YOY increase in Shaw’s legacy divisions. Importantly, Consumer posted a modest 0.2% YOY growth rate to $1.9 billion, as cable and phone RGU losses slowed materially and Internet RGUs posted a solid gain. Wireless revenue was $300 million as Shaw added almost 42,897 subscribers in the first half of the year, bringing the total wireless subscriber count to 1.1 million. EBITDA margin declined by 280 bps to 41.2%, reflecting the contribution from the Wireless division and resulted in EBITDA of $1.1 billion in H1 2017 (an increase of 6.8% YOY). Trailing 12 months financial metrics improved modestly as gross debt-to-EBITDA, cash flow-to-debt and EBITDA interest coverage were 3.13x, 23.3% and 6.20x, respectively.

Impact of Transactions on Credit Risk Profile

DBRS believes that the sale of ViaWest represents a neutral to modestly positive impact on Shaw’s long-term business outlook reflecting the highly competitive landscape for hybrid information technology solutions and growing capital intensity, partially offset by the division’s impressive growth performance. In addition, while the Canadian wireless sector is highly competitive, the acquisition of wireless spectrum licenses strengthens the Company’s access to attractive growth markets and further supports Shaw’s strategy to provide ubiquitous connectivity to its subscriber base.

DBRS believes that the estimated net cash proceeds of approximately $900 million from the sale of ViaWest should increase the Company’s financial flexibility with regard to: (1) funding the ~$430 million spectrum acquisition from Quebecor, (2) providing liquidity for the $350 million in F2018 estimated capital expenditures (capex) to support the newly acquired spectrum and/or (3) potential debt repayment. As such, DBRS believes that Shaw’s series of announcements today enhances its position within its current credit category.

Outlook

Going forward, DBRS believes that the Company will continue to face broader trends of technological substitution of home phone services, as more consumers opt for mobile-only services. On the video side, Internet protocol television competition along with structural trends of cord-shaving and, to a lesser extent, cord cutting in favour of over-the-top services, pose mounting challenges to cable operators. DBRS notes that executing on a strategy to raise wireless average revnue per subscriber over time is not without considerable risk given the intense competitive environment. As such, DBRS will continue to pay particular attention to subscriber trends and customer adoption of new product launches.

Over the longer term, DBRS believes that additional investments will be required in the wireless business, both in terms of maintenance capex and, likely, additional spectrum acquisitions for Freedom to compete effectively with the incumbent wireless operators. DBRS believes that sustained subscriber erosions in the core cable business that may result in weaker-than-expected operating performance, a longer-than-expected period of negative free cash flow after dividends and/or large debt-financed investments would likely result in downward pressure on the ratings. Conversely, positive long term trends in net cable subscriber additions, net wireless subscriber growth, improving wireless profit and a prudent capex program such that lease adjusted debt-to-EBITDA tracks towards 2.0x-2.5x, would likekly result in a rating upgrade.

DBRS generally believes that a gross debt-to-EBITDA ratio between 2.5x and 3.0x would be sufficient for the Company to maintain an investment-grade rating at the BBB (low) level (without inclusion of the any equity income/dividends received in Shaw’s EBITDA). DBRS believes the Company’s holdings of Corus shares could have a positive effect on the overall credit risk profile of Shaw in the future should the Company use any proceeds on sale for debt reduction and/or to support the financing of the Company’s wireless capital program.

Shaw’s ratings continue to be supported by its incumbent position in western Canada, its well-established fixed-line networks, improving RGU trends in cable and increasing ability to provide a full communications bundle to subscribers across a growing network footprint. The ratings also reflect the erosion of phone and satellite RGUs, significant capex required to support growth and risks associated with regulatory changes.

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 principal methodology is Rating Companies in the Communications Industry and the principal criteria is DBRS Criteria: Preferred Share and Hybrid Security 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.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.