Corus Entertainment has agreed to buy the media business of Shaw Communications. This should strengthen its position in the changing cable-TV industry. This puts the consumer stock back on buy for attractive dividends and a long-term share price recovery.
We formerly recommended that you hold television broadcasting stock Corus Entertainment (TSX─CJR.B). That was because of the unbundling of cable TV. Beginning in March, viewers will be able to pick-and-pay for only those channels that they want. There was concern that Corus would lose subscribers. Also, the company was only mid-sized. This would weaken its bargaining power against vertically-integrated companies such as BCE Inc. and Rogers Communications. In addition, it looked likely to lose advertising revenue.
Now Corus has made what it calls a ‘transformational acquisition’. It has agreed to pay $2.646 billion to acquire the media business of Shaw Communications. Corus chief executive officer Doug Murphy said, “With the addition of Shaw Media, we will have the competitive scale, the brands, the content . . . to accelerate our growth.” Corus is back on a buy for highly-attractive, stable dividends and a long-term share price recovery.
Corus will become a whole lot bigger
After the acquisition, Corus will own 45 specialty TV channels, 15 conventional TV stations, 39 radio stations, digital assets and content studio Nelvana. The specialty, pay and content TV business will account for about 65 per cent of the combined company’s total revenue of $1.895 billion. Conventional TV (from coast to coast) will generate about 26 per cent of the revenue. Radio will generate the other nine per cent of Corus’ revenue.
Corus will now account for 34.5 per cent of Canada’s English-language TV viewership. That’s only marginally behind BCE’s 35 per cent market share. Even better, Corus is now the leader in the highly-valued Women, Kids and Family media segments. The transaction is expected to close in the March-to-May quarter.
This acquisition will make Corus a much bigger competitor. Had the transaction occurred at the start of fiscal 2015 (on September 1, 2014), the company would’ve generated $619 million in underlying earnings and $430 million of free cash flow on revenue of $1.895 billion. Last year, Corus alone earned adjusted net income of only $136 million and free cash flow of $201 million on revenue of $815 million.
The chairman of the special committee of directors, Fernand Bélisle, said: “We are buying Shaw Media at an attractive price, financing it prudently and the transaction is immediately accretive on an earnings and free cash flow per share basis. This combination will deliver strong free cash flow which will allow the company to de-lever quickly while maintaining its current dividend.”
Corus pays a dividend of $1.14 a share. That works out to a yield of 9.9 per cent. That’s despite a 6.9 per cent increase in the company’s share price, to $11.51 a share. Normally such a high dividend yield is a sign of danger. But with Corus planning to maintain its dividend, you can earn this attractive dividend income for the foreseeable future.
The facts confirm Mr. Bélisle’s statement. Corus is paying less than 4.3 times the underlying earnings of $619 million. This does look like an attractive price.
Corus is paying partly by issuing shares
Corus is financing the transaction prudently. That’s because it will put up cash of $1.85 billion. The company will also issue 71 million of its shares to Shaw. These shares are worth $11.21 each, based on their past trading on the Toronto Stock Exchange. This will raise the other $796 million. Issuing shares is less risky than taking on debt, of course.
The issued shares will raise Shaw Communications’ stake in Corus Entertainment to 39 per cent. Shaw will not sell any Corus shares for at least 12 months after the acquisition closes. Shaw could only sell up to a third of its shares 12, 18 and 24 months after the acquisition closes.
The acquisition of Shaw Media will immediately add to Corus’ earnings and free cash flow per share. Within the first 24 months, it expects to cut costs by $40 to $50 million. The company also expects to achieve “significant revenue synergies”.
With combined free cash flow of $430 million, Corus should manage to reduce its debt while maintaining its dividend. When the acquisition closes, it will have total debt of $2.3 billion as well as bridge financing of $560 million.
Corus is tops in women’s specialty TV
Corus will acquire Shaw Media’s specialty TV channels, including Food Network Canada and HGTV Canada. According to The Globe & Mail, this will give it the top six specialty TV channels that women watch. It writes: “Advertisers love this segment of the population, because the vast majority of women are the [chief executive officers] of their households, meaning they’re the ones who make most spending decisions.” It’s estimated that Canadian advertisers spend $1.98 billion a year to reach women. That’s 60 per cent of total advertising spending.
Corus also has a strong position in children’s programs. It operates specialty TV channel Treehouse, which delivers children’s programs 24 hours a day. The company also now offers the Disney channel. Corus plans to raise its results by cross-selling its content.
The acquisition of Shaw Media is a positive development. That’s because Corus’ future was clouded by the coming pick-and-pay regime and sagging earnings. In the first three months of fiscal 2016, it earned an adjusted $42.5 million, or 49 cents a share. This was down by 18.3 per cent from an adjusted $51.9 million, or 60 cents a share, a year earlier.
In addition, Corus faces competition from Netflix and Shomi—owned by both Rogers Communications and Shaw Communications. Such streaming video services are gaining more viewers. Even so, with the acquisition of Shaw Media, Corus should do better. It may eventually acquire half of Shomi.
The Investment Reporter, MPL Communications Inc.
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