PrefBlog

It will be recalled that Shaw Communications Inc. recently announced:

it has agreed to acquire a 100% interest in Mid-Bowline Group Corp. and its wholly-owned subsidiary, WIND Mobile Corp. (“WIND” or the “Company”) for an enterprise value of approximately $1.6 billion (the “Transaction”).
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Under the terms of the Transaction, Shaw will acquire 100% of the shares of WIND‟s parent company, Mid-Bowline Group Corp., by plan of arrangement, for an enterprise value of approximately $1.6 billion based on quarterly financial statements as of September 30, 2015. Shaw has executed a fully-committed bridge financing facility with the Toronto Dominion Bank and the Canadian Imperial Bank of Commerce. Shaw is committed to a financing plan that maintains its investment grade status and accordingly will optimize the significant flexibility available to it, including potential debt issuance, asset sales, the issuance of preferred or common equity or any combination thereof. Additional details regarding the longer term financing of the Transaction will be provided prior to close.

Tim Kiladze of the Globe commented:

The missing segment of Shaw’s earnings mix was becoming a bigger sore spot. When the company last reported earnings in October, the bottom line was fine, but investors and analysts worried about the pace at which Shaw is losing subscribers, particularly for cable and home phones. Some of it could be shrugged off, because Shaw is big in Alberta, and that province has some economic woes. Some could be chalked up to a competitive fight with Telus. But there were growing worries this was a structural issue.

So Shaw was eager to buy. And Wind was the only competitive company available. No Excel model was needed to determine a ballpark value in that scenario – it’s simple supply and demand.

Of course, there’s more to it. When Wind changed hands in 2014, the company was valued around $300-million, and it looked different than it does today. At that time, there were serious concerns about Wind’s wireless spectrum, because it was largely built to deliver 3G service, which isn’t good enough to handle massive data.

That all changed when Wind picked up valuable wireless spectrum from Mobilicity as part of Rogers’ complicated purchase this summer.

And Wind has continued to deliver encouraging earnings and subscriber growth. Earnings before interest, taxes, depreciation and amortization is expected to hit $65-million this year, and the company now has just shy of one million subscribers – the majority of which are post-paid.

And today DBRS Places Shaw Communications Inc. Under Review with Negative Implications:

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.
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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.

S&P also expressed concern:

• •We are placing all of our ratings on Shaw Communications Inc. on CreditWatch with negative implications.
• •The company announced an agreement to acquire mobile operator WIND Mobile Corp. for C$1.6 billion.
• •The transaction will increase Shaw’s pro forma consolidated adjusted debt leverage to above 3x, which would be high for our investment-grade rating.
• •We could lower the rating on Shaw by one notch if we believe the acquisition will weaken profitability and cash flow such that we consider a weaker business risk assessment, or if the company cannot sustain leverage below 3x as it develops its mobile presence.

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The company has not detailed its financing plans, but we assume that the acquisition will be substantially debt- and cash-financed. “The CreditWatch placement reflects our opinion that this transaction will increase Shaw’s pro forma consolidated adjusted debt leverage to above 3x, which would be high for our investment-grade rating, while weakening the company’s free cash to debt measure significantly,” said Standard & Poor’s credit analyst Donald Marleau.

Moreover, we believe that the acquisition would have a mixed effect on Shaw’s business risk profile, adding a key segment in wireless to support the competitive position of its core cable and internet offerings, but weakening margins and increasing earnings and cash flow volatility during a period of elevated debt leverage and higher capital expenditure requirements to upgrade WIND’s network to competitive standards LTE. We believe that the strategic defensiveness of the acquisition could be blunted by the intense competition WIND will face in increasing its subscriber base over the next few years, considering the strong wireless product offerings in western Canada from larger incumbents like Telus Corp. , BCE Inc., and Rogers Communications Inc. WIND is concentrated in Ontario, where Shaw has almost no cable or internet operations, such that most efficiencies and the marketing enhancements will be from integrating WIND’s small market share in Western Canada with Shaw’s solid cable platform.
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We could lower the corporate credit rating on Shaw by one notch if we believe the acquisition will weaken Shaw’s profitability and cash flow such that we consider a weaker business risk assessment, or if the company cannot sustain leverage below 3x as it develops its mobile presence. On the other hand, we could affirm our ‘BBB-‘ rating on Shaw if we expect the company to improve leverage to about 2.5x while integrating and building out WIND’s relatively small and outmoded network.

Shaw has one issue of preferred shares outstanding, SJR.PR.A

Update, 2016-1-13: To be financed by the sale of media assets to the related company, Corus Entertainment. See January 13, 2016.

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