When takeovers nearly clean out an industry and only one big player remains in public hands, you can bet with confidence that an acquisition of the last company is in the cards. It’s not a matter of whether a takeover will occur, it’s only a question of when.
That’s the case many investors and analysts are making in regards to Corus Entertainment Inc., the only large pure-play media company on the Canadian market, now that Astral Media is being swallowed by telecommunications giant BCE.
Corus is “the last one standing – but for how long?” noted Canaccord Genuity in a recent report on the company.
It’s an intriguing question because corporate acquirers often pay substantial takeover premiums. That means patient investors can frequently profit by taking a flyer on potential acquisition candidates and waiting to see what happens.
In the case of Corus, Bay Street chatter has the controlling shareholder, the Shaw family, buying the rest of the company through Shaw Communications Inc. , of which they are also controlling shareholder. If a bid for Corus was done at the same multiple to cash flow as the recent Astral deal, the bid would be at least $32 a share, a premium of about 33 per cent to the current market price. (The Shaw family controls 85 per cent of Corus through voting shares, but their actual ownership is far smaller because the publicly traded shares have no votes.)
Stephen Takacsy, portfolio manager at Lester Asset Management, a Montreal-based money management firm, has long argued that the Shaws will eventually bid for the part of Corus they don’t already own. He believes BCE’s acquisition of Astral makes a Shaw bid for Corus even more likely.
“I remember mentioning this theory for years and years now, and no analysts would even listen to me, and now all of a sudden that’s all you read about,” he says.
Even if a takeover doesn’t materialize, Corus’s hefty dividend yield – which works out to 4.1 per cent at current prices – offers investors a decent reason to stick around. The company has been able to increase its payout over time, another attraction for the stock.
The prospects for Corus’s media properties are considered excellent. Its specialty channels, such as the Oprah Winfrey Network (Canada) and Nickelodeon (Canada), appeal to women and children, respectively, two demographics coveted by advertisers. Given Corus’s attractive business mix, it arguably has better prospects than Astral, which is more heavily loaded with slower growth radio properties. “We’d still own [Corus]even without the potential of a takeout,” Mr. Takacsy says.
The compelling business logic driving the takeover chatter is the structure of the Shaw family empire. Shaw Communications, a traditional telecommunications company, holds cable and high-speed Internet assets, but recently expanded into media in a big way through the purchase of the television and specialty channel holdings of CanWest Global.
It makes no sense for the family to own similar media assets in two separate companies, when there is no regulatory requirement to do so.
Shaw spun its media assets into Corus back in the late 1990s, when it appeared that regulators wanted to separate content providers from those offering telecommunication services. However, regulators never formally introduced such a requirement, paving the way for behemoths like Rogers and BCE to dominate both the media and communications businesses, and leaving Shaw with a corporate structure that it never really needed to establish.
Mr. Takacsy says Shaw could probably wring about $50-million to $100-million in overhead cost savings by combining the two companies, another compelling reason for a deal.
Last week, RBC Dominion Securities increased its target price for Corus to $27 from $25, in part on the possibility of a takeover.
In a note to clients, RBC analyst Drew McReynolds said there are “considerable cost and revenue synergies” to be had by merging Shaw and Corus and “a rising probability of an eventual takeout.” Mr. McReynolds also takes the position that the shares have support, regardless of a takeover. He foresees a strengthening advertising market in the last half of the year and the potential for Corus “to return significant capital to shareholders through further dividend increases and/or share repurchases.”