The cable guys, like bankers, will never be loved, but they can still do pretty well for themselves. Earlier this month, Calgary-based Shaw Communications Inc. announced better-than-expected earnings, and its Star Choice satellite television service followed competitor Bell ExpressVu's move to increase prices.
In a major report issued in January, Dominion Bond Rating Service Ltd. ranked Shaw as the fourth-best cable company in the world, behind AOL Time Warner, Comcast and Cox Enterprises, and ahead of its Canadian competitors Rogers, Cogeco and Vidéotron, in that order.
"Operationally, Shaw ranks among the strongest operators in the industry through its highly clustered advanced-broadband network," the study concluded. "Shaw is a leader in rolling out high-speed Internet, with the highest penetration level for this service of any cable or telco in North America."
There is no doubt that Shaw, which was founded by its executive chairman JR Shaw and is run by his son Jim Shaw as chief executive officer, has a lot going for it. Thanks to consolidation in the industry and deals with other cable providers, it has 2.1 million basic-cable customers tightly clustered in Western Canada. It has 482,000 digital-cable customers, with the result that the company has a better than 20-per-cent penetration rate, the highest in the country.
Shaw's 855,000 broadband Internet customers give it an unsurpassed 40.4-per- cent penetration rate (and a whopping 70 per cent in Fort McMurray, Alta.) It has met the threat from satellite through its ownership of Star Choice, a DTH (direct-to-home) provider.
Meanwhile, Shaw is launching new products, including video on demand, starting in Vancouver, and high-definition television, beginning in Calgary and Vancouver. It has $1-billion in available credit in a business that is notorious for burning through a lot of cash for infrastructure and upgrades.
Shaw achieved one of its primary goals with its announcement on April 9 that for the first time it had positive free-cash flow (defined as operating income less capital expenditures), to the tune of $10-million for the second quarter. Revenue was up almost 10 per cent.
But amid these successes there are some worrying signs, quite apart from its loss of 13 cents a share and the fact that the stock is off 36 per cent over the past year (the class B shares closed at $17.27 on Thursday.) Growth in basic cable is a minuscule 0.6 per cent over the past two quarters.
Shaw's satellite operations were $33.7-million cash-flow negative in the second quarter. Worse, Star Choice added only 17,000 customers, despite spending $35.2-million on equipment subsidies and capital expenditures.
There is little hope that the gap between the market share of ExpressVu and Star Choice will narrow. Five years ago, the two players evenly split the Canadian market. ExpressVu now has about 62 per cent of the market, a percentage that is expected to increase marginally over the next four years. Many observers expect the two players will merge.
Meanwhile, earlier this year Shaw followed its three competitors into junk-bond territory, making it more expensive for the company to raise money. Because of its high leverage, and long-term debt of $3.1-billion, it has been forced to sell assets, including its cable holdings in Florida and Texas for $300-million a couple of months ago.
Investors should ask themselves if it is wise to load up on a highly leveraged company when its cable and satellite growth is modest, and the response to VOD and HDTV uncertain. Then, of course, there is the company's dubious corporate governance record, which it is starting to address.
The Shaw family exercises control through dual classes of shares (which the New York Stock Exchange has not allowed U.S. companies to introduce since 1994) and has rewarded its senior executives very handsomely in the face of poor performance. Shaw Communications scored a lowly 41 out of a possible 100 in a wide-ranging Report on Business survey of corporate governance and disclosure last fall.
However, the ground may soon shift under the cable industry and its competitors. First, the acquisition of DirecTV by Rupert Murdoch's News Corp. could give that global player clout in the Canadian market. Second, the House of Commons industry committee is expected to issue a report shortly on foreign ownership levels for telephone companies. Those levels could be raised, not only for phone companies, but also for cable and satellite firms. If that happens, the prospect of broader ownership and greater access to capital -- which is what the cable industry has been arguing for -- could translate into higher multiples and better share prices.
Douglas Goold, a Toronto-based writer and broadcaster, can be reached at .