Corus Entertainment Inc.'s deal to buy Shaw Media Inc. for $2.65-billion is a move to bulk up and avoid being outmuscled in a shifting television market that will soon give viewers the tools to pick apart large cable bundles.
In return for its media assets, Shaw Communications Inc. receives $1.85-billion in cash and 71 million Corus class B shares valued at $11.21 a share, which gives it 39 per cent of all of Corus's stock. Without a group of media assets facing uncertainty on the books, the Calgary-based company can sharpen its focus on cable and telecommunications, becoming a "pure-play" connectivity company, and use the proceeds to fund its recent $1.6-billion deal to buy wireless carrier Wind Mobile Corp.
Corus, on the other hand, is redoubling its efforts to corner the market for programming aimed at kids, women and families, in preparation for sweeping regulatory changes that will soon take hold across the TV industry. The Toronto-based media company already owns a stable of networks such as Canada's Disney Channel, YTV, W Network and Treehouse, and now adds major channels such as Food Network Canada, HGTV Canada and Showcase from the Shaw Media portfolio.
Alberta's influential Shaw family, which spun off Corus in 1999, ultimately controls both companies through a family holding company, although they are separately listed on the Toronto Stock Exchange.
The combined company would own 45 specialty and 15 conventional television stations, including the Global Television network, plus 39 radio stations, the Nelvana content studio and other assets. (Shaw retains its interest in Shomi, the streaming video service it owns as a joint venture with Rogers Communications Inc.)
"The opportunity presented itself, we jumped on it, the timing was right from the regulatory timetable perspective, and quite frankly, these two businesses belong together," Doug Murphy, president and chief executive officer of Corus, said in an interview.
The company is now more confident, with Shaw Media's brands in the fold, that it has the scale to compete in the new landscape. The combined revenue of Corus and Shaw Media in 2015 would have been $1.9-billion, meaning the deal, negotiated over a period of months, should catapult Corus into a close race with Rogers Media to be Canada's second-largest media company, trailing only Bell Media.
The transaction needs approval from the Canadian Radio-television and Telecommunications Commission (CRTC), and from more than 50 per cent of Corus's minority shareholders, with the Shaw family excluded from voting. If successful, the transaction should close in the third quarter of Corus's 2016 fiscal year.
A CRTC spokesperson said the deal shows that Corus and Shaw "believe strongly in the future of broadcasting in Canada," but the regulator "will follow its usual practice, which is to examine transactions closely to ensure they are in the public interest."
The combined company will control 34.5 per cent of English TV viewership in Canada, just below the 35-per-cent threshold above which the CRTC will give extra scrutiny to a change in broadcasting control, as it did when BCE Inc. took over Astral Media. Even so, that policy likely wouldn't apply in this case as the Shaw family's control of Corus and Shaw hasn't changed – Heather Shaw, daughter of company founder JR Shaw and sister of Shaw CEO Brad, is Corus's executive chair and her family's holding company still controls 84 per cent of the voting shares in Corus.
"We believe these two companies will form a winning combination," JR Shaw, executive chairman of Shaw Communications, said in a statement. "Their complementary mix of assets and strong management teams fit extremely well together."
Shaw picked up most of its current media holdings in 2010 when it paid $2-billion to acquire CanWest Global Communications Corp.'s broadcast assets following that company's restructuring.
But the outlook for media has changed dramatically since then. Corus's stock price had been battered, falling from more than $22 last March to below $10 in December, due to pessimism about broader declines in advertising returns as well as concerns that regulatory changes might expose some Corus channels to subscriber losses. As new rules from the CRTC's Let's Talk TV decisions continue to roll out, viewers will soon be able to pick and pay for their channels individually, while TV distributors have an incentive to re-size some cable and satellite packages.
"What is increasingly evident out there is that the larger media competitors of ours were bundling their services to our detriment," Corus CEO Mr. Murphy said. "So we can now, on the revenue side, be much more competitive."
Mr. Murphy said he expects the reach of the Global TV network, combined with nearly all the top women's and kids brands under one roof, will allow Corus to cross-promote its content and identify key demographics that advertisers want to reach, giving the company more leverage to negotiate higher rates.
And by combining with Shaw Media, Corus is also expecting to wring out $40-million to $50-million in annual cost savings within two years, which will no doubt mean substantial job losses.
But analysts at credit rating agency Standard & Poor's are watching the Corus deal and warned in a report that it could push the company's current triple-B-plus rating lower, predicting that the effects of declining ad revenue and a fragmenting audience could offset gains made on scale and efficiency.
The deal is expected to drive up Corus's debt leverage and a key priority will be "to delever the debt as quickly as possible," Mr. Murphy said.
"While we recognize the rationale for the transaction, given the structural challenges impacting the broadcast sector and soft results we had been seeing at Corus, our primary concern is the leverage, which could become a bigger factor if industry weakness exacerbates," Canaccord Genuity analyst Aravinda Galappatthige said in a research note.
Corus shares closed at $10.78, down about 7 per cent on the day. By contrast, Shaw's stock traded up more than 5 per cent to $24.70.
Corus reported its first-quarter earnings results on Wednesday, edging expectations despite a 6-per-cent drop in advertising revenue from its specialty networks, year over year.
Profit was $41.3-million or 47 cents a share, down from $51.9-million or 60 cents a year earlier.
Revenue was $228.3-million, up 1 per cent from $227.1-million in the first quarter of fiscal 2015.