Tangible benefits unclear for Corus-Shaw deal: expert

Regulatory approval of Corus Entertainment Inc.'s planned purchase of Shaw Communications Inc.'s media division shouldn't be a problem since there's no real change in who's controlling the assets, said one consultant, though there is some question as to how tangible benefits will apply in this deal. As a condition of approving acquisitions in the broadcasting industry, the CRTC generally requires the purchasing company to contribute a proportion of the value of the sale toward initiatives that benefit the broadcasting sector. For transactions in the TV industry, that proportion is usually 10 per cent. On Wednesday, Corus and Shaw announced a deal that sees the former purchasing Shaw Media for $2.65 billion — $1.85 billion in cash and $800 million in stock. Assuming the CRTC valued the transaction at the same level, it could warrant about $265 million in tangible-benefit payments. Gerry Wall, an Ottawa-based consultant who specializes in telecommunications and media, said the transaction is likely to be approved since the CRTC already considers the two companies' assets as one because the Shaw family owns a controlling stake in both. " has always felt that were controlled by the same party, therefore they look at them and treated them for regulatory purposes that way," Wall said in a phone interview. "So I don't think is going to matter to the CRTC; they're already there." Wall added that he doesn't think Corus will be forced to sell off certain assets as a condition of this sale, as was required when BCE Inc. bought Astral Media. However, Wall said it remains to be seen how things will work out in terms of tangible benefits. "I do think that is completely within their rights to say, 'Hey, it's a change in ownership.' The rules are whenever there's a change in ownership or effective control . ... If I'm the CRTC, I'm saying, 'Yes, this is in fact a change in ownership structure and corporate ownership, and therefore the benefits test should apply." Wall added: "Shaw structured its corporations that way a long time ago, and if they're going change that corporate structure now, then the test should apply, and therefore they're liable for making those production contributions." Yet Wall said Corus is likely to argue that because there is no change in control, no tangible-benefits payment should be required. "When money's involved, I always expect that, on behalf of the shareholders, the executives will do their best job to retain shareholder value — to not pay it," he said. Corus spokeswoman Sally Tindal said in an email she could not immediately say where the company stood on tangible benefits in relation to this deal. CRTC spokeswoman Patricia Valladao would not say how the ownership structure of Shaw and Corus would affect whether the transaction gets approved or how the question of tangible benefits is handled. She said in an email: "The transaction announced today shows that Corus believes strongly in the future of broadcasting in Canada. The CRTC will follow its usual practice, which is to examine transactions closely to ensure they are in the public interest." An ownership chart of Corus from the CRTC, updated in December, shows members of the Shaw family holds a combined 85 per cent of the company. A chart for Shaw Communications, also updated in December, shows the family holds about 80 per cent of that entity. Corus said in a press release that the transaction will require approval from most of the company's minority shareholders, and shares held by JR Shaw, Shaw Family Living Trust and their affiliates will not be included in the vote. The deal announced Wednesday involves 19 Shaw specialty TV channels, including Food Network Canada, HGTV Canada and Slice, as well as the Global conventional television network with 12 local stations. Corus said that, following the purchase of Shaw Media, its assets will include 45 specialty TV channels, 15 conventional TV channels and 39 radio stations. “This is a transformational acquisition that redefines Corus and Canada’s media landscape,” Corus CEO Doug Murphy said in the release. “This game-changing transaction brings together a powerful portfolio of synergistic media assets that will solidify Corus’ position as the market leader in the highly valued women, kids and family segments. It will also advance our strategic priorities through investment in content creation for our own platforms, and for global markets.” The CRTC's most recent communications monitoring report shows that Shaw and Corus, combined, accounted for 26 per cent of revenue in Canada's commercial TV revenue in 2014; Shaw was 16 per cent and Corus was 10 per cent. That falls short of the 35 per cent Bell was responsible for. The Canadian Media Production Association (CMPA) said the acquisition of Shaw Media by Corus is bad for the independent TV production industry, in light of the CRTC decision last year to eliminate terms of trade rules, which governed dealings between independent producers and large broadcasters. “This acquisition has troubling implications for the independent production sector,” CMPA president Reynolds Mastin said in a press release. “If approved, it will lead to even greater consolidation of control in an already exceptionally consolidated broadcasting industry. “It will mean that two players — the merged Corus/Shaw and Bell Media — would control 70 per cent of the English TV viewing market. It’s hard to imagine a more imbalanced marketplace. In such an environment, competitive safeguards like terms of trade become an even greater necessity.” Shaw said in a press release Wednesday that it is retaining its stake in Shomi, the video-streaming service it operates jointly with Rogers Communications Inc. It added that it plans to use the cash proceeds from the sale to pay for its $1.6-billion purchase of Wind Mobile that was announced last month. Shaw said both transactions are expected to close during its third fiscal quarter, which runs between March and May. "This transaction represents a significant milestone for Shaw, firmly positioning the company as a leading pure-play connectivity provider with an attractive growth profile while allowing Shaw to participate in the significant upside potential resulting from the combination of Shaw Media and Corus," Shaw CEO Brad Shaw said in the release. Shaw Communications said that the transaction will give it a stake of about 39 per cent in Corus. The Competition Bureau would not confirm whether it will review Corus' planned purchase of Shaw Media, citing the confidentiality of its work. It did acknowledge last month it would review Shaw's proposed purchase of Wind, though Competition Bureau spokeswoman Taylor Bildstein said in a phone interview that was because Shaw, itself, announced the bureau's involvement in its planned acquisition of Wind. Aravinda Galappatthige, a telecom analyst with Canaccord Genuity, said in a research note that the deal announced Wednesday is positive for Shaw because it helps it avoid accumulating more debt and it scales down the proportion of Shaw assets that were not seeing growth. He said, when factoring the sale of Shaw Media to Corus with the purchase of Wind Mobile, Shaw's "exposure to revenue growth segments" will increase to 60 per cent next year compared to 37 per cent last year. "With a less levered Shaw, it is possible that the company can now accelerate its wireless network upgrade plans for WIND and/or become more aggressive on the wireless subscriber acquisition front," Galappatthige said in the note. Galappatthige was less positive for what this deal means for Corus. "Our concern is debt," he 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." Also Wednesday, Corus released its first-quarter financial report. It said revenue for the three months ended Nov. 30 was up one per cent from a year earlier to $228.3 million. It reported net income of $41.3 million, down from $51.9 million in same quarter a year before. Shaw is scheduled to report its first-quarter earnings on Thursday. — With reporting by Derek Abma at dabma@thewirereport.ca and editing by Shruti Shekar at sshekar@thewirereport.ca

Tangible benefits unclear for Corus-Shaw deal: expert

Broadcast | January 13, 2016

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