Shaw Communications is looking for a buyer for its stake in specialty television and radio company Corus Entertainment (TSX:CJR.B), but in all likelihood, the transaction amounts to a strategic review process for Corus itself, says analyst Aravinda Galappatthige of Canaccord Genuity.
In effort to expand its Freedom Mobile wireless network, Shaw has reportedly hired investment bank TD Securities to search to find a buyer for its stake in Corus, with the Globe and Mail reporting that both Shaw and Corus are willing to look at offers from private equity firms and strategic buyers for individual business sections of Corus.
Galappatthige says the Shaw sale effectively pushes Corus into a strategic process of its own.
“This, in a sense, should not be surprising as we see little reason for a PE firm, for instance, to take a minority stake in Corus; control would have to be on offer,” says the analyst in a client update on Wednesday. “Consequently, one can interpret this as Corus essentially going through a quasi strategic review process.”
Galappatthige argues that selling off pieces of Corus while allowing it to continue as a public company likely doesn’t make sense. Some of Corus’ smaller networks could feasibly be sold separately but selling its main assets such as its radio holdings or its flagship networks like Nelvana would leave Corus a much less attractive entity.
At the same time, selling the whole company is unlikely, the analyst argues, in key part due to Canada’s foreign ownership restrictions would deter interest from US media companies, while domestic regulatory and competition concerns are bound to keep away Canada’s other major telcos like BCE and Telus.
On the private equity front, the analyst is dubious, as well, considering Corus’ net debt load of $1.96 billion, or 3.4x LTM EBITDA.
“While we cannot dismiss the idea that this news could create some interest in the stock, we would recommend a cautious approach due to the aforementioned factors,” says the analyst. “We also note that Corus is going into what is likely a soft Q3/18 on June 27th which is expected to accompanied by a dividend cut of likely 50-70 per cent.”
Galappatthige rates Corus a “Hold,” with a 12-month target price of C$7.00, representing a projected return of 2.9 per cent at the time of publication.