Corus debt, equity plan raises red flag: report

Financing for Shaw Media deal will dilute shares

An influential shareholder advisory firm has raised a red flag about the way Corus Entertainment Inc. intends to fund its $2.65-billion acquisition of Shaw Media Inc., but is still advising shareholders to approve the transaction.

In a Feb. 19 report, U. S.based Institutional Shareholder Services ( ISS) Inc. expressed concerns over how much debt and equity Corus will raise to finance the purchase, which will be paid through $1.85 billion in cash and $800 million in stock.

ISS cautions that the Toronto media company is taking on “a substantially greater amount of debt than it has maintained in the past,” pushing its leverage ratio beyond its target range. ISS says that by issuing a total of 104 million new class B shares in relation to this transaction, Corus is diluting its outstanding 84.5 million shares in a fashion that “appears high.”

Indeed, during a Jan. 13 conference call after the deal was announced, Corus chief executive Douglas Murphy said that the company is now “going to be intensely focused on delevering.”

Nevertheless, ISS is advising the institutional clients that subscribe to its services to vote in favour of the deal at a special meeting on March 9.

The report states that the offer price “appears fair” as it lands on the mid-point of the valuation range prepared by Barclays Capital Canada Inc., retained by the special committee at Corus that was setup to lead the negotiations.

Barclays concluded that the fair market value of Shaw Media was between $2.45 and $2.85 billion.

It is unclear from the 18-page report whether ISS’s recommendation is based entirely on the opinions of Barclays and RBC Dominion Securities Inc., which acted as an investment banker to Corus. Subodh Mishra, an ISS spokesman, said the report, which is available to clients, is based on public material and declined to comment any further. He said that ISS prohibits its analysts from speaking to the press.

Still, what was clear from the report was its conclu- sion: The benefits of the deal outweigh the costs.

“Although the high dilution of share issuance and the increased leverage as a result of the transaction may be a cause of concern, the strategic rationale behind the transaction appears appealing ...” Victor Guo, the author of the 18-page ISS report, wrote in a summary.

Corus published a news release Monday about the ISS report that abbreviated the above statement and quoted only its latter half, and went on to explain how the acquisition of Shaw Media bolsters Corus’ scale and command of Canada’s English- speaking TV audience.

When asked Monday for a copy of the complete ISS report, Corus spokeswoman Sally Tindal said that it couldn’t be shared due to a contractual agreement.

Even though the majority of both Shaw’s and Corus’ voting shares are controlled by JR Shaw through the Shaw Family Living Trust, the Shaw family cannot control the voting outcome of related- party transactions, which is the nature of the proposed deal now before investors.

The Financial Post reported Monday that Catalyst Capital Group Inc., a private equity firm that specializes in distressed situations, has filed complaints about the deal to two regulators, the Ontario Securities Commission and the Toronto Stock Exchange. It raised what it termed “serious concerns” regarding a lack of disclo- sure related to how the Shaw family stands to potentially gain at least $ 50 million from the transaction.

Gabriel De Alba, managing director and partner at Catalyst, had voiced his concerns during a lengthy meeting with senior managers at Corus on Feb. 16. At the meeting, De Alba criticized the terms of the transaction, referring to an 18- page analysis prepared by the firm.

Corus has rejected Catalysts’ claims. The “acquisition of Shaw Media is a game- changing opportunity to generate long- term value for shareholders,” the company said in a statement Tuesday.

Catalyst said it has forwarded the same presentation to representatives at ISS, adding that it plans to distribute copies to minority shareholders before the vote.