CORUS SHAREHOLDERS CALL FOR REVIEW OF SHAW DEAL.
MINORITY SHAREHOLDER RAISES ‘SERIOUS CONCERNS’ IN LETTER TO OSC, TSX
Two market regulators have been urged to review whether enough information about Corus Entertainment Inc.’ s proposed $2.65-billion acquisition of Shaw Media Inc. have been publicly disclosed to allow minority shareholders to make an informed decision.
According to two letters filed with the Ontario Securities Commission and the Toronto Stock Exchange late Friday, Catalyst Capital Group Inc., a Toronto- based private equity fi rm that owns class B shares of Corus, raised what it termed “serious concerns” regarding a lack of disclosure in the notice of special meeting and management information circular issued on Feb. 9.
Catalyst said this is “abusive of minority shareholder interests.”
Most notably, the private equity firm alleged the Shaw family stands to potentially gain at least $ 50- million from the related-party transaction as a result of its controlling interest in Corus. However there is no disclosure of this information in the circular to the company’s shareholders. “This gain is highly material,” declared the private- equity firm’s five- page missive to the OSC, “… this is information that minority shareholders require in order to be able to make a fully informed decision…”
Officials at the OSC and the TSX declined to comment Monday.
The complaints to regulators surfaced more than a month after Corus announced on Jan. 13 that it had agreed to buy Shaw’s media portfolio for $1.85 billion in cash and $ 800- million worth of stock. Shaw said it would use the proceeds to fund its purchase of upstart carrier Wind Mobile Corp. for $1.6 billion.
The transactions would see Shaw, whose market cap is more than 13 times that of Corus, exit the foundering media business and realize a wireless strategy that has been at least eight years in the making. Meanwhile, Corus would stand to more than double its sales and profits.
In its letters to the regulators, Catalyst also takes issue with the deal’s governance protocols. Specifically, the firm is questioning why a deal was hammered out between Corus’ management and board of directors and the Shaw family prior to a special committee being established to review terms of the transaction, which is widely considered good corporate governance practice.
Catalyst also raised concerns about a $ 55- million “reverse break fee” payable by Corus to Shaw in certain circumstances, the purpose of which Catalyst alleged is not fully explained in the circular.
Ultimately, Canada’s second-largest privateequity firm, run by Newton Glassman, wants the OSC to force Corus to remedy what it called “disclosure deficiencies” to allow minority shareholders to “make a reasonable and informed decision” before the scheduled vote on Mar. 9.
Corus spokeswoman Sally Tindal told the Financial Post, “the company stands behind both the robust process and the extensive disclosure related to the transaction.”
Although she could not comment on Catalyst’s complaint to the regulators, she said senior executives from the Toronto- based media company have met with representatives from the private- equity firm as well as more than 100 different shareholders to discuss the proposed transaction and “the response has been overwhelmingly positive.”
To that end, Corus announced Monday that proxy advisory research firm Institutional Shareholder Services Inc. recommends shareholders vote in favour of the transaction.
Corus released a limited portion of the report, which is not yet public, stating “the benefits of the transaction appear to outweigh the costs.” That recommendation is based on the midpoint of the valuation range prepared by Barclays Capital Canada Inc., which was retained by the special committee at Corus. Barclays concluded that the fair market value of Shaw Media was between $ 2.45 billion and $ 2.85 billion.
Repeated calls and emails to ISS requesting comment and a copy of the report were not returned Monday.
Corus was formed in 1999 as a spinoff of the media assets held by Shaw Communications Inc. The majority of both of their voting shares are controlled by J.R. Shaw, the patriarch of the Shaw family, through the Shaw Family Living Trust.
Although the Shaw family controls 84.8 per cent of the class A shares of Corus and 8.1 per cent of the class B, it cannot control the voting outcome of related- party transactions, which is the nature of the proposed deal now before shareholders. As such, the fate of this deal rests on the approval of more than half of Corus’ minority shareholders, including Fidelity Investments, Mackenzie Financial Corp. and Sentry Select Capital Corp.
Shaw Communications declined to comment on Catalyst’s concerns. In an emailed s t atement, t he Shaw Family Group said: “The Shaw Family respects the i ndependence of the process and the work done by the Independent Special Committees of Corus and Shaw Communications and has no additional comment.”
Three days before dispatching their l etters to the regulators, Gabriel De Alba, managing director and partner at Catalyst, met with Corus chief executive Douglas Murphy, chief financial officer Tom Peddie, and a representative from RBC Dominion Securities Inc., which acted as investment banker to Corus and provided a fairness opinion, to voice concerns about the governance practices and financing of the proposed deal.
During the meeting on Feb. 16, De Alba discussed an 18- page analysis Catalyst assembled, based on publicly available information. Armed with the data, the Catalyst executive criticized the proposed transaction, arguing that in its current form, it “transfers significant value to t he Shaw family while unfairly punishing and oppressing minority holders of Corus.”
The analysis outlines Catalyst’s claim that the Shaw family created about $ 62 million in additional value from the related- party transaction: $ 40 million through price fluctuations i n Shaw and Corus after the Shaw Media deal was made public, $ 10 million by buying more Corus shares at a discounted price in a private placement of 3.56 million Corus B shares at $ 9 a share before the deal was announced ( s hares were trading at $ 11.7 1 at the time), and $ 12- million worth of dividends to be paid by Corus to Shaw as a result of Shaw’s newly bolstered position in Corus.
Based on its internal calculations, Catalyst figured that Corus is overpaying for Shaw Media by an estimated $ 400 million to $ 600 mil- lion so Shaw could fund its acquisition of Wind. “They could not refute any of the math we presented to them,” De Alba explained. He said his firm had already sent the analysis to ISS and intends to distribute the analysis to Corus minority shareholders before the vote.
Catalyst is pressuring Corus to postpone the March 9 meeting, reconfigure the offer by lowering the price and eliminate the benefits accrued to the Shaw family from the related- party transaction.
For her part, Tindal described the Feb. 16 meeting as “quite lengthy,” adding that Corus executives “addressed all of ( Catalyst’s) questions in a comprehensive way.”
In an email, Tindal disputed Catalyst’s criticism regarding the governance protocols saying Corus’ special committee met 28 times over the course of what she referred to as “a rigorous, f our- month negotiation process.” She added that Barclays’ valuation of Shaw Media was based on an analysis that included an assessment of 14 comparable transactions from the North American broadcasting sector.
Since the proposed acquisition was announced, class B shares of Corus have plunged 15 per cent to $ 9.98, a level well below its 52- week high of $ 22.36. Shaw’s minority shares, in contrast, have remained relatively flat. Over the past 12 months, both stocks have performed poorly, with class B shares of Shaw and Corus plummeting 20 and 54 per cent, respectively.
TRANSFERS SIGNIFICANT VALUE TO THE SHAW FAMILY.