Corus buys Shaw Media in $2.65B deal that puts Shaw's focus on wireless and cable

Toronto-based Corus Entertainment is buying Shaw Media from Shaw Communications in a $2.65-billion deal.

The move shuffles ownership of 19 specialty TV channels including Global, Food Network Canada, HGTV Canada, HISTORY, Slice, National Geographic Channel and Showcase between two companies that are controlled by the Shaw family. Corus also owns a network of radio stations and the Nelvana animation studio.

If it gets the backing of regulators and shareholders, the move would turn Corus into a media empire — with 45 specialty TV channels and more than a dozen conventional ones— big enough to compete with rivals Bell and Rogers.

All while giving Calgary-based Shaw a cash infusion to beef up their core cable television, internet and wireless distribution networks.

"Look at it like it's cleaning house," Irene Berkowitz, an instructor with Ted Rogers School of Management in Toronto, said in an interview. "If you put aside that the Shaw family controls both companies … what we have is a Corus that creates content and Shaw as a company that specializes in delivery."

Executives from both companies described it in similar terms on Wednesday, a deal that strengthens both core businesses to let them better compete with rivals, while still maintaining a relationship.

In a release, Corus called the deal "a transformational acquisition that redefines Corus and Canada's media landscape."

Pick-and-pay cable coming

It comes on the eve of a sea change for Canadian television, due to new CRTC rules that will mandate cable companies to offer so-called "skinny basic" cable packages as of March 1. They will be followed by "pick-and-pay" plans that will give consumers much more choice in what channels they want to pay for.

Portfolio manager Andrea Horan with Agilith Capital in Toronto says the looming new cable landscape has media companies scrambling to best position themselves for a murky future.

"It's another uncertainty," she said. "Many participants are quite hopeful that the net impact will be reasonably minor. I think that's what the hope is."

The move would make once-tiny Corus a major player in content, with 32 per cent of all English-language television viewership in Canada. That could give the company the size and scope to compete with larger rivals, but it comes with a hefty price tag.

Corus will fork over $1.85 billion in cash for the assets, as well as 71 million shares.

"The challenge now is the cash flow within the media business is not growing as much any more," Horan said. "But there's synergies they hope to get out of this."

Indeed, Corus says it expects to book as much as $40 million in cost savings from combining the media assets, and that's just in the short term. "There's no doubt in my mind that those assets are better together than apart," Horan says. "It's just at what price and at what point were they put together."

The move also fundamentally changes Shaw, too. Over the years, Shaw has been turning itself from a regional cable company into a more integrated media one, capped by its purchase of the old CanWest broadcasting assets in 2010.

But the Corus deal flips the broadcast assets they got from CanWest for an amount that on paper is less than they paid for them in the first place.

Wireless play

In contrast from the days of convergence, the Corus deal turns Shaw into more of a distribution company, with large assets on the cable, internet and, now, wireless side, thanks to Shaw's purchase last month of Wind Mobile for $1.6 billion.

The Corus deal pays for Wind and gives the company a cash injection to pay to improve and expand Wind's wireless network.

Shaw CEO Brad Shaw said as much in a memo to staff on Wednesday after the deal was announced, saying the sale to Corus "positions us as a leading pure-play connectivity company."

When the Wind deal was announced, Shaw's stock dropped as investors worried how much it would cost to build out their network. The Corus deal removes that "overhang" from Shaw's stock, as Horan describes it, because Shaw would get more cash from Corus than they spent to acquire Wind in the first place.

But as Berkowitz notes, the deal could be good news for Corus, too, by taking advantage of a market void in Canada: a pure-play global content provider. "Canada has Entertainment One," she said, referring to the Toronto-based but London-listed production studio that produces or owns the rights to tens of thousands of movies and TV shows, "but not much else."

"That space is really open for grabs in Canada," Berkowitz said.

Corus CEO Doug Murphy said the purchase of Shaw Media "positions the combined business as one of Canada's leading media and content companies with significantly enhanced scale and growth prospects going forward."

The deal also comes with a pledge that The Shaw family living trust will not sell their Corus shares for at least one year, and the trust has provided written commitment to Corus' board of directors indicating its support for the acquisition.

Both deals, pending regulatory approval, are scheduled to be finalized in May, and the Shaw family will still retain majority control of both companies.

For her part, Horan says there's a logic in combining the two businesses, but telling that the deal hives the two apart at a time when others are consolidating. "The hope from some was that Shaw was going to bring Corus into the fold, not eject their media part," she said.

Berkowitz, meanwhile, sees a lot to like in the deal, and suspects it will get a green light from regulators.

"The CRTC has made it clear they are interested in modernizing the system and this is exactly that," she said.

"It's a little bit of forward thinking, and I think it's great."