Why it Makes Perfect Sense for Shaw Communications Inc. to Buy Corus Entertainment Inc.

With Corus Entertainment Inc. (TSX:CJR.B) shares at a six-year low, a takeover makes perfect sense. Here’s why Shaw Communications Inc. (TSX:SJR.B)(NYSE:SJR) is the likely suitor.

| More on:

It has not been a good year for Corus Entertainment Inc. (TSX:CJR.B) shareholders. Shares are down nearly 50% as the company has gotten slammed with bad news from all sides.

First of all, the CRTC made life a little more interesting for Corus’s television business with its decision to allow cable consumers to pick and choose individual channels starting in 2016. Remember, Corus owns a bunch of specialty channels, like Treehouse, Teletoon, CMT, YTV, Cosmo TV, the W Network, and others like those. It also has the rights to show Movie Central and HBO Canada to customers in western Canada.

While Corus is holding out hope that at least a couple of its channels will be included in some sort of basic cable package, it’s obvious what the market is thinking. Investors are spooked that Canadians are going to dump Corus’s specialty channels once they get the opportunity to do so. This will lead to lower advertiser rates, which is the beginning of a slippery slope no investor wants.

Additionally, the tepid Canadian economy is taking its toll on the advertising market. That, combined with advertisers concentrating their spending on Rogers Communications-owned channels—because of the boost in ratings it got with its new NHL content deal—has led to some pretty lackluster results. The radio business has also been soft.

Still, if you look past the headline earnings numbers, things don’t look so bad for Corus. It’s still on pace to generate some $180 million in free cash flow this year, which puts it at a price-to-free cash flow ratio of just six times. That makes it one of the cheapest stocks in the whole market based on that metric.

It also makes the company an attractive takeover possibility. Here’s why I think it’s likely to happen, with Shaw Communications Inc. (TSX:SJR.B)(NYSE:SJR) as the likely bidder.

A close relationship

Corus was actually spun out of Shaw back in 2000, and the two companies continue to work closely together.

Corus has class A and class B shares, with the investing public holding the class B shares and their limited voting rights. Even though holders of the class A shares have just a fraction of the total shares, they have effective voting control. The Shaw family controls the class A shares, and with them, the fate of the company. The family has a similar setup with their namesake company.

But the Shaw family isn’t just sitting off on the sidelines. Both Julie Shaw and Heather Shaw are members of Corus’s board of directors, with Heather assuming the role as chairperson. It’s not much of a stretch to assume they could work closely with the family members that run Shaw.

Other advantages

There are other advantages to Shaw and Corus getting back together.

It costs Corus millions of dollars annually to stay publicly traded. If Shaw took the company over, it would just be part of a bigger Shaw Communications, saving the costs of filing reports to regulators and having investor-relations employees.

There’s also the synergies. Shaw also has its own media division, owning channels like Global, The Food Network, History, and others. Instead of both Shaw and Corus having to work with advertisers, the combined company could offer access to more channels and a broader cross-section of the Canadian population. Other improvements could be made as well, like sharing office space or production facilities.

And finally, it would certainly be accretive to Shaw’s bottom line. Shaw generated approximately $600 million in free cash flow in 2014. Adding Corus’s $180 million to that is a marked improvement.

With Corus shares trading at levels we haven’t seen since 2009, it’s a perfect opportunity for Shaw to take the company over. And if it doesn’t, Corus shareholders are still getting a dividend of 8.8%. That’s not such a bad reward for waiting.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Nelson Smith owns shares of CORUS ENTERTAINMENT INC., CL.B, NV. The Motley Fool owns shares of ROGERS COMMUNICATIONS INC. CL B NV. Rogers Communications is owned by the Motley Fool Pro Canada. Rogers Communications is a recommendation of Stock Advisor Canada.

More on Dividend Stocks

young woman celebrating a victory while working with mobile phone in the office
Dividend Stocks

3 CRA Benefits Most Canadians Can Grab in 2024

You can save on taxes by claiming the dividend tax credit on Fortis Inc (TSX:FTS) shares.

Read more »

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »