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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 continues to be advising shareholders to approve the transaction.
In a Feb. 19 report, U.S.-based Institutional Shareholder Services (ISS) Inc. expressed concerns over just how much debt and equity Corus will raise to finance the acquisition, which is paid through $1.85 billion in cash and $800 million in stock.
ISS cautions that the Toronto media company is dealing with “a substantially greater amount of debt than it has maintained previously,” pushing its leverage ratio beyond its target range. ISS says that by issuing a total of 104 million new class B shares with regards to this transaction, Corus is diluting its estimated outstanding 84 million shares inside a fashion that “appears high.”
Indeed, during a Jan. 13 conference call following the deal was announced, Corus chief executive Douglas Murphy said that the company is now “going to be intensely centered on delevering.”
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Nevertheless, ISS is advising the institutional clients that sign up for its services to vote towards the deal at a special meeting on Mar. 9.
The report states that the offer price “appears fair” as it arrives at the mid-point from the valuation range prepared by Barclays Capital Canada Inc., which was retained through the special committee at Corus that was set-up to lead the negotiations. Barclays figured 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 open to clients, is dependant on public material and declined to comment any more. He said that ISS prohibits its analysts from talking with the press.
Still, what was clear from the report was its conclusion: The benefits of the deal outweigh the costs.
“Although the high dilution of share issuance and the increased leverage because of the transaction may be a cause of concern, the strategic rationale behind the transaction appears appealing …” Victor Guo, the writer of the ISS report, wrote inside a summary.
Corus published a news release Monday about the ISS are convinced that abbreviated the above statement and quoted only its latter half, which continued to explain the way the acquisition of Shaw Media bolsters Corus’ scale and command of Canada’s English-speaking TV audience.
When asked Monday for a copy from the complete ISS report, Corus spokeswoman Sally Tindal asserted it couldn’t be shared as a result of contractual agreement.
Even though the most 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 results of related-party transactions, the nature from 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 also the Toronto Stock Exchange. It raised what it really termed “serious concerns” regarding deficiencies in disclosure related to how the Shaw family stands to potentially gain a minimum of $50 million in the transaction.
Corus has rejected Catalysts’ claims. The “acquisition of Shaw Media is really a game-changing opportunity to generate long-term value for shareholders,” the organization said inside a statement Tuesday.
Gabriel De Alba, md and partner at Catalyst, had voiced his concerns throughout a lengthy meeting with senior managers at Corus on Feb. 16. At the meeting, De Alba criticized the the transaction, referring to an 18-page analysis prepared by the firm.
Catalyst said it’s forwarded the same presentation to representatives at ISS, adding it plans to distribute copies to minority shareholders prior to the vote.
cpellegrini@nationalpost.com
