Analysts at banks advising Corus-Shaw deal take different tacks when it comes to research

The two Canadian investment banks that acted as financial advisers in Corus’ $2.65-billion purchase of Shaw Media have taken opposite approaches to how their research desks have covered the proposed transaction, that has been opposed by a minumum of one Corus minority investor.

Catalyst’s opposition to Corus-Shaw Media deal questioned by investors, analysts

The motives fuelling a minority shareholder’s make an effort to thwart Corus’s $2.65 billion purchase of Shaw Media were called into question Friday, as Catalyst Capital Group Inc. aired its concerns concerning the proposed sale on a business call with investors and analysts.

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Equity analysts at RBC Dominion Securities Inc., which acted for Corus Entertainment Inc., published research notes on Feb. 12 that offered a favourable opinion of the offer and analyzed the outlook for Corus and Shaw Media’s parent company, Shaw Communications Inc. In contrast, analysts at TD Securities Inc., which was hired by Shaw, happen to be prohibited from releasing any comments about the companies for an unspecified time period.

Both banks stand to generate millions in fees if the deal close.

The related-party transaction requires more than half of Corus’ minority investors to vote in favour of it either before or at a special meeting, which is held on March 9. It means shareholders can nonetheless be persuaded by research reports from brokerages and shareholder advisory research companies. 

Private equity firm Catalyst Capital Group Inc., which specializes in distressed debt situations, has raised questions about Corus’ lack of disclosure within the management information circular, that was published on Feb. 9, and the $2.65-billion price tag – a figure it contends is as much as $858 million too high. 

For the global research industry, which has been plagued by concerns over potential or perceived conflicts associated with investment banking clients, preserving autonomy is crucial.

To assist in managing actual or perceived conflicts of interest, RBC and TD say they follow strict internal policies that protect the independence of their research divisions. Certainly one of the tools that’s employed is a virtual and physical barrier that restricts and monitors the flow of knowledge between the research and investment banking sections. 

Both RBC and TD maintain internal policies that forbid their research analysts from talking with reporters. Official spokespeople offered limited explanations via email.

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“At the time of publication, neither Corus nor Shaw were restricted,” said Gillian McArdle, a spokeswoman at RBC. “Restricted” means that analysts are banned from publishing research. “We have comprehensive policies and procedures in place which govern the publication and distribution in our research.” She didn’t say why the businesses weren’t on the restricted list, or if so when the happy couple could be put back on this type of list.

In their notes, RBC’s analysts updated their estimates for companies and decreased their price target for Corus’ class B shares to $12 from $13 “following a period of research restriction.” They commented around the merits and pitfalls from the deal, calling it “an interim solution” in today’s slumping media environment.

“Our view of the Corus-Shaw Media transaction is relatively balanced,” one research note reads. They write that the combination “creates a stronger company with meaningful scale and a ‘right to win’ in a maturing broadcasting industry.” But they also explain some risks, too, including the lingering uncertainty around channel unbundling, a softer ad market and the “relatively high leverage” that Corus will need to pay for it.

But some are questioning RBC’s decision to publish their reports before the March 9 shareholder vote. Despite the fact that its research and investment banking arms are distinct, positive analysis could be seen as conflicted.

“It might happen to be prudent for RBC to haven’t issued any investment reports to prevent any appearance of a conflict of interest,” Laurence Booth, a company finance professor in the University of Toronto’s Rotman School of Management, said.

“When you start referring to compliance, the question isn’t whether it this is legal or illegal activity, but a question of whether a bank really wants to get involved with some kind of questionable activity that may play out poorly in the court of public opinion. That’s the job from the bank.”

In contrast, TD says it hasn’t published about the deal because it’s material to an investment banking client.

“TD Securities has a policy to limit analyst research on clients involved with a transaction deemed material to the clients,” said spokeswoman Alison Ford. When asked what is the foundation for this policy, she pointed to an Ontario Securities Commission policy that “provides general guidelines that registrants may wish to consider” for crafting policies and operations for safeguarding inside information about an issuer.

The OSC suggests that a registrant “should normally” move an issuer’s name to some restricted list when their relationship continues to be disclosed to the market, but the bank might be in possession of or could gain access to material knowledge over the course of a transaction.

The guidelines say that in this case, the dissemination of research materials concerning the issuer’s securities “ought to be restricted or stopped.” It says that a company “should normally” be moved from a restricted research list after any inside details are disclosed towards the market “following completing a distribution or perhaps a merger or acquisition.”

Ford declined to elaborate on why a study restriction have been initiated or when its institutional clients can get it to be lifted. “I can’t confirm the details,” she explained. “It might be inappropriate to publicly discuss our internal policy. Our internal policy is within place using the best interest of our clients in mind.”

Financial Post
cpellegrini@nationalpost.com