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 is still 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 taking on “a substantially greater amount of debt of computer 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 in a fashion that “appears high.”
Indeed, during a Jan. 13 conference call following the deal was announced, Corus leader Douglas Murphy said the company is now “going to be intensely focused on delevering.”
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Nevertheless, ISS is advising the institutional clients that sign up for its services to vote towards the deal in a special meeting on Mar. 9.
The report states the offer price “appears fair” as it lands on the mid-point of the valuation range made by Barclays Capital Canada Inc., which was retained by the special committee at Corus which was set-up to guide 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 around the opinions of Barclays and RBC Dominion Securities Inc., which acted being an investment banker to Corus. Subodh Mishra, an ISS spokesman, said the report, which is available to clients, is based on public material and declined to comment any more. He said that ISS prohibits its analysts from speaking to the press.
Still, what was clear from the report was its conclusion: The advantages of the deal outweigh the costs.
“Although the high dilution of share issuance and also the increased leverage as a result of the transaction can be a cause of concern, the strategic rationale behind the transaction appears appealing …” Victor Guo, the writer from 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 any 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 outcome of related-party transactions, which is the nature of 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 2 regulators, the Ontario Securities Commission and the Toronto Stock market. It raised what it termed “serious concerns” regarding deficiencies in disclosure related to the way 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 chance to generate long-term value for shareholders,” the organization said in 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 exactly the same presentation to representatives at ISS, adding it intends to distribute copies to minority shareholders prior to the vote.
cpellegrini@nationalpost.com
