TD down to sellTHE TD COWEN INSIGHT
Well before the loss of WBD/NBC-U content and brands (that headwind should escalate in calendar 2025), results have fallen to arguably unsustainable levels in Q3, and guidance is for revenue declines to be just as bad in Q4. There are going concern and covenant breach warnings in the MD&A.
Event: Q3/24 results.
Impact: NEGATIVE
We lowered our estimates to reflect both weak revenue trends in Q3/Q4 (more detail on page four), and the likely loss of some revenue related to content supply deals with WBD and NBC-U. When the announcement of losing the output deals occurred (see our note from June 12 here: LINK), we outlined the risk, but we did not change our official forecasts because we were waiting to see if there would be clarity on either what Rogers intends to do with the content/channels, and/or legal/regulatory options for Corus.
We believe that Corus is still weighing various options, but we have no certainty on what or when, so we are now attempting to incorporate the loss of these content/brand output deals into our forecasts. Even with incremental cost reduction efforts by management (the headcount reduction plan is now up to about 800, or 25% of the beginning of 2025 level, versus about 500 in the prior plan), we believe consolidated EBITDA could fall into a range of $175M- $200M in fiscal 2025 (we set our estimate at the bottom of this range out of an abundance of caution amidst the current uncertainty). Management indicated that debt/EBITDA as measured in the bank covenant (a more onerous calculation than the reported PF figure of 3.91x) was above 4.25x at the end of Q3/24, so there will likely be a breach on September 1 when the covenant steps down to 4.25x from 4.5x.
Looking out to the end of fiscal 2025, we now expect debt/EBITDA to be over 6x (using the less onerous reported figures calculation). We do not view this as a sustainable capital structure, so we expect the company to pursue a negotiated recapitalization with its banks and bondholders in the near-term. Using our prior EV/ EBITDA target multiple of 4.5x, we estimate an enterprise value of $790M at the end of 2025, which is below estimated net debt at that time of $1,077M. It is possible that equity holders could end up with zero, but we have assumed the Board (including Shaw family influence) will negotiate for a token ~1% of this EV to remain with common shareholders, leading to our new $0.05 target price. Given our return to target, our recommendation moves to SELL from Hold.