Arizona Metals Corp T.AMC

Scotia What $1Bi debt gets you-Wiped Out as a common holder

[SunsetGrill]

Wishful thinking on any takeover-the debt will wipe you up and flush you down. S
Does a TVA and Corus Combination Make Sense ?

OUR TAKE: Neutral. Last night The Globe and Mail published an article indicating that Quebecor could be looking to make a bid on Corus. While Corus remains cash flow positive, the debt level being held on its balance sheet is disproportionately high. We indicated in a recent note that we expected the company to work on recapitalizing its balance sheet as a result. If Quebecor were to make a bid, we would expect it to occur within a debt-restructuring initiative and not through a direct acquisition offer to equity shareholders. We don’t think Quebecor would pay north of $400M in enterprise value for Corus. Bottom line: if Quebecor can secure a deal below that level, it could make sense. We don’t see many potential acquirers for Corus at this stage, and any entity that could be interested in bidding would likely also undertake such an investment within an overhaul of the debt which would likely dilute essentially all the equity value in the company. We maintain our Sector Underperform rating at this point.

What could Quebecor be ready to pay? Historically, Quebecor has been very opportunistic in its acquisitions, such as when it bid for Videotron and, recently, Freedom. We believe any offer Quebecor would present to Corus would be at a fraction of the value of the company’s debt. We don’t believe Quebecor would risk its balance sheet to acquire these broadcasting assets.

Does it make strategic sense? Combining the broadcasting assets of TVA with those of Corus could result in material cost synergies in production and content rights. It would also provide Quebecor with a bigger opportunity to market its Freedom wireless services in English Canada through Global. That said, we don’t believe the Corus business could be well managed from Quebec, so some material management resources would need to remain in Toronto.

But the question remains: does Quebecor need to make this acquisition? We believe TV revenues will continue to decline and viewership will continue to shift online, depriving conventional and specialty TV channels of important viewership and hence advertising revenues. So, while in the short to medium term, acquiring Corus could make strategic sense (if the price paid is a fraction of the debt level), in the longer term we believe Quebecor should focus its capital on the telecom assets and not get distracted from the bigger opportunity that Freedom presents.

Would a deal run into regulatory issues? We don’t believe so. TVA is essentially a French specialty and conventional business, while Corus is predominantly English. Combining Corus and Quebecor would not lead to higher concentration than what BCE has in English Canada. In Quebec, the combination could push the boundaries of what the CRTC could accept; however, channel divestitures could be made in that case, similar to what BCE did when it bid for Astral.

Analyst Team

• 
  Maher Yaghi, MSc., MBA, CPA, CFA

  Analyst | 437-995-5548

  Scotia Capital Inc. - Canada

  View Details
• 
  Joey Chan

  Associate | 437-241-2558

  Scotia Capital Inc. - Canada

• Pertinent Data

Valuation: 4x EV/EBITDA on NTM EBITDA 1 year forward
Key Risks: Macroeconomic slowdown; Decline in ad spending; Subscriber pressure on streaming platforms; Regulatory Risks on TV and Radio operations
Rating	Sector Underperform
1-Yr. Target	C$0.05
CJR.B-T	C$0.13
Risk Ranking	Speculative
Div. (NTM)	C$0.00
Quant Ranking	0

Capitalization
Market Cap. (M)	C$26
Net Debt + Pref. (M)	C$1,332
Enterprise Value (M)	C$1,358
Shares O/S (M)	199
Float O/S (M)	184

Volume and Closing Price for CJR.B-T