Corus Entertainment Inc CJREF

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Loss of Five Channel Trademarks Leads to a Material Equity Value Reduction

OUR TAKE: Negative. After the close on Friday, Corus announced that Warner Bros Discovery unexpectedly decided not to renew certain programming and trademarks output with Corus post the end of calendar 2024. The decision will likely deprive Corus of trademarks and programming on 5 channels which together accounted for close to $155M and $49M of revenues and Operating Income in fiscal 2022 (last published CRTC data). While Corus will work on backfilling the programming for those channels with other content, the loss of the trademark will likely push many subscribers currently on those channels to turn to other broadcasters/streamers who will end up landing those rights. Assuming that Corus could lose 50% of the subs and advertising revenues, we believe the company’s valuation would be materially affected. We kept our EBITDA multiple unchanged at 4x, but the assumption that 2025 EBITDA could decrease to $306M brought down our valuation to $0.37/share leading to our downgrade to Sector Underperform.

KEY POINTS

Loss of 5 profitable channel trademarks. The non renewal of trademarks and programming by Warner Bros Discovery will likely lead to a scramble between Corus and whichever company will end up with the content for a fight for the subscribers currently paying for access to these channels. The channels in question are the Food Network Canada, HGTV Canada, Cooking Channel, Magnolia Network and the Oprah Winfrey Network. As per the latest CRTC data, in fiscal 2022, those channels generated $155M in revenues (around 10% of Corus total revenues) and close to $49M in operating profit (around 12% of total). It is important to point out that the loss of trademarks and content coming from Warner Bros does not mean that all revenues will be lost. Corus will look to secure additional content from other producers in order to beef up the content on these channels, however the trademark of the channels themselves (the brand name of the channels) will go to whichever company secures the rights to those trademarks. What will follow could get very messy.

How the regulator will deal with this situation will be key. The Canadian BDU/Broadcasting market could become a key test to the CRTC. If the trademarks of those channels have been acquired by one of Canada’s BDUs (we don’t know exactly who ended up taking those rights yet), the buyer will likely transition all the subscribers it currently has on those channels to the new channels operated by the buyer’s Media division. That could lead to a substantial loss of revenues for Corus and a regulatory minefield for the CRTC as we expect Corus will likely raise the issue of vertical integration yet again which could lead to a material review by the CRTC of the subject. If the rights have been acquired by a foreign streamer, the loss of revenues to Corus might be lower initially, but as some customers find that the content on those TV channels (which would need to be rebranded) have changed, they might decide to drop their subscription with Corus over time.

We see the news as a significant negative to equity valuations. While Corus’ management has delivered significant cost-cutting protecting the company from the reduction in advertising dollars over the last 2 years, the loss of those 5 channels could be hard to fully offset. The 5 channels are very profitable, especially the Food network and HGTV, and securing content that would replace them will be a difficult task. We have assumed that of the close to $50M in annual profit generation from those channels, Corus will be able to keep $25M hence losing $25M in annual profits. Given the static nature of the company’s debt, the loss of these profits has led to a material reduction in our equity valuation. While we expect the company to continue to generate positive FCF and earnings, until the debt is materially reduced, the equity value will likely remain under significant constraint. Hence, we have downgraded our rating on the shares at this point.