Investment bankers call them busted auctions: Companies that put up a “For Sale” sign, fail to find a buyer and face the daunting prospect of continuing to run the business without wealthy new owners.
Canada’s media sector, traditionally a neighbourhood where any property put up for sale kicks off a bidding war, is currently littered with busted auctions. Businesses that were on the auction block this summer include Corus Entertainment Inc. and DHX Media Ltd., along with the magazines division of Rogers Communications Inc. The “For Sale” signs are still up on front yards.
The reasons these businesses failed to find buyers are partly rooted in regulatory issues, but mainly a reflection of the sector’s daunting financial prospects. One long-term question that springs from a season of busted auctions is how the federal government should react when a once-vibrant domestic media industry becomes increasingly cash-strapped.
Corus provides a case study into the current state of play. The debt-heavy broadcaster announced plans to raise $200-million this spring by selling French-language specialty TV stations to Bell Media, a division of BCE Inc. The federal Commissioner of Competition blocked the deal in May, a regulatory ruling that effectively scotched strategies focused on further consolidation in Canada’s broadcasting industry.
Shaw Communications Inc., the controlling shareholder at Corus, is focused on building out expensive wireless and cable networks rather than pouring more cash into the owner of 59 TV channels, including the Global network, and 39 radio stations. So Corus spent the summer looking for an investor, hiring TD Securities Inc. to find a potential new owner.
Corus reached out to dozens of potential bidders, mainly private-equity funds, but to date no offers have emerged. Sources in the private-equity world said they steered clear because the broadcaster’s growth prospects are uncertain, and regulators are likely to block a roll-up strategy that depends on consolidating media businesses.
At a BMO Capital Markets conference last week, Corus chief executive Doug Murphy set out a go-it-alone strategy that focused on increasing profits from digital media strategies, paying down debt and continuing to cut costs. Mr. Murphy said he planned to “cull the herd” in specialty television by focusing its resources on a handful of his most popular channels.
The same BMO conference saw Rogers chief financial officer Tony Staffieri explain the company sees its sports media properties as businesses that support its core wireless and cable offerings. Rogers values the marketing boost and customer retention it gets from owning and broadcasting baseball’s Blue Jays, along with stakes in Toronto’s NHL and NBA franchises.
The same halo doesn’t extend to magazines: Rogers hired CIBC World Markets Inc. this summer to shop a portfolio that includes Maclean’s and Chatelaine. Sources say Rogers is also open to selling TV offerings such as CITY, FX, OMNI and TSC, formerly known as The Shopping Channel. To date, Rogers has failed to find a buyer for either its print or television assets.
DHX’s board launched a “strategic review” last October that opened the door to the sale of the creator of children’s entertainment, which shouldered significant debt in recent years to pay for acquisitions. Again, no one stepped up with an offer, although Sony Corp. did invest $237-million for a minority stake in DHX’s Peanuts brand. The board is expected to shut down the review when DHX reports financial results at the end of September
Rogers, and other telecom companies with media holdings, acquired broadcasting businesses when valuations were high, on the back of rising advertising revenues. Now, sales and profits from conventional TV assets are in decline and that has a direct impact on stock prices.
A dollar of earnings before interest, taxes, depreciation and amortization (EBITDA) from Rogers’s growing wireless business is worth more than eight dollars to the company’s stock price, using the EBITDA multiples that analysts and investors employ when valuing the company. In contrast, a dollar of EBITDA from media assets translates into roughly six dollars in Rogers' share price. No prizes for guessing where Mr. Saffieri wants to invest.
If there are no buyers for Canada’s traditional media companies, in part because federal regulators are blocking further consolidation in the sector, the current owners of the country’s magazines, and TV and radio stations will simply starve these ventures of capital. Businesses that cry out for innovation and re-invention will instead be focused on cost-cutting. That’s a dynamic the federal government should keep in mind when asked to pass judgment on the next domestic media takeover.
Andrew Willis