Doubt raised over fate of Shaw's payout

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For a long time, investors have loved the leadership team at Shaw Communications for both its irreverent style and its long-standing commitment to return cash to shareholders.

Last week, chief executive officer Jim Shaw put that reputation to the test with his announcement of a $2-billion deal to purchase CanWest Global television assets. On the whole, the Street considers that a good price for some premium media properties.

Not only did Shaw buy "highly coveted beachfront property" at the bottom of the economic cycle, but the potential for the media assets to drive profits are significant, Robert Bek, an analyst with CIBC World Markets Inc. said in a recent note.

But the planned acquisition has some analysts ringing the alarm bell, noting that Shaw might be forced to pull back on its dividend hikes just as other communication firms are boosting theirs.

Shaw shares yield 4.5 per cent at their closing price Wednesday of $19.45. The stock price has climbed nearly 2 per cent since Shaw's announcement about the CanWest assets on May 3.

The valuation of the deal is fair, the purchase is opportunistic and the assets represent solid media properties, but the size of the deal is unnecessary, Maher Yaghi, an analyst with Desjardins Securities Inc., concluded in a report last week.

The cash investment of $1.2-billion, plus the assumption of $850-million of CanWest's debt, comes at a time when Shaw has also committed to spend hundreds of millions of dollars to launch a wireless network by the end of next year. The additional CanWest investment will constrain Shaw's cash position, he said. "We believe there will be increased pressure on free cash flow, which could restrict dividend growth in 2011."

Mr. Yaghi and some other analysts question Shaw's rationale that the company needs to own content to help drive its video-on-demand programming and wireless services down the road. Several other North American cable companies, including Rogers Communications Inc. and Quebecor Inc.'s Videotron have also made big bets on content. But the disbelievers point to the phone giants that have avoided investments in content, or have at least been pairing them back in recent years.

"Having proprietary English-language content will not be the determining factor of Shaw's success in wireless. Rather, the critical factors relating to Shaw's success in wireless will more likely be product bundling, price discounting, network service quality, handset availability and customer service," Mr. Yaghi said.

Greg MacDonald, an analyst with National Bank Financial Inc., says there is simply no precedent showing a cable company needs to own content to be successful. "We remain somewhat skeptical on whether this deal will create significant value either on the content or conduit side mainly because we have yet to see evidence of this theory from any carrier globally."

Mr. MacDonald also believes Shaw paid a reasonable price for CanWest's TV assets and has not overburdened itself with debt. And, since the existing dividend still represents about 75 per cent of Shaw's free cash, the payout is "quite safe."

"However, the market is right to assume Shaw will want to pay down some debt in the near term and this could mean a dividend growth holiday," he wrote.

It's a sentiment expressed elsewhere on the Bay Street. Following comments from Shaw's management on a conference call last week that the company will be cautious about any dividend increases next year, Phillip Huang, an analyst with UBS Securities Canada Inc., noted: "While we continue to believe a dividend cut is unlikely, we now believe that [a]dividend increase next year may be more moderate or delayed."

One of the standard valuation measurements for the sector is a multiple calculated by dividing the company's enterprise value (market value plus debt and preferred shares, minus cash) by earnings before interest, taxes, depreciation and amortization (EBITDA). On this basis, Shaw trades at 7.4 to Rogers' 6.2 and Quebecor's 5.6, according to Bloomberg data for the last 12 months.

It's not only Shaw's track record on dividends that has won the company a premium valuation in the market place. As a pure-play cable company, Shaw has long been considered a takeover candidate for its bigger, eastern rival Rogers.

Mr. MacDonald says that scenario is now much less likely, given the anti-trust concerns such a move would generate at the federal Competition Bureau and the Canadian Radio-television and Telecommunications Commission.

Measuring cable companies

Shares of Shaw traditionally have commanded a premium because of the company's reputation for increasing dividends.