Corus buys Shaw Media in $2.65B deal that puts Shaw's focus on wireless and cable

Toronto-based Corus Entertainment isbuying Shaw Media from Shaw Communications in a $2.65-billion deal.

The move shuffles ownership of 19 specialty TV channels including Global, Food Network Canada, HGTV Canada, HISTORY, Slice, National Geographic Channel and Showcasebetween two companies that are controlled by the Shaw family. Corus also ownsa network of radio stations and theNelvanaanimation studio.

If it gets the backing of regulators and shareholders, the move would turn Corus into a media empire with 45 specialty TV channels and more than a dozen conventional onesbig enoughto compete with rivals Bell and Rogers.

All while giving Calgary-based Shaw a cash infusion to beef up their core cable television, internet and wireless distribution networks.

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"Look at it like it's cleaning house," Irene Berkowitz, an instructor with Ted Rogers School of Management in Toronto, said in an interview."If you put aside that the Shaw family controls both companieswhat we have is a Corus that creates content and Shaw as a company that specializes in delivery."

Executives from both companiesdescribed it in similar terms on Wednesday, a deal that strengthens both core businesses to let them better compete with rivals, while still maintaining a relationship.

In a release, Coruscalled the deal "a transformational acquisition that redefines Corus and Canada's media landscape."

Pick-and-pay cable coming

Itcomes on the eve of a sea changefor Canadian television, due to new CRTC rules that will mandate cable companies to offer so-called "skinny basic" cable packages as of March 1. They will be followed by "pick-and-pay" plans that will give consumers much more choice in what channels they want to pay for.

Portfolio manager Andrea Horan with Agilith Capital in Toronto says the looming new cable landscape has media companies scrambling to best position themselves for amurky future.

"It'sanother uncertainty," she said. "Many participants are quite hopeful that the net impact will be reasonably minor.Ithink that's what the hope is."

The move would make once-tiny Corusa major player in content, with 32 per cent of all English-language television viewership in Canada. That could give the company the size and scope to compete with larger rivals, but it comes with a hefty price tag.

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Corus will forkover $1.85 billion in cash for the assets, as well as 71 million shares.

"The challenge now is the cash flow within the media business isnot growing as much any more," Horan said. "Butthere's synergies they hope to get out of this."

Indeed, Corussays it expects to book as much as $40 million in cost savings from combining the media assets, and that's just in the short term. "There's no doubt in my mind that those assets are better together than apart," Horan says. "It's just at what price and at what point were they put together."

The move also fundamentally changes Shaw, too. Over the years, Shawhasbeen turning itself from a regional cable company into a more integrated media one, capped by its purchase of the old CanWestbroadcastingassets in 2010.

But the Corus deal flips the broadcast assets they got from CanWestfor an amount thaton paper is less than they paid for them in the first place.

Wireless play

In contrast from the days of convergence, the Corus dealturns Shaw into more of a distribution company, with large assets on the cable, internet and, now, wireless side, thanks to Shaw's purchase last month of Wind Mobile for $1.6 billion.

The Corus deal pays for Wind andgives the company a cash injection to pay to improve and expand Wind's wireless network.

Shaw CEO Brad Shaw said as much in a memo to staff on Wednesday after the deal was announced, saying the sale to Corus "positions us as a leading pure-play connectivity company."

When the Wind deal was announced, Shaw's stock dropped as investors worried how much it would cost to build out their network. The Corus deal removes that "overhang" from Shaw's stock, as Horan describes it, because Shaw would get more cash from Corus than they spent to acquire Wind in the first place.

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But asBerkowitz notes, the deal could be good news for Corus, too, by takingadvantage of a market void in Canada: a pure-play global content provider. "Canada has Entertainment One," she said, referring to the Toronto-based but London-listed production studio that produces or owns the rights to tens of thousands of movies and TV shows, "but not much else."

"That space is really open for grabs in Canada," Berkowitz said.

CorusCEO Doug Murphy said the purchase of Shaw Media "positions the combined business as one of Canada's leading media and content companies with significantly enhanced scale and growth prospects going forward."

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The deal also comes with a pledge thatTheShaw family living trust will not sell their Corus shares for at least one year, and the trusthasprovided written commitment toCorus' board ofdirectors indicating its support for the acquisition.

Both deals, pending regulatory approval, are scheduled to be finalized in May, and the Shaw family will still retain majority control of both companies.

For her part, Horan says there's a logic in combiningthe two businesses, but telling that the deal hives the two apart at a time when others are consolidating. "The hope from some was that Shaw was going to bring Corus into the fold, not eject their media part," she said.

Berkowitz, meanwhile, sees a lot to like in the deal, and suspects it will get a green light from regulators.

"TheCRTC has made it clear they are interested in modernizing the system and this is exactly that," she said.

"It'sa little bit of forward thinking, and I think it's great."