Corus defends strategy despite stock price woes
Corus Entertainment Inc., like many traditional broadcasters, is fending off the internet on two fronts: subscription and advertising. Digital giants are encroaching on both revenue streams, as some entice television viewers to cut their subscriptions in favour of streaming video online while others lure advertisers over to social media.
Two years ago, the Toronto-based media company, created in 1999 as a Shaw Communications Inc. spinoff, bulked up for a long-term battle. It more than doubled its size with a $2.65-billion deal to buy the rest of Shaw’s media assets and plotted to deal with the online onslaught by focusing on premium content, selling data-driven ads and cutting costs.
The deal allowed Corus and Shaw — both were and remain controlled by the Calgary-based Shaw family, which respectively owns 85 per cent and 78 per cent of the class A voting shares in each company — to focus purely on their main businesses: content and the pipes that carry it.
But it’s been a bumpy start to the third year of “the new Corus,” as chief executive Doug Murphy described the post-transaction company on a quarterly call with analysts Thursday. Despite healthy cash flows and a strategy that analysts seem to like, Corus’ success is anything but certain in a market disrupted by the likes of Netflix Inc., Google LLC and Facebook Inc. — even if it does everything right.
Corus’ stock price hit an all-time low earlier this week, closing at $5.82 on Tuesday. Its stock rebounded 20 per cent after its results beat Bay Street’s expectations, but even at its $7.34 close on Friday it is well below the $11 to $13 range it’s generally traded at since it bought Shaw Media.
Shaw received 71 million Corus non-voting class B shares in the sale. At the time, those were worth about $800 million. As of Friday, their value had plummeted to about $515 million. Shaw declined to comment for this article.
Following the transaction, which was funded with a loan, Corus has not reduced its debt as fast as it or analysts expected to, and soft television advertising revenue makes it unlikely it can reduce its debt-to-EBITDA ratio to 3.0 this year, Murphy said.
This has investors questioning the company’s high dividend yield and whether Corus has enough money left over to spend on growth strategies.
“A dividend cut appears inevitable,” Barclays analyst Phillip Huang noted Thursday after management said it would update its dividend policy in June. Desjardins analyst Maher Yaghi noted it would be better to cut the dividend to prioritize debt repayment, given the company’s high leverage ratio.
But despite the internal financial pressure and external industry challenges, Murphy believes Corus’ strategy is on the right track and said it was “absolutely” the right decision to buy Shaw Media.
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“This transaction brought a wealth of opportunity to strengthen Corus’ position in the market,” Murphy said in an email.
The deal added assets such as the Global Television Network, Food Network Canada and HGTV Canada to Corus’ stable of brands including W Network, YTV and the Disney Channel. In October, Corus sold two of the acquired channels, Historia and Series+, to Bell Media Inc. for $200 million, pending regulatory approval.
Murphy said the combined scope and scale from the Shaw deal helped Corus gain significant share from competitors, grow revenue in large local markets by combining its radio and television sales efforts, and improve partnerships internationally.
Corus had a particularly good quarter in radio, which Murphy credits to synergies from the Shaw deal.
“In those large markets where we are co-located with Global TV and Corus radio, the sales teams are just having a great time selling television and radio together,” he said on the call, adding the double-digit growth rate is off a small base, but still meaningful.
Murphy told analysts there’s been good uptake of its video-on-demand product sold through television providers such as Shaw that allows customers to binge watch shows such as HGTV’s Property Brothers. He said he sees a small opportunity for Corus programming as more online streaming players such as YouTube and Amazon Prime offer services in Canada.
Corus has also had success using technology to better insert ads into video on demand and target ads to specific demographics, such as empty nesters and foodies.
“Though we are operating in a changing media market and anticipate variability quarter to quarter, we are focused on our long-term goals and believe that we have the right strategy in place to deliver success and long-term value for shareholders,” Murphy said in the email.
“We have been clearly disappointed in the recent share-price decline and believe our stock is highly undervalued, particularly given our strong free cash flow and the progress we are making against our strategic priorities.”
But in the Netflix era, in which television ad revenue is lower and unpredictable, one of those priorities has to include offering premium content, which Murphy acknowledged. “We’re going to hunt with the big dogs,” he told analysts.
RBC analyst Drew McReynolds said he “fully supports” the strategy, but would like to see greater progress in merchandise and licensing revenue, ad technology adoption and dept repayment.
Although Corus didn’t meet its debt-reduction targets, Murphy said it intends to follow through on its dividend target of $1.14 per share in fiscal 2018. He also said the company “overachieved” on its goal to save $40 million to $50 million in costs during the first two years after the Shaw deal.
Corus cut staff by at least 300 employees during fiscal 2016 and fiscal 2017, and had 3,300 as of Aug. 31, 2017, according to its annual filings. It announced more cuts in February, with 79 layoffs hitting Global News teams.
Unifor blamed the loss of camera crews, reporters, anchors, control room staff, make-up artists and production crews in part on the Canadian Radio-television and Telecommunications Commission for “watering down the obligations for big media companies like Corus to protect local news, and it’s proving disastrous.”
Corus, among others, is calling for even less regulation to help the industry survive increased cord cutting and a weaker ad market.
Kaan Yigit, president at Solutions Research Group, a Toronto-based consultancy, said Corus did “quite well” with television ads in its last quarter given that prime time ratings are down an estimated eight per cent from last year. Still, his outlook isn’t optimistic, noting that Netflix is posting record numbers and Amazon Prime has now entered the market.
“The gradual prime time melt will continue for the foreseeable future and that’s why they are not able to project TV advertising confidently,” Yigit said, adding he sees the possibility of more industry consolidation and cutbacks.
In a December report, Scotiabank analyst Jeff Fan also floated the idea of more consolidation, pointing to the potential for a horizontal deal between Corus and Bell Media.
“We believe TV media consolidation will be necessary to fend off digital,” Fan said at the time. Regulators, he added, are unlikely to support too much consolidation without significant divestitures.
But Dwayne Winseck, a communications professor at Carleton University in Ottawa, said more consolidation is not the answer. Consolidation hurts creators by giving them fewer doors to knock on and stifles creative business ideas, he said, pointing to successful disruptors such as HBO in the U.S.
The bigger problem, Winseck said, is that advertising seems to have hit a ceiling. Whether it’s due to a lagging economy or cheaper online ads, he found that Google and Facebook are swallowing a larger share of the shrinking pie.
“Our big advertisers — consumer goods, the federal government, the automotive industry, banks — are increasingly taking their spend away from television and putting it into internet,” he said.
That may be true, but Corus’ Murphy sees a long-term path for his company’s content, though it’s hard to anticipate how it will perform quarter to quarter.
“Viewing habits are changing, but linear television viewing still delivers vastly more time spent per week than any other platform,” he said.
But not even he knows how long that will last.