TORONTO – At least one prominent financial analyst has serious doubts about the proposed purchase of Standard Radio by Astral Media.
In a research note published Monday, BMO Capital Markets Tim Casey said that because Standard is already known as a leader on margins and on cost containment, adding Standard to Astral is not such a good idea.
"We estimate the transaction will be earnings neutral in 2008 and modestly accretive to free cash flow," writes Casey. "We do not believe is enhances the long-term growth of the company." BMO Capital Markets downgraded Astral to "market perform."
"Based on (Standard’s) IPO data, it has industry-leading operating margins in the 38% range (vs. Astral at 35% and Corus at 26%)," writes Casey. Standard was all set to go public last year but pulled out when the markets turned sour.
"We remain of the view that revenue and cost synergies of (the Astral-Standard) combination will be very modest, and don’t justify the implied multiple. We foresee modest revenue benefits to owning national assets in a local medium. Lastly, we believe this materially reduces the likelihood that Astral is for sale. That focus now shifts to Corus, with two logical, well-capitalized bidders in CanWest/Goldman Sachs and CTV/Woodbridge," he wrote.
Astral’s shares closed Monday down 4.3% to $41. The potential purchase news was announced after the markets closed Friday.
The news release itself also vexed Casey. "The nature of the press release, particularly no mention of price, is curious to us. Why not issue a generic statement that, in response to media speculation, Astral confirms it is in negotiations with an independent media entity, but there can be no guarantee a deal will be completed, no further comment will be issued, and so on?" he asked. "While this transaction appears to be imminent, there is some element of risk that the two parties will not reach an agreement."
Speculation is that Standard will sell for between $1.1 billion and $1.3 billion.
"We had been of the view that Astral and its controlling shareholder, Ian Greenberg, would reluctantly come to the conclusion that clearest path to shareholder value creation was to sell the company. We remain of that view, but clearly, the company has chosen an alternative option. Our thesis was that with CHUM and Alliance Atlantis gone to other suitors (CTVGlobemedia and CanWest, respectively), there was little opportunity for Astral to buy scale in its television business. Corus is an excellent fit with Astral, but the Shaws (controlling shareholder of Corus) and Greenbergs seem unable or unwilling to consummate a transaction, despite significant cooperation between the two companies at the operating level," wrote Casey.
"We hold Mr. Greenberg’s track record of earnings growth and shareholder value creation in high regard. Pro forma Standard, Astral will have an EBITDA base exceeding $300 million, an enterprise value of about $3.2 billion and equity capitalization north of $2.5 billion. Equities available to investors within the media and consumer sector continue to shrink. Astral will benefit, to some degree, from a flow of funds into these scarce equity opportunities."
The last remaining belle of the ball, as it were, is Corus (notwithstanding smaller-market radio company Newfoundland Capital Corporation). In a separate research note on Corus, the Astral discussions with Standard are positive news for Corus, which may now be the target of a bidding war between CanWest and CTVGlobemedia. The wild card is that no one outside the Shaw family knows what they’d like to do with the radio, TV and production company.
The consolidation cycle in domestic media continues. CHUM, Alliance Atlantis and now, it appears, Standard Radio will be acquired, leaving CTV/Woodbridge, CanWest/Goldman Sachs and Astral as the remaining players. We acknowledge that it is unclear if controlling shareholder JR Shaw is willing to put Corus in play. However, the conditions for a competitive bidding process for the company between two strategic, well-capitalized buyers is, in our view, not debatable. We are upgrading Corus to Outperform," wrote Casey, who raised the company’s share price target to $55 from $50.
Corus shares closed Monday at $47.85
