DBRS Confirms Shaw Communications at BB (high), Trend Remains Positive

Dominion Bond Rating Service (DBRS) has today confirmed the long-term rating of Shaw Communications Inc. (Shaw or the Company) at BB (high) and maintained the Positive trend at this time. While DBRS continues to recognize Shaw’s sustained EBITDA growth, DBRS is concerned with Shaw’s focus on principally returning all or the majority of its free cash flow to shareholders with ongoing share repurchases and its increased dividend for F2007. As a result of its increased dividend, Shaw is expected to be in a slight negative free cash flow position in F2007 (normalized for taxes). The Company is expected to use its roughly $100 million from its cash tax savings for share repurchases or investments, with debt reduction expected to be a third option. The lack of debt reduction, along with an increasingly competitive environment and competitors operating with much strong balance sheets, has continued to mitigate rating improvement for Shaw. (DBRS had originally placed Shaw on a Positive trend in February 22, 2005, with the anticipation that positive free cash flow would be used in a balanced fashion between shareholders and bondholders.)

Notwithstanding these concerns DBRS recognizes Shaw’s (1) consistent incremental improvements in operations over the past four years and cash flow-to-debt improving to 0.17 times; (2) continued broadband growth despite strong broadband penetration – second highest in North America at nearly 60% of basic subscribers; (3) successful scaling of its telephony service that will contribute to future EBITDA growth; (4) growth in basic video subscribers indicating that new services are helping to drive growth in legacy services; and (5) improved key credit ratios mostly due to growth in operations.

Shaw is currently deploying its digital telephony service where demand is robust and the service is now available to roughly 60% of homes passed. Shaw’s triple-play offering of video, telephony and broadband continues to drive average revenue per unit (ARPU) and reduces customer turnover (churn). Shaw has been disciplined in its pricing strategy for its services, which has continued to support a relatively rational competitive environment in western Canada, thus averting a price war with its telco competitors.

However, DBRS expects that Shaw’s competitive advantage in some markets could potentially be short-lived as its telcos competitors are currently deploying video offers, which will give them a similar bundle of services with the addition of wireless. Furthermore, the telcos are currently appealing regulatory rulings that restrict their ability to respond to cable telephony competition. Should these restrictions be removed sooner than currently planned, DBRS believes that the telcos could become more nimble, which would likely increase Shaw’s business risk profile.

As a result, DBRS believes that it will be necessary to mitigate this expected heightening competitive environment through a reduction in its financial risk and therefore a more balanced use of its free cash flow. Thus, Shaw’s ability to improve its financial risk profile and compete against the incumbent telcos will be key for rating improvement.

Note:
All figures are in Canadian dollars unless otherwise noted.