Shaw Communications' Move East Leaves Investors Curious

Shaw Communications Inc. (SJR) has won the auction for Hamilton, Ontario-based Mountain Cablevision, one of the few remaining sizable, independent cable systems in Canada. The auction was apparently very competitive given the geographic proximity to Rogers Communications Inc. (RCI) and Cogeco Cable Inc. (CGEAF.PK) territory.

In fact, Shaw paid a premium to win, according to RBC Capital Markets analyst Jonathan Allen, who estimates it paid more than 10x EV/EBITDA or between C$250-million and C$300-million. He also noted that Shaw has C$365-million in cash on hand, although the Boris family (Mountain’s owners) has the option to receive a portion in Shaw shares.

Mountain has impressive subscriber penetration rates and a well-upgraded network, he told clients. Shaw’s most recent acquisitions have been smaller family-owned cablecos that require heavy capital expenditure and network upgrades, and have low service penetration rates, Mr. Allen noted. But the purchase of Mountain is a deviation from this strategy and investors are curious why Shaw is moving East.

The purchase presents a variety of opportunities, including acquiring smaller systems nearby to build a new cluster, gradually increasing Mountain’s discounted rates, capitalizing on Hamilton’s high population growth and new subdivisions, and the ease of linking Shaw’s fibre already running through Hamilton.

Shaw can also save money by moving Mountain’s phone service away from third party vendors and Mr. Allen thinks it may consider overbuilding into new housing developments on the border with Cogeco’s Burlington territory.

Closing is subject to CRTC approval, which is estimated at between eight and 16 weeks.

RBC rates Shaw shares at Sector Perform with a C$24 price target.