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05/25/2010 12:01 am EST

Focus: GLOBAL

Gavin Graham

Chief Strategy Officer, INTEGRIS Pension Management Ltd

The Canadian cable operator has placed a major bet on content with the purchase of CanWest Global's TV channels, writes Gavin Graham in The Income Investor.

In a bold move that few people saw coming, Shaw Communications (Toronto: SJR.B, NYSE: SJR) has gained control of some of the top specialty television channels in Canada. Earlier this month, the company announced it had spent $700 million to buy out Goldman Sachs Group's (NYSE: GS) 65% stake in CanWest Global's specialty TV operations, which consist of such well-known and profitable cable channels as History TV, HGTV, Showcase Diva, and the Food Network.

There was little movement in the price after the deal was announced. But Shaw's dividend has been increased each year and the shares yielded 4.6% based on Friday's closing price of C$19.20. 

CanWest had acquired the specialty channels from Alliance Atlantis in 2007. To facilitate the purchase, the company created an unwieldy joint venture with Goldman Sachs as its heavy debt load did not allow CanWest to buy the channels outright. As well as these "crown jewels," Shaw also acquired Global TV, the number two conventional commercial TV network. 

"It makes us a major player in the communications industry and television industry in Canada," said company founder J.R. Shaw in explaining the move, which many observers felt was out of character for what until recently has been a staid, conservatively run cable company that seemed content to focus on its core business and avoid risky ventures. 

Debt ratings agencies confirmed that they would not be reviewing Shaw's investment grade rating. The major concern expressed over the deal was that previous marriages of media organizations mixing program content and distribution, such as cable or TV stations, have not proved to add much, if any, value.

Shaw is facing a challenge from Telus's Internet TV offering in British Columbia and Alberta, which has already gained more than 200,000 subscribers. As a result, Shaw is looking to launch wireless services next year as part of its counterattack. By adding wireless phone service, Shaw will be able to offer [a service bundle of] TV, Internet, phone, and mobile.

By having access to exclusive content from its own TV channels, Shaw feels it will have a vital distinguishing feature to make its offering more competitive. It will also have the resources to invest in new programming, particularly at Global, where the heavy debt taken on by [the prior owners] to buy Conrad Black's newspaper empire in 2000 meant it was outbid by CTV for the top-rated US shows. 

The jury remains out on whether content will prove to be a game winner for Shaw and the cost of their new wireless business will undoubtedly constrain dividend growth. But Shaw's track record in building and operating its business commands respect and deserves the benefit of the doubt from investors. 

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