Source : Globe & Mail

TV station purchase builds platform for expansion outside Quebec

TVA Group Inc., one of the most successful media companies in Quebec, took a step across the border into English Canada late last year when it acquired a 75-per-cent interest in the money-losing Toronto 1 television station from CHUM Ltd.

That move could be a prelude to further expansion outside Quebec, analysts say, as the company looks for room to grow.

The Toronto 1 acquisition was made in partnership with TVA's sister company, Sun Media Corp. of Toronto, another arm of the huge Montreal-based Quebecor Media Inc. empire, which is already well established in English Canada with newspapers in several cities across the country.

Up to now, TVA has stayed within the borders of its home market. In Quebec, it is the largest private sector broadcaster with a network of 10 television stations (six of which it owns outright), several specialty and pay television stations and a publishing division that specializes in celebrity gossip magazines.

It's most successful television program is the wildly popular Star Académie, a reality talent show that has huge ratings in Quebec. In 2005, for the first time, the show will be recruiting talent at auditions outside of the province in Ontario and New Brunswick.

The purchase of Toronto 1 is "an important step in creating a growth platform for TVA outside of its traditional markets, and in broadening TVA's audience and advertising base," the company said in December, when it closed the deal, paying $31.9-million in cash for its stake.

But turning around Toronto 1 will be a big challenge for TVA. The station was a money pit for its original owners, Craig Media Inc., and the losses caused such damage to Craig that the entire company hit a cash crunch and had to be sold.

CHUM bought Craig Media last year for $265-million, but because CHUM already owned two stations in the Toronto area, Toronto 1 was put on the market, opening the door for TVA and Sun Media.

TVA and Sun Media have predicted a fairly quick turnaround in the fortunes of Toronto 1, saying they can take advantage of cross-promotions and linked advertising with the Toronto Sun newspaper, owned by Sun Media.

The two companies projected in their application to the Canadian Radio-television and Telecommunications Commission that Toronto 1 will lose $4-million in their first full year of ownership, and the station will become profitable four years from now.

Not everyone is convinced the turnaround will come that quickly.

Analyst Carl Bayard of Desjardins Securities in Montreal said TVA's projections may turn out to be too optimistic given the difficulties of operating in Canada's largest city.

"It's going to be a challenge for them to really stand out," he said. "The Toronto television market is almost as competitive as the Toronto newspaper market."

Mr. Bayard projects Toronto 1 will lose $10-million this year, far more than predicted by TVA and Sun Media.

That likelihood has prompted the analyst to reduce his 2005 earnings per share projections for TVA to $1.45 for 2005 from $1.51, and to lower his 12-month target stock price to $19.50 from $20.50.

But with strong cash flow and little debt, don't expect TVA to shy away from other acquisitions in English Canada, analysts say.

One reason is the potential for acquisitions in Quebec is limited. TVA already has many assets there, and regulators have frowned on Quebecor companies picking up more.

"The general feeling is that they'll likely be pretty aggressive outside of the province, using [Toronto 1] as a beachhead," said Bob Bek, an analyst at CIBC World Markets.

"I certainly would expect to see them build, instead of staying put."

TVA's ultimate parent, Quebecor Inc., has made it clear that its goal is to be a dominant media player both inside and outside Quebec, Mr. Bek said.

"They've got these newspaper assets already outside the province, so I think the goal is to build broadcast assets as well."

If any broadcasting assets come up for sale in the next while, "I'd be surprised if Quebecor, or Quebecor entities, weren't involved," he said.

In the nine months ended Sept. 30, TVA reported a profit of $34-million ($1.06 a share), up slightly from $33.1-million ($1) a year earlier. Revenue was $252-million, compared with $244-million the year before.

TVA's class A voting shares are almost entirely held by Quebecor Media Inc., which in turn is about equally owned by Quebecor Inc. and an arm of the Caisse de dépôt et placement du Québec.

The class B non-voting shares constitute the public float. They were on a gradual upward trajectory from late in 2001 to last March, rising from about $10 to over $25. But in the last 10 months, they have slipped back to the $20 range, closing yesterday, up 34 cents to $20.35 on the Toronto Stock Exchange.

The company pays an annual dividend of 20 cents a share, but with its strong cash flow some analysts have suggested this should be a much higher payout.

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