EXPECT CRTC COMMISSIONERS to take the finest of fine-tooth combs to the sale of Alliance Atlantis, because this is far from a straightforward buy. Control, as always, is key and the demise of Craig Media is still somewhat fresh.
However, this creative deal was something CanWest had to do. Two opposing forces faced the company as 2006 turned into 2007.
The first is that ever since the summer announcement by Bell Globemedia to purchase CHUM Ltd., CanWest CEO Leonard Asper knew – and told Cartt.ca – that he must make the next merger move or forever remain a distant, weakening, second banana to what is now called CTVglobemedia. If there was any sizable Canadian media company up for sale, Asper had to grab it. Had to.
("I think we can be creative and we’re certainly going to keep our eye open to get bigger… we need lots more services," he told me in November.)
But secondly, CanWest has neither the cash lying around nor a high enough share price to make an outright purchase of much of anything.
Thus, we have Wednesday’s unique deal which will see CanWest kick in only about 17% of equity portion of the $1.5 billion value it and Goldman Sachs has assigned to Alliance Atlantis’ specialty service. CWG will then pour in Global Television into a new entity where CanWest "should" end up controlling over 50% of when the deal is finally completed in 2011, said Asper today in a conference call with financial analysts.
I’ve got no degree in finance but have seen enough media mergers to know this is surely an odd-sounding deal (except for Alliance Atlantis controlling shareholders Michael MacMillan and Seaton McLean, who will walk away having built a company worth about $2.3 billion, when the CSI franchise and Movie Distribution Unit is factored in).
I think anyone with a sense of recent broadcast history will recall what happened to Craig Media as sort of a cautionary tale of what can happen when an American investor gets deeply involved. While the companies and circumstances were wholly different, the 2004 sale of Craig Media came to happen thanks to a deal it cut with an American firm, Providence Equity, a private investment company.
Providence kicked in $110 million to help Craig get its new broadcast station, Toronto 1, off the ground. In exchange, the U.S. company got 19.9% of Craig Media. However, saddled with certain covenants in that deal and an ad sales market at launch that was soft for everyone (fall-winter 2003-04), Craig was forced to sell the whole company to pay back its American backers.
About two years after the license was issued by the Commission – to the embarrassment of Craig, the CRTC and the industry in general – Craig was sold to CHUM for $260 million. Toronto 1 was sold off to Quebecor and is now SUN TV.
Of course, CanWest is not some tiny company looking to start an expensive new TV station in Canada’s most competitive market, as Craig was. It’s an established, successful, national player. Big, big difference. On the other hand, though, CanWest is kicking in just 17% of the equity of this new entity that will house the AA specialties, with Goldman Sachs contributing $644 million. That means $724 million of the $1,5 billion will be debt financed. A big chunk. "It’s levered, but not over-levered," said Asper.
The rest will be paid by adding Global Television to the entity over four years, with its value delineated by the whole entity’s EBITDA. It’s quite a risk. Not that the company will fail, but that the family will end up losing control of it.
The CanWest CEO told the analysts Wednesday that he believes the CRTC will see this as a "stage-purchase" of AA and that as long as CanWest controls the new entity, that it won’t be off side of the regulations which call for majority Canadian ownership of broadcasters, cable and telecom companies.
"We certainly think the issue is who controls the venture and I think the CRTC – I hope they will – see this as a staged purchase or a partially staged acquisition," said Asper. "We are quite satisfied this will meet the Canadian law…
"It’s a control test."
On this, he’s technically correct. But I’ve never heard of a transaction where the Canadian "controlling" company owns practically so little of the equity. And going back to Craig, it "controlled" the company but was still so bound by its lending covenants that it had to sell.
The closest parallel to this agreement I can recall came in the cable industry. In 2002, a group led by U.S. Hicks, Muse, Furst & Tate (now HM Capital) bought the Canadian operations of Persona Communications for $360 million. HM contributed $100 million, or 64.5% of the equity with TD Capital and CIBC kicking in the rest. The rest of acquisition was debt-financed.
But, control of the company rests with the board, which is Canuck-dominant, the CRTC approved it and Persona has seemed to thrive since.
If the CWG/GS/AA arrangement is approved by the CRTC, CanWest will manage the Alliance Atlantis specialty channels under its own umbrella in concert with Global Television, CH and its existing specialties such as TVtropolis and Fox Sports World Canada. So, it will be running the show and deciding on programming and so forth. But most of the profit from it will likely flow to Goldman Sachs.
Despite the curiously-structured deal, it’s hard to see the Commission nixing it. Commissioners can see that no matter how hard they wish, Canadian conventional TV has swung towards a duopoly and if it were to take apart this deal, the potential for a large competitive imbalance overly favouring CTVglobemedia would be problematic.
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