Source : Globe & Mail

If the Canadian broadcasting sector is opened to increased foreign investment after CanWest Global Communications Corp.'s recent takeover of Alliance Atlantis Communications Inc., the groundwork will have been laid by a tiny cable company in Newfoundland.

When Persona Communications Corp. took itself private four years ago, executives didn't think they were potentially drawing a new blueprint for industry consolidation. But last month's purchase of Alliance by CanWest has tapped much of the same structure used back then.

In a move to take itself private, Persona partnered with U.S.-based private equity players Hicks Muse Tate & Furst Inc. to finance most of the $360-million needed. Industry watchers are now pointing to the smaller cable deal as a potential precedent-setter in broadcasting if federal regulators approve the Alliance takeover.

"We were probably the first guys to go and knock on the door with that structure," Persona chief executive officer Dean MacDonald said. "It now seems to be something that other folks are adopting."

Persona convinced the Canadian Radio-television and Telecommunications Commission to allow the transaction by ensuring regulators that control over the assets would remain in Canada, though 65 per cent of the funds were coming from U.S. investors.

CanWest is using New York-based investment banker Goldman Sachs & Co. to pay more than 90 per cent of the tab for it's acquisition of 13 Alliance specialty cable channels, valued at $1.5-billion.

"They're pretty close," industry watcher Greg O'Brien, publisher of the cable sector online newsletter Cartt.ca, said of the two structures.

The Alliance takeover is one of two giant media acquisitions that will cross the desk of newly appointed CRTC chair Konrad von Finckenstein in the coming months. The other is the $1.4-billion purchase of CHUM Ltd. by CTVglobemedia Inc.

While the CHUM process will look closely at the ownership of multiple TV stations in a single market (CTV and CITY-TV), the Alliance deal will be examined to see if the U.S. investor can exert influence over the business.

Foreign-ownership limits for the cable and broadcast sector require the voting shares to be held by Canadians. Those rules are designed to keep control of the assets in domestic hands, though critics argue it stifles investment.

"Whether it applies across other sectors is not for me to say" Mr. MacDonald said. "But it obviously works for us. It opens up a bigger pool of capital."

Persona was successful in convincing the CRTC that it ran the operations. Of the 11 directors on Persona's board, at least seven are Canadian, though Hicks Muse (now called HM Capital Partners LLC) has the right to place up to five.

It is expected CanWest will make a similar argument, but could face a tougher task, since approving the deal may open the door for other transactions in broadcasting that draw heavily upon U.S. money, which could concern the CRTC.

Though CanWest is paying just $132-million of the price tag, it will eventually place its Global Television network into a partnership with Goldman in 2011 that includes the Alliance channels, such as Showcase and HGTV. The two sides will divide up shares in the venture at that date, based on the financial performance of each. CanWest then plans to buy out Goldman.

Whether the regulator sees Goldman as only a financial investor will depend on whether it believes the investment banker can exercise control over the Alliance assets by pulling other levers in the deal. When Craig Media Inc., former owners of the A Channel network, sought help from a U.S. investment bank in 2003 to finance their expansion into Toronto, that transaction included covenants that ended up forcing a sale when Craig struggled.

Since the U.S. investor owned less than 20 per cent of Craig, it wasn't required to make its shareholder agreement public and the CRTC wasn't aware of the trigger.

The regulator will be looking for similar aspects in the Alliance deal. However, Edwin Baker, a law professor with the University of Pennsylvania who specializes in media ownership, said it's difficult for regulators to determine how much control an investor wields.

Though restrictions may appear to limit influence, law makers are "naive" if they think financial backers can't call the shots, he said.

"Where the capital comes from is likely to be where the control eventually settles," Mr. Baker said. "I'd be telling the regulators that it's a bad idea to allow the money to be coming from the U.S."

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