Source : Globe & Mail

CanWest seeks minority stake in TV deal; U.S. buyer would test foreign stake rules

TORONTO, OTTAWA -- The coming sale of Alliance Atlantis Communications Inc. is expected to test federal regulations on foreign ownership of Canadian media, as the private equity arm of Goldman Sachs Group Inc. is set to pay the bulk of bill on a $2.1-billion takeover.

In a deal that is seen as imminent, Goldman has partnered with CanWest Global Communications Corp. to buy Alliance, which was formally put up for sale by its founders last month.

Alliance is considering an offer that would see the New York-based investment bank pay the majority of the purchase price, with CanWest making a cash contribution of less than 20 per cent of the value of Alliance's specialty TV channels, according to investment banking sources. Alliance owns 13 channels, including Showcase and History Television, and analysts say that division is worth about $1.6-billion. Goldman has lined up debt financing for the purchase.

Over the next three years, CanWest would have the option of buying 100 per cent of the specialty channels based on a preset formula, and Goldman is expected to be able to force CanWest to make the purchase by 2010, according to sources familiar with the deal. Alliance also owns 50 per cent of the CSI crime drama franchise and 51 per cent of Movie Distribution Income Fund.

Canadian regulations cap foreign ownership of domestic media and telecom companies. Goldman and CanWest plan to finesse those regulations by having CanWest take voting and management control of the specialty TV assets.

A similar structure was used last month when Canada's Public Sector Pension Investment Board teamed up with a U.S. satellite operator to buy Ottawa-based Telesat Canada, the owner of Canada's satellite network.

Alliance stock gained $2.21 yesterday to close at a record $53.50 on the Toronto Stock Exchange.

This was after the Dow Jones wire service reported Goldman and CanWest were close to a deal that would see Alliance sold for $55 a share.

A senior regulatory source said the potential sale of Alliance to CanWest and Goldman would likely not meet approval without some corporate ownership changes.

Foreigners are restricted by the Canadian Radio-television and Telecommunications Commission to a maximum 20 per cent of operating stock in a broadcasting company, and 33.3 per cent of a holding company, producing an effective limit of 46.7 per cent at the operating level.

But the source said the buyers could likely gain approval from the CRTC for an ownership change for most or all of Alliance Atlantis's licences by adjusting the ownership structure. One possibility would be to break the company into two parts, so that the regulated assets are owned largely by CanWest, and Goldman has a heavier ownership emphasis on the unregulated assets.

"They'll have to find ways," the source said. Alliance's potential buyers could also bring in more domestic money, or sell some assets.

Not all of Alliance Atlantis is subject to the regulator's ownership restrictions, with the CSI franchise co-owned with New York-based CBS Corp. Alliance is currently 16.4 per cent held by foreign shareholders, according to the CRTC website. The regulator deals with such corporate acquisitions on a licence-by-licence basis, not as a single takeover.

Amid all the speculation on Alliance's future, analysts say CanWest has the most to gain by purchasing the company's specialty channels.

"CanWest's motivation for potentially buying [Alliance's] specialty TV assets is well known. A lack of meaningful specialty TV exposure at CanWest has been an issue for the [company] for a decade," CIBC analyst Bob Bek said in a research note to clients this week.

"If CanWest gets these specialty assets, it will have additional clout with advertisers that should return [or] retain value at its conventional TV assets. In other words, it makes great sense," Mr. Bek said.

Westwind Partners analyst Ben Mogil anticipates CanWest could garner cost savings of $25-million from combining Alliance's specialty assets with its own, but calls that estimate "conservative." Much of those savings would be achieved through spreading programming across all of the channels.

A media executive who knows Alliance Atlantis well said the apparent partnership between CanWest and Goldman "looks like something bigger and far more complex" than this one deal. He said the two could work together to build CanWest outside the country.

CanWest is rumoured to be exploring a $1.5-billion sale of its Australian TV network to finance the Alliance deal. Observers suggested the structure of the Goldman Sachs agreement may allow CanWest to hold off on selling the Australian network, which pays millions in dividends to the parent company.

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