Source : Canadian Press

TORONTO (CP) - Global TV's financial performance will play a key role in how well CanWest Global Communications Corp. (TSX:CGS) does in its acquisition of rival Alliance Atlantis's specialty channels, CanWest CEO Leonard Asper said Thursday.

The media company announced late Wednesday that it would team up with Wall Street investment bank Goldman Sachs Capital to buy Alliance in a complex deal that would see the Canadian company initially put up just a fraction of the $2.3 billion price tag.

Winnipeg-based CanWest will take an initial 17 per cent stake in Alliance's specialty channels, which in total are worth $1.5 billion, through a new subsidiary. In return, the company will put up about $132 million as well as its Global television network.

CanWest then plans to buy a full ownership of the specialty channels by 2011.

The outcome of the deal leans strongly on the financial performance of the combined broadcasting assets.

When the 2011 deadline approaches, CanWest and Goldman will divide the shares of the new company according its overall performance. Without high profits, CanWest could risk holding less than half of the company.

Asper told a news conference Thursday that the greatest challenge will be in meeting the deadline to buy the full stake in Alliance Atlantis's (TSX:AAC.B) 13 specialty channels.

"We put it all on our shoulders to perform," he said, adding that acquiring the speciality channels "enhances the likelihood Global will perform better."

But it wasn't clear what would happen if Global and the cable channels turn in a disappointing performance over the next four years, though that could leave CanWest with a minority stake in the new company.

The Internet has become an increasing concern for network executives stateside where viewers have been migrating to online services to watch their favourite shows. While online video streaming and purchased downloads have proven lucrative in the U.S., the networks have also seen viewers turning to illegal downloads.

Chief financial officer John Maguire wouldn't comment on what would happen if CanWest performs below expectations nor would he say if the company will receive a first-look opportunity to buy up shares it might not acquire at the deadline. He said those details will be made public within a month.

The acquisition is set to be completed by the summer, pending approval by regulators, shareholders and the CRTC, the federal regulator.

Under the agreement, Goldman Sachs will gain Alliance's share of Motion Picture Distribution through a Canadian partner and Alliance's 50 per cent interest in the "CSI" television franchise, while U.S. television network CBS Inc., the other holder, will assume international distribution of the show.

Rumours have suggested that Goldman will eventually sell its interest in the show to CBS, though the network declined to comment.

Asper said the deal was shifted to a subsidiary to avoid it having a direct impact on CanWest, giving the debt-laden parent company more financial flexibility.

"If we were going to borrow money, we wanted the borrowing to be in the subsidiary company, not at the CanWest parent level," he said, which opens the company up to "maximum flexibility to do whatever we want in our asset groups."

CanWest loaded up on debt in the wake of buying newspaper assets from Conrad Black's former Hollinger empire for more than $3 billion in 2000.

Since then the company has been actively reducing its debt by selling assets and making other financial moves. It also formed CanWest MediaWorks Income Fund (TSX:CWM.UN), which assumed most of the debt.

"With our balance sheet we could not write a $1.5-billion cheque," Asper said. "but we do have a lot more flexibility than we had three or four years ago now that we've paid down a lot of debt from the Hollinger transaction."

Analyst Ben Mogil of Westwind Partners said in a research note that CanWest could buy up the income fund sometime in the future, though he considers it "a longer-term possibility."

New tax legislation on income trusts is set to kick in the same year as the deadline for the agreement between CanWest and Goldman.

The specialty channels are the focus of the Alliance deal for CanWest Global, which has struggled to gain a strong presence on the cable TV market with its line of channels that include Mystery, Men TV and Lonestar.

Rival broadcaster CTVglobemedia Inc. has had greater success on the cable TV front while Alliance's 13 stations have also carved their own niches.

As part of the deal Global will gain Alliance's ownership of History Television, HGTV, Showcase and others.

"It has been 10 years that we've been trying to get into the specialty arena," Asper said. The deal will "fortify our competitive position against CTV."

Asper also said that the international rights for Alliance's domestic programming will prove lucrative. HGTV shows have been especially hot on the international market, selling to overseas networks and American cable channels.

Media watchdogs continued to criticize CanWest's announcement, with Peter Murdoch, the media vice-president of the Communications, Energy and Paperworkers Union of Canada promising to fight the deal.

"We are demanding that the Canadian Radio-Television and Telecommunications Commission and Heritage Minister Bev Oda order public hearings into this proposed deal," Murdoch said in a release.

The Canadian Media Guild issued a separate statement saying that "few people in positions of authority seem ready to question, at least out loud, what such consolidation will mean for Canadian audiences and readers, content creators, advertisers and media employees."

Concerns have begun to mount at Alliance that job cuts could be on the horizon, though Asper said that assumption would be "premature."

On the Toronto stock market Thursday, CanWest shares closed up 64 cents, or 6.4 per cent, at $10.63. After rising recently on speculation of a sale, Alliance Atlantis fell $1.51, or 2.8 per cent, to $52.10 in trading of 12.4 million shares.

© Canadian Press