Source : Ottawa Citizen

CanWest shares climb as investors endorse complex $2.3B media purchase

TORONTO - CanWest Global Communications Corp.'s $2.3-billion purchase of Alliance Atlantis Communications Inc. is complex, analysts said yesterday, but investors appeared to endorse the purchase by pushing the shares of CanWest up 6.4 per cent in heavy volume on the Toronto Stock Exchange.

Improved first-quarter financial results for CanWest's existing Canadian television operations accompanied the announcement late Wednesday that CanWest will add 13 specialty channels through the creation of a new subsidiary co-owned by a private equity arm of U.S. investment bank Goldman Sachs.

CanWest shares yesterday closed up 64 cents at $10.63.

What such analysts as Ben Mogil of Westwind Partners and Adam Shine of National Bank Financial like about the deal is that CanWest gets in with a small investment -- $132 million to $200 million -- alleviating fears the company would further ramp up debt levels to participate in the media consolidation occurring in Canada.

But the deal involves a significant investment by Goldman Sachs, and investors won't know what the combined company looks like until 2011, when CanWest folds in its existing conventional TV businesses with the specialty channels purchased from Alliance Atlantis.

How CanWest and Goldman split the equity of the new company will depend on the financial performance of all the television assets and how much money each partner put up initially.

"The deal is quite convoluted and details remain surprisingly sparse," Bob Bek, an analyst at CIBC World Markets, told clients in a report. "The problem is valuation, as it is very difficult to incorporate the full effect of the deal on CanWest."

If the turnaround at Global TV, CanWest's Canadian conventional TV network, continues through 2010 with more hit shows and higher ratings, and if combining the specialty channels provides advertising clout and program buying power, CanWest expects to have slightly more than 50 per cent of the new company created by the Alliance Atlantis deal.

But the stake could be lower if the television assets don't perform as expected.

"Whether it's 45 per cent or 55 per cent, we're still going to have a stronger net asset value, even on a present value basis, than we have today," said Leonard Asper, CanWest's chief executive. "The risk is, really, how does Global perform? And we have that risk today anyway. What this does is it enhances the likelihood that Global will perform better."

One fund manager who did not want to be named said, "They're betting the personal farm."

"It's a risky move, but it's also a gutsy move," the analyst said. "You have to give credit where credit is due. They did what they had to do to get the deal done."

At CanWest's annual shareholders meeting in Toronto yesterday -- which was attended by Alliance Atlantis's top executives Michael MacMillan and Phyllis Yaffe, CanWest chairman Derek Burney acknowledged the Alliance transaction "is not without risk."

But he said directors "are confident that our management team will meet the challenge."

Mr. Shine, the National Bank analyst, said it made sense for CanWest to structure the deal in a way that does not depend on today's market value of the company's conventional TV operation, which also includes the smaller CH network.

"The market appears to be giving Global/CH a value of close to $400 million, which is ridiculously low," Mr. Shine said in a note to clients.

Global's earnings plunged over the past couple of years as more hit shows were purchased by CTV and advertising dollars flocked to the rival network. But, in the first quarter, CanWest's Canadian TV earnings (before interest, taxes, depreciation and amortization) rose 30 per cent, with revenue up 11 per cent. "We believe our Canadian TV and newspaper recovery theme is very much intact," Mr. Shine told clients.

The analyst does not anticipate a bid trumping the CanWest-Goldman Sachs deal because Goldman dealt with assets CanWest didn't want, including a 50-per-cent stake in hit TV show CSI and its two spinoffs.

CanWest executives said yesterday that talks with Goldman date back many months, and the bank has been interested in adding Canada to the list of countries in which its private equity funds have media holdings.

"With our balance sheet, we could not write a $1.5-billion cheque," said Mr. Asper, explaining the structure of the deal. He said he does not expect a regulatory review by the Canadian Radio-television and Telecommunications Commission to create problems for the Alliance Atlantis deal.

"The CRTC cares about who controls the programming (and) who has the voting power. We have the voting power," he said. "There's no constraints on our ability to program the business as we see fit, so we think it meets all the tests ... (Goldman's) position can never get any better. It's simply a question of how they exit and when they exit."

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