Source : Globe & Mail

TORONTO -- The combined television assets of CanWest Global Communications Corp. and Alliance Atlantis Communications Inc. could be spun out in a multibillion-dollar public offering four years from now under one of several scenarios set out in CanWest's deal with financial partner Goldman Sachs & Co.

The specifics of how the New York investment banker will cash out on this week's blockbuster takeover of Alliance are not yet public, but the pact with CanWest includes a limited number of outcomes that will dictate the future of CanWest's Global Television Network.

CanWest partnered with Goldman Sachs on the $2.3-billion deal, which gives CanWest control of Alliance's 13 specialty TV channels such as HGTV and Showcase, while Goldman gains the international distribution rights to the TV drama CSI: Crime Scene Investigation and Alliance's movie distribution business.

Lacking the cash to pull off the takeover itself, CanWest has formed a separate company with Goldman Sachs that will acquire the specialty channels and is paying $132-million for a 17-per-cent stake. In addition to the cash, CanWest is folding in the Asper family's major asset, the Global Television Network, to increase its stake in the deal. Goldman will hold the remainder of the equity, but CanWest will control the voting shares in an effort to appease Canada's foreign ownership laws.

At the end of 2010, the two companies will divide up shares in the company based on the financial performance of the TV assets. The better Global TV does financially, the bigger CanWest's stake will be, chief executive officer Leonard Asper said.

However, Goldman has "three or four" options at its disposal to cash out on the deal, including selling the assets to CanWest or through an initial public offering, Mr. Asper said yesterday.

CanWest expects to hold more than 50 per cent of the company by the end of 2010, but depending on the earnings of the television business over the next four years, the number could be anywhere in the "40s or 50s" in terms of its ownership percentage.

CanWest officials said the company has a mechanism in place that gives the Winnipeg-based broadcaster the right to buy out Goldman's stake before any other scenarios are considered.

"We intend to own 100 per cent [of the specialties]. We have four or five years of planning for that," Mr. Asper said. "The risk is really just performance . . . We've put it all on our own shoulders to perform."

The full extent of Goldman Sachs's options will be made public when the shareholder agreement for the takeover is filed with securities regulators in the next few weeks. Those documents will also be closely scrutinized by Canada's federal broadcast regulator.

Although CanWest and Goldman say the deal is structured to comply with Canada's foreign ownership rules -- mainly by keeping the voting shares under CanWest's control -- regulators will be looking for any conditions that may give Goldman influence over the assets, including when and how they are sold.

"I don't presume to prejudge [the CRTC]. There will be a hearing and this issue will be addressed," Mr. Asper said before CanWest's annual meeting in Toronto.

"But the fact is there are very clearly defined rules about what control means; it is a control test, it's not an economic test. And the rules are not only defined, they've been tested in different hearings and situations before . . . We have the voting power. There's no restraints on our ability to program. So we think it meets all the tests."

A day after Corus Entertainment Inc. said it was an interested bidder for Alliance, media executives were divided in their opinions of the chances that a rival bid for Alliance Atlantis might emerge.

"I doubt this story is over," said one media executive, speaking on condition of anonymity. "This is round one. It all depends what a private equity firm thinks the value of CSI is."

Both Corus and Montreal-based Astral Media Inc. are believed to have coveted Alliance's specialty channels but weren't interested in buying the CSI asset, which includes two spinoff shows, CSI:NY and CSI:Miami.

Analysts say the Goldman-CanWest purchase of Alliance values Alliance's half stake in the three CSI shows at about $900-million, although Sprott Securities placed their worth higher, at $967-million.

If a private equity player thought CSI's value was substantially higher, it might be tempted to bid for Alliance with a Canadian partner, such as Corus or Astral, two companies that were keen to own Alliance's specialty channels. "The private equity guys will be all over this in the next few days trying to figure this out," he said.

Other industry executives played down the chances of a rival bid emerging. Obstacles range from the $65-million break fee and the right to match any higher offer to uncertainty about the value of CSI.

"We find it hard to believe that anyone would put a value on CSI higher than the value Goldman put on it," one executive said.

The executives said determining CSI's worth is little more than a guessing game, because neither Alliance nor CBS, which owns the other half of the hit franchise, can say for sure how long CSI will remain in production, nor accurately predict its syndication revenues.

Deal highlights

CanWest Global will combine its television network and Alliance Atlantis's specialty channels, but the ownership won't be pooled with Goldman Sachs until Jan. 1, 2011.

When the Alliance takeover closes, CanWest will own 17 per cent of the company. That will change in 2011, when CanWest adds in its conventional television holdings and acquires a larger stake in a formula that reflects the two TV network's earnings before interest taxes, depreciation and amortization, or EBITDA.

For example, it's possible that CanWest's conventional TV throws off $200-million of EBITDA in 2011 and the former Alliance specialty channels also do $200-million of EBITDA.

In that scenario CanWest gets an additional 50% of the combined TV venture. So its total holding would be 58.5 per cent -- half the pie coming from conventional TV plus the 17% share in the specialty TV portion of the pie.

If CanWest's conventional TV assets are doing less EBITDA than the former Alliance division, then CanWest ends up owning far less of the new company. This year, CanWest's Canadian television assets are expected to generate $57-million of EBITDA, while the Alliance channels are forecast to churn out $151-million.

What Alliance Atlantis specialty channels will become:

Total Capitalization: $1.5-billion

CanWest Global investment: $132-million

Goldman Sachs Capital Partners investment: $644-million

Debt: $724-million

Forecast EBITDA: $151-million

Forecast interest payments: $43-million

Forecast Income: $72-million

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