Source : Globe & Mail

Wary of regulatory opposition to its planned $2.3-billion takeover of Alliance Atlantis Communications Inc., powerhouse New York investment bank Goldman Sachs Group Inc. plans to invite some of Canada's biggest pension funds into the leveraged buyout.

Goldman's private equity arm, GS Capital Partners LP, has already partnered with CanWest Global Communications Corp. on the Alliance purchase, and investment banking sources say that starting next week, the biggest domestic money managers will be invited in.

Goldman's motivation in selling a portion of its planned 83-per-cent equity stake in the Alliance TV channels is entirely driven by a need to "Canadianize the deal," said one investment banker familiar with the transaction, as the U.S. fund has the financial muscle do the deal on its own. "You'll see discreet calls to the big Canadian players," said another financier close to Goldman.

Goldman and CanWest need federal regulatory approval for their deal, and foreign companies are not allowed to control Canadian media plays. "Goldman is very sensitive to the regulatory regime," said another investment banker familiar with what is playing out, adding: "Goldman would also be sensitive to the fact that it's important to build institutional relationships, as the big Canadian pension funds are all potential investors in its funds."

There is already opposition to selling Alliance's 13 channels to a U.S. fund. Canada's largest media union plans to mount a "vigorous" fight to stop the purchase. Peter Murdoch, vice-president of the 150,000-member Communications, Energy and Paperworkers Union of Canada, said the deal "is the thin edge of the wedge to the ceding of Canadian cultural institutions to American investment."

When Goldman does start to sell a portion of its position, it will not be hard to find interest. Paul Renaud, CEO at OMERS Capital Partners, the private equity arm of the Ontario Municipal Employees Retirement Board, said he'd welcome the opportunity to invest. "If we were approached, we would certainly look at it," he said yesterday. "We know Goldman. Borealis, our infrastructure fund, has done some business with them." The CPP Investment Board, which is bulking up its private equity holdings, is also seen as a likely investor.

Financial details are beginning to emerge. The Alliance takeover, dubbed "Project Major League" by the participants, could see CanWest invest up to $300-million.

Initially, CanWest CEO Leonard Asper said his company would contribute just $132-million in return for a 17- to 19-per-cent stake in the specialty television division. That would value the entire unit at $1.5-billion. CanWest had the option of increasing its equity contribution to $200-million, Mr. Asper said.

Yesterday, when CanWest filed the terms of the shareholder agreement with Goldman, the Canadian firm revealed it can choose to contribute another $100-million, cash that would be used to reduce debt carried by the new entity. Analysts estimate the division will initially have $750-million of debt.

CanWest carries a significant $2.7-billion debt load, and Mr. Asper has admitted his firm could not bid for Alliance on its own because it could not shoulder more loans.

The shareholder agreement also includes a covenant that states: "CanWest and its affiliates will not compete" in specialty or conventional TV with the new partnership with Goldman Sachs, once Global TV is folded into the operation. That agreement lasts until Goldman Sachs's holding drops below 10 per cent of its original investment.

Under such arrangements, any TV acquisition CanWest makes over the next several years — for example, more specialty channels — would have to be rolled into the partnership company as well, and could not stand alone. However, a CanWest official said that agreement does not preclude the company from making further deals.

The CRTC has not received any paperwork on this deal, but will be scrutinizing the agreement for any clauses that appear to give Goldman operating control over Canadian broadcasting assets. The documents state that Goldman will not have any control over what is broadcast on the channels, which should ease some CRTC concerns.

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