Source : Variety

Will bankers break co. in pact?

TORONTO -- CanWest Global Communications is literally betting the family farm on a C$2.3 billion ($1.96 billion) deal for Alliance Atlantis Communications, inked with the help of deep-pocketed investment bankers Goldman Sachs.

Announced Jan. 10 after months of speculation, this is make or break for CanWest, a family-controlled media company helmed by Leonard Asper, son of founder Izzy Asper, who died in 2003.

"In a family company, the theory is that the genes don't distribute brilliance equally in each generation," says Ian Morrison, spokes- man of Friends of Canadian Broadcasting, a privately funded broadcasting watchdog. "It could be that these guys are in over their heads. It could be that they're desperate. Or it could be that they're geniuses. We'll have to wait and see."

CanWest wants AAC's 13 pay channels, valued at $1.28 billion, and is not interested in its stake in CBS' hit "CSI" franchise or its controlling interest in the Motion Picture Distribution income trust, both of which will be hived off and handed to Goldman Sachs.

In the short term, "CSI's" international distribution will be handled by CBS. Given that Goldman Sachs is neither a film distributor nor TV producer-distributor, it is likely the "CSI" stake, which one Canadian analyst valued at $640 million, and the Motion Picture Distribution income trust, valued at $154 million, will be sold.

But CBS and other "CSI" suitors need not get their checkbooks out yet. There are plenty of hurdles to be crossed first.

First, the deal has to be approved by AAC shareholders, probably in March. Since co-founder Michael MacMillan, who also controls the company's voting shares, approves of the deal, it is likely to come off without a hitch -- provided a sweeter offer doesn't come along.

Then the company must go into the hands of a trustee while Canada's broadcast regulator looks it over.

And that's the rub.

"I'm not sure it'll fly," says Morrison. He expects the ownership structure will be challenged by the Canadian Radio-television and Telecommunications Commission, since local law limits foreign ownership of media companies to 47%.

CanWest needed Goldman Sachs to finance the deal because it has a lot of debt.

CanWest believes the CRTC's ownership test comes down to voting and operational control as opposed to dollars invested.

Even though CanWest will only have to pitch in $113 million for a financial stake of just 17%, it will have both voting and operational control over the specialty channels, and execs believe this will be enough to satisfy the CRTC.

"There's concern that Goldman might be trying to rent our passport for this purchase," Asper told the New York Times. "It's just the opposite. We're renting their equity."

Morrison doesn't believe it will pass the sniff test.

"To say that you're putting in $113 million out of a $1.96 billion deal and you really are in control, I believe they (the CRTC) will be digging into the shareholders agreement and demanding changes," he adds.

Despite this, CanWest execs expect the deal to close this summer, even though some observers believe it is likely to take longer than that to reach the CRTC docket.

A decision could take a year or more -- and that's assuming it gets the greenlight.

If a deal can be reached with the CRTC, there's a lot of potential upside for CanWest.

Deal leapfrogs the company into the lucrative Canadian pay TV game without having to sell off any significant assets or greatly increase debt.

It will have to pay for them down the road, but this buys the company time to integrate the operations.

Final, and greatest, hurdle for CanWest will come at the end of 2010 when the pay channels and CanWest's Global Television will be combined, and CanWest and Goldman Sachs will split the company in accordance with an undisclosed formula.

Given Goldman Sachs' financial stake and leverage in the deal, it is unlikely to be taking on as much risk as CanWest, whose stake depends on its ability to manage the assets.

Asper hopes CanWest will hold more than a 50% stake. And it has the option to buy out Goldman Sachs.

"The danger is that CanWest will be eaten alive," says Morrison. "The Aspers could lose control of their broadcasting empire over this."

© Variety