CanWest-Goldman battle erupts by Andrew Willis and Grant Robertson

Nov 2, 2009

U.S. investment bank tells court that media company's move to dissolve barriers around specialty channel joint venture is 'abusive'

Source: Globe and Mail

A little-known numbered company inside CanWest Global Communications Corp. is now at the heart of a major legal battle between Goldman Sachs Group Inc. and the powerful bondholders controlling the media company.

Goldman is attacking the distressed funds that control Canada's largest media company and asking the courts to rebuild barriers that separate CanWest's profitable specialty television from its parent.

The Wall Street investment bank is attempting to undo what it calls a "fraudulent" and "abusive" move to rework the internal operation of CanWest in the days before it filed for creditor protection. According to court filings Monday, the distressed debt funds shut down a numbered company within CanWest that was set up three years ago, at Goldman's request, to separate the Winnipeg-based parent from its stable of 13 lucrative specialty channels – which include Showcase and History Television.

CanWest creditors, led by a trio of U.S. and Canadian distressed debt funds, dissolved the numbered company as part of a larger drive to gain control of the specialty TV unit, known as CW Media Holdings and widely viewed as the most prized CanWest asset. This division is not part of CanWest's court-supervised restructuring, and turned in a $129-million profit over the past nine months. Goldman Sachs owns 36 per cent of the votes in CW Media, and 65 per cent of the equity.

Goldman Sachs only found out that the numbered company, called 4414616 Canada Inc., was gone after reading CanWest's filing for creditor protection on Oct. 6.

Goldman filed a claim Monday asking that the Ontario Superior Court resurrect the numbered company, and keep CW Media separate from the rest of CanWest. The development also caught Canada's broadcast regulator by surprise. The Canadian Radio-television and Telecommunications Commission was not told the numbered company within CanWest was dissolved.

Media companies must inform the CRTC of any changes to their corporate structure that result in a change of control of the company, or any changes that alter existing shareholder agreements. However, it is not clear whether dissolving the numbered company within CanWest requires notification to the regulator.

CRTC officials are checking into the matter, a spokesman said. If it determines the move does affect control, CanWest and the bondholders could be called to a hearing. Firms are required to update their structures with the CRTC periodically and most do it once a year.

"This is part of a strategy to manage Goldman's claim on the assets," acknowledged a source close to the distressed debt funds that own CanWest debt, who added that the investment bank was always expected to fight back. Lawyers for Goldman have already asked the Ontario court to keep CW Media separate from the rest of the restructuring.

This battle could take an ugly turn for bondholders: As part of its latest court filing, Goldman claimed CanWest's creditors should be forced to repay $426-million of cash they took out of the company in September, after CanWest sold its stake in Australia's Ten Network Holdings Ltd. for $634-million. The company filed for creditor protection two weeks later.

CanWest's major creditors – led by U.S. funds GoldenTree Asset Management, Beach Point Capital and Toronto-based West Face Capital – have already tripled their original investment in the company, Goldman said in the filing.

Despite the rash of court filings – Goldman's latest batch of legal documents runs to 246 pages – the two sides are expected to sit down and hammer out a new ownership structure for the firm. The move to shut down the numbered company was part of a tough negotiating stance on the creditors part, sources say, with one individual explaining that bondholders wanted to show Goldman a "worst-case scenario."

CanWest is reviewing the affidavit, said CanWest spokesman John Douglas. "We believe the claims are without merit."

"Neither party here wants to leave this issue to the judge. There will be negotiations," said a source close to the distressed debt funds. "We recognize that the best interests of the company lie with both sides working together, and no one wants to pursue a path of mutually assured destruction."

Throughout this long-running restructuring, Goldman Sachs has been repeatedly been rebuffed in attempts to make operational improvements at CanWest and CW Media, including offers to help obtain additional Canadian and international programming.

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