CanWest Global Communications Corp. has tapped one of the world's biggest private equity players to buy Alliance Atlantis Communications Inc. in a $2.3-billion deal that lets CanWest put down just $132-million, with a big payday if it can build a TV powerhouse, but considerable risk if it falters.
In a complex partnership struck with powerful New York investment bank Goldman Sachs & Co., CanWest is forming a special bidding company to buy out Alliance Atlantis at $53 a share, giving CanWest access to specialty cable television channels valued at $1.5-billion.
The deal will see Alliance's 13 specialty channels -- which include names like Showcase, HGTV and Food Network Canada -- combined with CanWest's Canadian television operations, while Goldman Sachs takes over Alliance's distribution rights to the hit TV series CSI: Crime Scene Investigation and its spinoffs.
"Today, suffice to say, marks a turning point in CanWest's evolution," CanWest chief executive officer Leonard Asper told analysts on a conference call yesterday to announce the acquisition.
In exchange for putting up such a small sum of cash and taking on no debt in the transaction, Mr. Asper is placing his family's crown jewel, the Global Television Network, into the deal.
At the end of 2010, CanWest and Goldman will divide up shares in the assets based on the financial performance of the combined operations. The more money the television operations earn, the bigger piece of the pie CanWest will hold. At that point, the broadcaster has the option to buy out the shares held by Goldman Sachs.
However, if the operations falter financially, Mr. Asper acknowledged CanWest's stake in the combined operation could drop below 50 per cent.
This would make the buyout from Goldman Sachs a bigger chore.
One source familiar with the structure of the deal said the deal takes some pressure off CanWest to grow. "Len Asper just bought time to mature and build a powerhouse TV network, with very little money up front, and both CanWest and Goldman benefit if Asper succeeds."
The deal creates a broadcasting company of comparable size to its rival CTVglobemedia Inc., which owns The Globe and Mail and the CTV network. It bought the broadcasting assets of CHUM Ltd. last year in a $1.4-billion deal that included 21 specialty cable channels and a variety of conventional TV and radio stations.
CanWest's deal to acquire Alliance, seen as a response to the CHUM takeover, gives the company 20 specialty channels and a minority interest in six more channels. CanWest had coveted specialty cable assets -- generally those channels higher up on the dial -- since it lags competitors in that department.
"In an increasingly competitive environment, this gives CanWest a great platform for growth in Canada going forward," Mr. Asper said.
CanWest will get a 17-per-cent stake in the specialty channels, Mr. Asper said. The deal was mostly put together in the past three weeks and the companies were scrambling to finalize details yesterday.
Speculation about a deal was rampant this week, and CanWest and Alliance issued identical statements yesterday morning saying they were in "exclusive" discussions with each other.
Alliance Atlantis chief executive officer Michael MacMillan, who helped found the business, said the company fielded several offers, but decided, along with advice from RBC Dominion Securities, that the CanWest proposal "was clearly the most favourable."
"This planned purchase of all of the shares means no more Alliance Atlantis," Mr. MacMillan said.
The transaction, which requires approval from Canada's federal broadcast regulator, is expected to close by the summer 2007, and will not require CanWest to refinance its existing debt, Mr. Asper said.
The deal includes a break fee of $65-million and CanWest has five days to match any offer.
Immediately after the deal, Dominion Bond Rating Service placed some of CanWest's debt under review "with developing implications" to assess the impact of the deal.
Mr. MacMillan said he would stay with the company until the deal closes, but also said "beyond that I don't have other plans." Friends say he plans a new career that would combine philanthropy with his love of public policy.
Corus Entertainment Inc., the broadcasting firm controlled by Calgary's Shaw family, was on the list of interested bidders that also included Astral Media Inc. of Montreal. However, CanWest is believed to have used the might of Goldman Sachs to lock up exclusive talks with Alliance, since it was offering to buy all of the company's assets.
Corus and Astral are believed to have been interested only in buying the 13 specialty channels.
Having been left on the outside, Corus CEO John Cassaday told analysts yesterday morning that his company was the "logical strategic buyer with the greatest number of synergies" for the Alliance TV channels.
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The $40-million duo
Atlantis Communications Corp.
Atlantis's roots go back to the late 1970s, when Mr. MacMillan and Mr. McLean set up a company to make industrial films and short movies based on Canadian short stories. By 1984, Don McBrearty's Boys and Girls had won Atlantis an Oscar.
Alliance Communications Inc.
Robert Lantos and colleague Victor Loewy founded Alliance in the 1980s as a joint venture of several independent producers.
A production powerhouse
Alliance Atlantis Communications Inc. was created in 1998 when the two long-time rivals joined forces to establish a film and television production powerhouse. Mr. Lantos handed the reins of the company to Mr. MacMillan to focus on creative projects. At the time, the new company had 28 per cent of the Canadian television production market.
Alliance Atlantis eventually solidified into a company with three central businesses: film and television production, movie distribution, and the ownership of 13 specialty television channels.
In 2003, the company spun off its movie distribution business into an income trust but kept half ownership. Soon after, the company closed down its production operation, except for the lucrative CSI: Crime Scene Investigation franchise.
The highly profitable specialty television operation remained the crown jewel of the company, and that asset proved irresistible to CanWest Global Communications Corp.
The founders' stakes
Mr. MacMillan and Mr. McLean share ownership of 617,000 class A shares worth $35.6-million. Mr. MacMillan also owns 28,000 class B shares worth $1.5-million and options on 125,000 class B shares with a strike price of $27, for an additional $3.3-million. The duo's total stake is $40.4-million.