OTTAWA – It’s not just the creative side of the industry that objects to the purchase of Alliance Atlantis by Goldman Sachs and CanWest Global (and even the directors and producers aren’t totally united on that front).
The Association of Canadian Advertisers, while giving their blessing to the merger of CanWest’s and Alliance Atlantis’ substantial TV properties, also sounded an alarm, saying that even though a bigger, more robust CanWest will be much better positioned to compete with CTVglobemedia, there may now be too many individual specialty services under just two corporate umbrellas.
In its submission to the CRTC in advance of the September 5th public hearing on the merger, ACA president Bob Reaume wrote: "We would like to suggest as well, though, that the time has come to extend the Commission’s common ownership regulation to specialty TV services. Subject to the Commission’s approval of this CanWest/Alliance Atlantis deal, of course, the majority of specialty channels in Canada could soon be controlled by only two companies (CanWest and CTVglobemedia).
"This is far too concentrated a level for the operation of a healthy competitive specialty television marketplace. There may be several alternatives available to address this issue, and they should all be explored. However, in our opinion, the time has come to consider regulatory numeric limits on the number of specialty stations allowed per owner."
Media buyer Sunni Boot, president and CEO of ZenithOptimedia, also voiced support for the merger and of stronger, larger Canadian companies but added her voice to the ACA’s concern "that too much concentration would reduce the advertiser’s ability to effectively participate in the broadcast system," she wrote.
Not surprisingly, CTVglobemedia, CanWest’s primary competitor, also filed objections to the deal, finding fault with, among other things, CanWest’s proposed benefits package and what will likely be the focus of the hearing – who controls the new entity that will run the CanWest and Alliance Atlantis properties.
The deal to buy Alliance Atlantis is a complicated one which will see Goldman Sachs provide most of the equity while CanWest will have board control. This is not without precedent, however.
"In this Application, CanWest is asking the Commission to approve an ownership structure that involves a level of foreign investment, both in terms of the percentage and magnitude, that is unprecedented in the Canadian broadcasting sector," says the submission by CTVgm’s senior vice-president, corporate affairs, Paul Sparkes.
"1) The transaction is being almost fully financed by non-Canadian equity and debt financing;
2) The ‘economic equity’ of the company acquiring Alliance Atlantis will overwhelmingly reside in the hands of the non-Canadian partner, Goldman Sachs, with a 64% interest, and not CanWest. An investment of this size and nature has never been seen before in a transaction involving a Canadian broadcaster;
3) The debt financing component of the transaction is also heavily concentrated in the hands of Goldman Sachs – with Goldman Sachs involved at every level of the debt financing by bankrolling 60% of the debt and providing the bridge financing;
4) Goldman Sachs will have a substantial role in corporate governance with 40% of the seats on the Board at every holding company level, notwithstanding the fact that Goldman Sachs only controls one-third of the voting shares;
5) Goldman Sachs also has significant liquidity rights which, if exercised, can force CanWest to purchase Goldman Sachs’ equity investment in the company and, in certain circumstances, Goldman Sachs could cause the entire combined entity to be sold; and
6) And perhaps the most important manifestation of Goldman Sach’s level of control is that CanWest’s failure to achieve certain EBITDA and net debt targets could result in CanWest’s economic interest in its merged Canadian television business (i.e. CanWest’s current television undertakings and the Alliance Atlantis broadcasting undertakings) being less than 50%.
"CTVgm submits that these six factors, when considered together, create, at minimum, a presumption of economic dependence and non-Canadian control in fact," adds the CTVgm submission.
The precedent that fared poorly, Craig Media’s forced sale at the hands of U.S. investors Providence Equity, shows how Craig, even with board control, faced onerous conditions on the investment it obtained and had to divest its operations in order to repay Providence.
"Providence was able to exert significant control and ultimately force the dissolution of a Canadian broadcaster. This case highlights the importance of the Commission conducting a review of the level of non-Canadian ownership and control in a transparent, fair and predictable manner," reads Sparkes’ submission.
CTVgm and other intervenors also expressed disapproval over the direction of the $137 million benefits package and the length of time (10 years) CanWest wants to be able to spend it (the norm is seven years).
"We note with concern that CanWest has proposed spreading its benefits spending over an unprecedented ten years," says the submission from Friend of Canadian Broadcasting, "and we recommend instead that the Commission require that these benefits be expended over a five to seven year cycle. We also count on the Commission to ensure that all the proposed benefits spending is truly incremental, directed to projects and initiatives that would not be undertaken or realized in the absence of the transaction, and flow predominantly to third parties, such as, in the case of programming, independent producers."
And, since the CanWest deal with Goldman Sachs calls for a 2011 deadline where CanWest will assume full control of the media company and buy out GS, it doesn’t make sense to even allow the benefits spending to go past five years, add some intervenors.
Finally, Canada’s TV producers offered its support of the merger only if the following conditions are met:
"• A clear determination by the CRTC of Canadian control of the shares in AAC’s broadcasting undertakings;
• A firm commitment by CanWest to establish a terms of trade agreement encompassing all of its own and AAC’s conventional and specialty broadcasting services;
• The filing of a revised benefits package, acceptable to the Commission, that reallocates the almost 30% of proposed benefits that CFTPA considers to be unacceptable;
• The CRTC impose Canadian program expenditure requirements on CanWest’s conventional television services to ensure that these are not considered “discretionary” expenditures that can be reduced in order to meet profit targets specified in the business arrangements between CanWest and GSCP; and,
• Appropriate safeguards are put in place to ensure that distinct programming strategies for the AAC specialty programming services are maintained," reads the CFTPA submission.
– Greg O’Brien
