By Jamie Sturgeon | Financial Post | Jan. 26, 2011In December 2009 the North American telecom industry made a sharp and irrevocable turn. Comcast Corp., the largest cable and Internet provider in the United States bid on then-flagging NBC-Universal, the prominent television network and producer of mega-hits like The Office and Saturday Night Live.
“That was a game changer,” Peter Buzzi, managing director and co-head of RBC Capital Markets’ M&A unit, said of the multibillion-dollar blockbuster deal. “Everybody in the industry asked ... ‘What does that mean for us?’”
The ripple effect would soon be felt. Desperate to find an investor to financially reflate its debt-laden television division, Winnipeg’s Canwest Global Communications Corp. announced two months later it would cede voting control to Shaw Communications Inc., Canada’s largest cable company — a Trojan Horse decision that would see Shaw eventually seize the assets outright.
What Comcast started and Shaw solidified, BCE Inc. would cement. “You could see the template in the U.S., then quickly in Canada. Everybody was getting aligned with content,” Dan Colohan, RBC Capital Market’s managing director of global investment banking said.
On Sept. 10, BCE Inc., which had dipped its massive appendages in the convergence waters before only to find them too frigid, returned with a running cannonball, bidding $1.3-billion in cash and stock for the TV assets of CTVglobemedia Inc., the country’s top broadcaster.
The New Convergence was on. The telecom landscape was changing rapidly, George Cope, Bell’s chief executive, said at the time. Owning video content to drive television and broadband subscriptions to a carrier — and away from others — is fast becoming the new norm.
“Our acquisition of CTV more than levels the playing field in our increasingly competitive industry,” Bell’s chief said.
The Shaw and Bell deals were two of the most high-profile transactions of 2010, and RBC Capital Markets played a pivotal role in both. As adviser to Canwest, Mr. Buzzi was at the table when Shaw’s initial offer ran headlong into fierce opposition from Goldman Sachs. It was RBC that Bell turned to last summer.
For Canwest, its long march into the hands of Shaw began when the financial crisis blew a hole in the side of the economy in late 2008.
Media firms that rely on advertising for a considerable portion of revenues are among the first to reel from economic downturns; ad budgets are easy targets for cash-conscious CFOs. Canwest was in a particularly bad position, having amassed $3.8-billion in debt in an acquisition spree during the pre-crisis credit binge.
At the time of the economy’s collapse, cash flows from the newspaper division were being used to service company-wide debt, a source of money that nose-dived. “They were facing some pretty significant liquidity issues,” Mr. Buzzi said.
Significant turned to dire when Canwest began tripping over payments. The newspaper division was unable to keep up on its own $1.5-billion debt load, let alone obligations at the parent holding company or on the syndicated debt tied to the deal with Goldman, the U.S. brokerage which bankrolled Canwest’s 2007 multibillion-dollar purchase of Alliance Atlantis Communications.
Under RBC’s watch, Canwest executed an arguably overdue sale of Australian broadcaster Ten Network in September 2009, wiping from its books $1.2-billion of debt. It was too little, too late. Two weeks later, Canwest was under creditor protection.
“There was no clear way to refinance that remaining debt,” Mr. Buzzi recalls. Creditors, such as New York hedge fund Golden Tree Asset Management, still had to be made whole. The question was how. “Basically what the bondholders said at the time was, ‘We’re prepared to turn our debt into equity and own this business. But they needed to find a Canadian equity investor, that was our next task.”
To satisfy Canada’s media laws which limit foreign ownership, RBC canvassed dozens of domestic parties to “recapitalize” Canwest. “Ultimately, Shaw was the winning bidder,” the banker says.
The Western Canada cable giant agreed to pay $95-million for a 20% economic interest in an emerged Canwest while taking ownership of 80% of the broadcaster’s voting shares. Canwest’s U.S.-based creditors were on side, but there was one major obstacle: Goldman, which remained a partner in CW Media, the entity that housed the Alliance Atlantis specialty channels.
CW Media represented the most attractive component of the Canwest empire and Goldman was not going to see Shaw attempt to reset the terms of its shareholder agreement with Canwest under the cover of court protection, vowing during tense court hearings to fight the cable firm at every pass.
Justice Sarah Pepall would accept Shaw’s bid but warned Shaw it would have to engage the Wall Street firm to win final approval. “You couldn’t close until you dealt with Goldman,” recalls one Bay Street lawyer on the file. “I don’t think Shaw had a clue what the end game was going to be. They just rolled the dice — and good for them; they took the risk that they would be able to come to some resolution.”
On May 3, Shaw agreed to pay off the investment bank for $700-million, in the process transforming its role from controlling partner into absolute owner for $2-billion. It is a potentially steep price tag analysts say, diverting the firm’s attention from an important push into wireless. However, six months later, Shaw Media was born while Canwest was well on its way to becoming a textbook case study in the risks of over-extension.
On the other side of Canwest’s sprawling corporate structure was its newspaper business. While Shaw was pulling for the broadcast assets, RBC was formulating a way to pay back $1-billion to the unit’s secured creditors, Canada’s largest banks.
The banks eventually agreed to a credit bid of $950-million — effectively a plan to seize the assets in the event the offer failed to attract a higher one.
Owed some $450-million that faced a writedown to zero, Canwest LP’s unsecured lenders stepped forward with a $1.1-billion offer on the chain, which they took ownership of in mid-June, rebranding it as Postmedia Network Inc.
“If you cut through all the complexities, you had an over-leveraged company in Canwest facing financial difficulties that over an 18-month period with a lot of twists and turns ultimately got split up into two packages, the television piece and the newspaper piece, and got sold to two different buyers,” Mr. Buzzi says.
“From a shareholder perspective it wasn’t a terrific outcome, although they did get a modest recovery at the end of the day. From a Canwest creditor perspective it was a good outcome,” he concludes.
The Shaw deal made most whole on the broadcast side. The new newspaper division owners paid out its secured group while their recovery hinges on how the business performs going forward.
The Shaw transaction also took off the table one of the few major media assets in Canada. For BCE, which was watching regional rival Quebecor Media Inc.’s cable subsidiary Videotron Ltee. aggressively leverage its own content and networks, a play for all of CTV soon became “crystallized,” in Mr. Cope’s words.
“There weren’t that many properties and the ones that were there were going, so it quickly became a focus for them,” RBC’s Mr. Coholan said. The CTV deal still faces regulatory clearance, while hearings into vertical integration could see new rules written that hamstring carriers’ content options.
Still, it is perhaps no surprise that weeks after the Shaw deal closed last December, the Street was alight with rumours that Rogers Communications Inc. was sizing up sports content powerhouse Maple Leaf Sports & Enterntainment. And they have not gone away.
Financial Post
jasturgeon@nationalpost.com
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