Asper considers taking CanWest private

Asper considers taking CanWest private

GRANT ROBERTSON and BOYD ERMAN AND DEREK DECLOET

From Saturday's Globe and Mail

August 1, 2008 at 9:10 PM EDT

CanWest Global Communications Inc. [CGS-T] chief executive officer Leonard Asper, faced with a plunge in the value of the media company his father founded, is exploring a range of options that include taking the company private as the stock hovers at a 16-year low, sources said.

One possibility is a takeover of the company by the controlling Asper family with backing from major shareholder Fairfax Financial Holdings Ltd. [FFH-T] Two people familiar with the situation said the idea has been pitched to Fairfax, an insurance and investment company that owns 18.73 per cent of CanWest's outstanding subordinated voting shares, and at least one major investment bank has offered financing for a transaction.

No deal is imminent and a privatization may not be the favoured option, the sources stressed.

CanWest shares have plunged 83 per cent in the past 18 months, leaving the company with a market value of just $366-million, amid concerns about the company's rising debt, a soft economy that may hurt advertising sales and a weak outlook for the media sector. Any potential buyer would also have to contend with the company's debt load of more than $3.7-billion, which investors fear may leave CanWest afoul of its bank agreements if earnings slump.
CanWest Global Communications


Separately, a group led by Senator Jerry Grafstein has been actively seeking backers to put together some kind of bid to purchase the National Post newspaper.

“The frustration at CanWest is that concerns about the company's debt will continue to overshadow improvements in operations,” said one investment banker close to the company. That frustration has Mr. Asper considering alternatives to running a public company, including a buyout, the banker said.

Winnipeg-based CanWest's holdings encompass a chain of newspapers that includes the National Post, and television properties that include Global Television and specialty TV channels such as Showcase and The Food Network. Expanding the company into specialty TV, the more lucrative side of the Canadian broadcasting industry, accounts for much of the debt load. CanWest bought the TV assets of Alliance Atlantis Communications Inc. in 2007, with Goldman Sachs Group Inc. financing most of the deal.

The pressure is now coming to bear on Mr. Asper not only because of the stock's performance. Much of the company's debt comes due in the next two years, and CanWest must also deal in 2010 with the need to come up with funds as part of the Goldman Sachs deal.

The investment bank and CanWest will divide up their shares in the broadcasting assets at that time based on the performance of CanWest's broadcasting properties at the end of 2010. CanWest will then have the first right of refusal to buy out Goldman's share.

As CanWest's stock has sagged, Fairfax has boosted its stake. After increasing its holdings to 11 per cent in late 2007, when the stock slid from more than $11 to less than $7, Fairfax has added to its stake in CanWest three more times.

Fairfax's last increase was announced in April as the shares fell to $4, bringing its stake to more than 18 per cent. On Thursday, they closed at $1.99, their lowest point since 1992, before rising Friday to $2.

While Fairfax is cash-rich, with more than $1.1-billion on its own balance sheet as of the last quarter, there are hurdles to a deal, sources said. The company isn't in the private-equity business, and as an insurer Fairfax would be leery of tying up too much capital. Any deal would have to be structured to enable Fairfax to be able to exit its investment reasonably easily, sources said.

“We think the companies that we've bought have intrinsic values much higher than their stock prices,” Fairfax CEO Prem Watsa said in an interview, adding that he's not aware of plans to privatize CanWest. “Ours is a long-term investment, so we don't get involved in the day-to-day chatter in the marketplace.”

A CanWest spokesman would not comment.

RBC Dominion Securities analyst Drew McReynolds in June laid out a scenario for a buyout in late 2010 or early 2011. That would see the Asper family – CEO Leonard Asper, and his siblings Gail and David Asper – end up with 56 per cent of the equity. New partners would own a 44 per cent stake.

“We question whether the public market will give CanWest full value under the current capital structure and strategy direction of the company,” Mr. McReynolds said in the report. “On this premise, we believe the company should consider a privatization.”

Another scenario believed to be under consideration by Leonard Asper is that he would take a bigger stake in the company by acquiring some of his siblings' shares, sources said. Each of the three Asper children inherited a large voting stake in the company from their father, Izzy Asper, who died in 2003. Their personal stakes of about 25.6 million multiple voting shares are now worth about $58-million each.

However, David and Gail Asper would be unlikely to sell their stakes in the company at current share prices, said a person who works as an adviser to the company.

The slumping share price has also sparked renewed speculation that CanWest may sell the National Post, which competes with The Globe and Mail.

While it's not clear that the paper is formally up for sale, sources said that interested parties have considered the asset. Media executives estimate the paper would fetch $25-million to $35-million. Removing the National Post's estimated $10-million a year in losses from CanWest's books would potentially boost the value of the company, though bankers who have looked at the numbers say the gain would be small relative to the overall financial situation at the company and that a sale may not be a high priority.

According to sources, Mr. Grafstein is proposing an arrangement that would allow the Asper family or CanWest to retain a minority ownership position. Mr. Grafstein could not be reached for comment Friday.

CanWest has split its $3.7-billion of debt into four chunks pledged against different parts of the company, giving it breathing room with its banks.

When asked recently about the prospects of taking the company private, given the low stock price and increasing talk in the market of such a deal, Leonard Asper said “I'll leave that for you to speculate on.”

“I go back to 2002, there was this massive fear about debt and the stock went down to the same price and we did what we said we were going to do. We gradually worked away at the debt and we paid it off and the stock went up,” Mr. Asper said.

“We think it's got growth rate potential that's better than the multiples that people are ascribing to it would suggest.”

With files from reporters Tara Perkins and Andrew Willis