On the face of it, CanWest Global Communications Corp.'s January decision to acquire Alliance Atlantis Communications Inc. seemed like a made-in-Canada consolidation story. But the $2.3-billion takeover was actually brought to you by the maker of several heavily leveraged buyouts, U.S. investment bank Goldman Sachs & Co. Goldman, through its affiliate, GS Capital Partners, is putting up 71% of the money. The deal also stipulated that Goldman would find a Canadian partner to operate Alliance's 51% stake in Motion Picture Distribution LP, Canada's largest film distribution company.
Now, Goldman has teamed up with Toronto-based private equity firm EdgeStone Capital Partners to pay nearly $193 million for Movie Distribution Income Fund, which controlled the other 49% of MPD. The fund's trustees have also agreed to allow the sale of Alliance's 51%.
Cue the made-in-Canada media storm: The Globe and Mail and the Toronto Star ran several articles quoting film producer Robert Lantos and directors David Cronenberg and Atom Egoyan decrying the potential sale of a cultural jewel to a U.S. firm. Speaking of MPD's library of Canadian films — the fruit of more than 35 years of production — Telefilm Canada executive director Wayne Clarkson told the Globe: “This library? has to be protected.”
The call for action is initially compelling: the MPD library, with its 6,000 hours of Canadian film, is used to fill Canadian content requirements of broadcasters. Irony of ironies, a U.S. company will be making money selling Canadian product, subsidized by Canadian taxpayers, to a regulated Canadian industry.
But MPD is much more than a distributor of Canadian content. Its value is principally as a conduit for U.S. films. MPD, which has 10% to 15% of the Canadian market, has subdistribution deals with major U.S. companies, including Miramax Films, the Weinstein Co. and New Line Cinema. And the contents of MPD's library are not just homemade: there are another 10,000 foreign and considerably more lucrative hours to be exploited.
In fact, MPD is a multinational corporation. It wholly owns a U.K. distributor, Momentum Pictures, and a Spanish one, Aurum. In 2006, Momentum reported DVD revenues alone of $77.4 million. MPD's stated strategy is, first, to maintain its market position as a distributor of U.S. studio product; second, to continue its international growth, such as offering distribution in the U.K., Spain and the U.S., “which may collectively represent up to 15% of the global box office.” Only after that does the strategy refer to the library of what it calls “domestic distribution.”
Presumably, the number crunchers at Goldman Sachs read this report, as well as the Investment Canada Act of 1987, which states that “takeovers of Canadian owned and controlled distribution businesses will not be allowed.”
Neither Goldman Sachs nor EdgeStone will say how they plan to pull it off but, rest assured, no Canadians will be injured. Said one U.S. source, “This deal is all about recognizing the unique franchise MPD has created and taking that Canadian success story abroad.”