CanWest Global Communications Corp. has initiated talks with the federal government on a potential change of ownership as the company and its creditors negotiate a financial restructuring of its vast media properties.
The company, which owns more than a dozen newspapers across the country, the Global Television network and several cable TV channels, has taken the first steps needed in Ottawa, signalling to federal regulators that discussions will be needed on a possible new ownership structure.
At issue, according to several sources involved in the restructuring, is whether the company's main creditors - a series of distressed-debt funds that own most of its bonds - can stay within Canadian ownership rules for broadcasting assets if they convert the debt they are owed into equity in the new restructured firm.
Those involved must find a way to fit any new ownership structure within rules that have for years required Canadian broadcasting assets to be controlled by domestic owners.
If that can't be done, they would have to go back to the drawing board.
The Canadian Radio-television and Telecommunications Commission is said to have already requested a copy of the shareholders agreement when it is complete, among other key documents.
Though CanWest has signalled the change, sources in Ottawa indicate the CRTC does not expect formal meetings to begin for several weeks, likely not until September.
CanWest and its creditors must first agree on a restructuring plan that will allow the company to manage its $4-billion debt load, including possibly filing for protection under the Companies' Creditors Arrangement Act.
At that point, the complete plan will be put to the CRTC.
"Ownership is going to be the issue," said one source who requested anonymity because the formal talks have not yet begun.
The distressed-debt funds that hold CanWest's bonds would likely want to hold stakes in the operation going forward to make their money back.
The Winnipeg-based media giant is controlled by the Asper family, which owns most of the voting shares.
But it is likely that situation may change in the restructuring because the bondholders are now largely in control of the restructuring.
CanWest approached the regulator several weeks ago to signal that formal talks would be needed soon, though delays in reaching a restructuring agreement with the creditors have held up that process.
The delays are due mostly to a complex ownership structure within CanWest in which debt has been allocated to various segments of the company, making asset sales and negotiations with creditors difficult.
The central players in CanWest's restructuring are three money managers with an expertise in fixing troubled companies.
Two of these distressed-debt funds are American - GoldenTree Asset Management and Beach Point Capital Management - and the third is Toronto-based West Face Capital Inc.
"The U.S. funds treat the border as invisible, and most of the time it is," said one adviser working on the CanWest restructuring.
"But once in a while, the border matters. In this situation, foreign ownership could be controversial."
The source, an expert in cross-border transactions, and numerous other sources familiar with CanWest's restructuring, say there are ways to rework the media company so that after a debt-for-equity swap, the two U.S. distressed-debt funds can potentially own a majority of the equity, but satisfy regulators by holding a minority of the votes.
The blueprint for what may be coming was drawn up in 2007, when CanWest partnered with New York-based investment bank Goldman Sachs Group Inc. to buy Alliance Atlantis Communications Inc., which owned several cable TV channels the media company coveted.
Cash-strapped CanWest took majority voting control of the assets, to satisfy Canadian ownership requirements, but just 17 per cent of the equity. Goldman held a minority voting position, despite owning the bulk of the company.
It's not clear, however, if this means preserving part of the Asper family's voting shares.
A similar structure was used in 2006 to sell Ottawa-based satellite operator Telesat Canada to a U.S. company, Loral Space & Communications Inc., and a Canadian pension fund, the Public Sector Pension Investment Board. Loral got the majority of the equity, but the Ottawa-based pension fund kept voting control.
"There are ways to make this work, and everyone involved understands they need to work with regulators to find an acceptable outcome for CanWest," said another source advising the restructuring.
In any change of control for a broadcast company, an equivalent of 10 per cent of asset values must go towards supporting Canadian broadcasting initiatives. But if the company were to file for protection from creditors, it isn't clear whether that requirement would apply.
Though deadlines to make interest payments on CanWest bonds over the past several months have been extended many times, those deadlines have in some ways become irrelevant now to the restructuring process.
The creditors owed the payments are also the same groups who are working on the restructuring, so they are able to set their own schedule and change it if necessary, said one observer.
The restructuring is being led by Hap Stephen, a chartered accountant, who has worked on similar restructurings at Stelco Inc. and Eatons.
His firm, Stonecrest Capital, has been brought in as chief restructuring adviser to the parent company that holds CanWest's assets.