Canwest Global saved by the recession

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(MIKE DEAL / WINNIPEG FREE PRESS)

The rude realities of the Canadian media industry will be exhibited in all their excruciating detail tomorrow when Canwest Global Communications Corp. issues its third-quarter results.

The Winnipeg media company has been sticking fingers in the dike for the last several months, holding back the floodwater of debt holders at exactly the same time the global recession has dried up revenues.

But Canwest's results will likely show, as they have done fairly consistently in the past, that operationally (not counting debt servicing costs), most of its units are still able to squeeze out some money.

That is ultimately the reason why, no matter how many missed interest payments on its bonds or bank covenants Canwest breaches, the company will not likely be liquidated.

That, and the fact that this is probably the worst market in decades in which to try to sell either television stations or newspapers.

For all those reasons, this week's about-face by the country's television broadcasting regulators had to be bittersweet for Canwest management.

The Canadian Radio-television and Telecommunications Commission (CRTC) implemented a 50 per cent increase in the fees the distributors (cable, satellite and phone companies with television services like MTS) pay into a fund to help produce local programming for small markets.

The one-year licence renewals the CRTC handed out this week also include lower obligations for local programming.

But most significantly, the commission decided to start the process of developing a new regulatory framework for the conventional television business -- the one that broadcasters have been saying for some time is broken.

The CRTC has indicated that new framework will likely include some negotiated fee-for-carriage formula (where the distributors pay the conventional broadcasters a fee for the right to carry a signal).

For Canwest, it is like the answer to its prayers. It has been arguing for years that the industry had changed so much that the regulatory environment is outmoded.

"Of the 16 local markets we are in, 14 lose money on local programming and they always have," said John Douglas, Canwest's vice-president of communications.

The difference is that 10 years ago, the stations' prime-time revenue would have offset those losses, Douglas said.

But the proliferation of electronic entertainment and information choices has fragmented audiences so much that those profitable mass market successes are now very few.

It's not surprisingly that the cable companies are up in arms about what they are referring to as a potential tax on their customers (not that they would ever contemplate bearing those additional costs themselves).

Chris Peirce, chief corporate officer of MTS Allstream, shares the complaints of the cable companies. He says MTS is additionally disadvantaged because it is a regional and relatively new entrant to the field, investing more than $300 million in creating an alternative television distribution service.

"After doing that, we're now being told we may find our obligation to subsidize different parts of the industry may rise when the CRTC decides to raise those subsidies," Peirce said.

That said, the CRTC is supposed to help ensure the supply of Canadian programming that reflects the national culture.

"The CRTC does play a Robin Hood role," said one Bay Street equity analyst, who asked that his name not be used. "There is definitely a huge divergence of financial performance, share prices and equity values of distributors vs. broadcasters."

Canwest investors, of which the Asper family is the largest, will witness some of that awful truth tomorrow.

The regulatory changes are a rare bit of good news for the company. But alas, it is probably too little, too late for the Aspers.

Next Friday, management will present an agreement in principle to recapitalize its balance sheet that is acceptable to the bondholders.

"They continue to chip away at it," said one analyst. "But the bondholders are driving the bus. The equity is wiped out."

martin.cash@freepress.mb.ca

Republished from the Winnipeg Free Press print edition July 9, 2009 B4