After the cash injectionÉ

It’s business as usual

When six major film and television production companies went public in Canada between June 1993 and May 1994, over $150 million in capital was raised. At the time, questions arose of just how broad the marketplace is and whether the rather sudden influx in this one arena had saturated the market.

Only Vancouver-based International Keystone Entertainment (see story, p. P-11) made the move to go public since Toronto-based Nelvana filed its preliminary prospectus in March 1994, although some companies, such as Norstar Entertainment, were prepared to file a prospectus within months of that time. It is generally held that the window of opportunity closed due to a drop in interest rates and a slump in the stock market, not from saturation.

The consensus from the public companies is there is plenty of elbow room, especially as the focus of entertainment software continues to shift toward an ever-expanding global platform. Playing on an international scale has long been a necessity for Canadian producers, but now they have deeper pockets.

Micheline Charest is ceo of Montreal-based Cinar, a producer of family entertainment known internationally for its animation output.

Cinar’s market has increasingly moved out of Canada, ‘not by choice, but by obligation,’ says Charest, pointing out this has been a reality for at least five years, due in part to Canada’s decreasing ability to support financing of an increasing number of projects.

While Cinar has been an international player all along, the overall market has changed significantly, and in Cinar’s favor.

‘Once upon a time you had very distinctive ways of getting product done, particularly in North America,’ says Charest. ‘The u.s. was completely closed to the notion of international programming, and even with the best intentions, the foreign component was enough to kill the deal. That has all changed.’

Jon Slan, ceo of Toronto-based producer/distributor Paragon Entertainment, is based out of Los Angeles, and, from a slightly different perspective, he echoes Charest’s experience. The Canadian industry continues to get more and more legitimized as the size of our companies grow and as the American landscape changes, he says.

‘First of all, simultaneously with the growing of the Canadian companies is a diminishment of the number of American independents,’ says Slan, noting that while Canadians have always had to think more globally than u.s. companies, ‘now it’s beginning to pay off.’

In the last year, Paragon purchased the library of u.k.-based HandMade Films, and more recently, acquired 50% of Ottawa animation house, Lacewood Films.

The end result is a diversification in production activity, allowing the largely television producer entry into more feature film and animation activity.

Being in l.a. helped to trigger the Lacewood initiative, says Slan. ‘With me down here, we get lots of opportunities to produce or develop animated shows, and we didn’t have a way to do it without going to a third-party company.’

Alliance Communications, producer of the Due South tv series and a major Canadian distributor, has grown exponentially since going public in June 1993, raising a net sum of $68 million through its ipo, a special warrant issue and the sale of 8.6% of the company to Onex Corporation.

Alliance coo Gord Haines says the company is not the big fish in a small pond but a competitive swimmer in global waters. The company has received a lot of interest from investors outside Canada, especially from the u.s. ‘We know that people have acquired shares on the Canadian markets from as far away as Great Britain,’ says Haines, ‘but we have to manage the numbers because we plan to stay a Canadian company.’

Charest sees the growth of public companies in Canada as paralleled by the growth of opportunities around the world. ‘If you have an ability to finance a component of a project, you are likely to be able to attract opportunities from outside. That to me is becoming the focus of our growth: outside Canada, and that is a pretty big place,’ she says.

While the consensus is that going public did not directly affect the production strategies of these companies, the cash injection has had many, varied results in both volume and types of production.

Haines says Alliance’s initial strategy as a public company was ‘to invest in businesses that were synergistic and strategic in terms of the core business of production and distribution at Alliance, and we’ve done that.’ ReBoot, Alliance’s first move into animation and a highly successful computer-animated children’s series (produced by Alliance and Vancouver’s BLT Productions) is a prime example.

For Cinar, the capital raised from going public was used to boost its production slate. ‘We have rationalized departments, made them more efficient and developed new areas of revenues, but it’s all connected to what we were doing before: audio releases, home video labels, television series,’ says Charest.

These companies stand behind solid policies that are created to ward off the element of risk.

Alliance has 80% of financing in place before the cameras roll on a production and Haines says that system was in place long before the company went public.

‘I don’t think it’s a risky business the way we approach it. That’s why the investment community has started to take a real interest in this business,’ says Haines.

Cinar’s policy is also to have 80% of financing in place before production starts. In addition, the company reduces the risk potential by specializing in one area, family entertainment.

For Paragon, it’s 75% of financing in place before a project rolls.

Where risk comes to the forefront for Paragon is in developing and producing series for American networks, a high-risk, high-reward area.

Paragon’s strategy is to factor in costs but not profit potential should such a project take off. ‘Our business plan in that area does not require success to be successful,’ says Slan. ‘Having used that as our philosophy, we have increased our movie-for-television staff and goals and our family entertainment goals, both of which ought to yield more sustainable earnings for us.’

New media is more than a buzzword in the film and television production industry, having progressed from a largely unknown entity a few years ago to a multifaceted industry encompassing digital technologies, new distribution systems and a potentially mammoth marketplace. Yet like any wave of the future, it involves enough unknowns to place it well within the high-risk category. So while the public companies are pursuing new-media ventures through various means, caution is a priority.

‘As a major supplier of filmed entertainment software, we recognize that we need to be a major player (in new media),’ says Haines. ‘Retaining all the rights to all the product we make or acquire for distribution so that we’ve got those available for those markets when they open up is key.’

There are countless other sources of risk: the upcoming federal budget, expected cuts to the federal government agencies that fund the film and television industries, and the possible replacement of tax-shelter initiatives with a tax-credit system, to name a few.

The future of Alliance Equicap, Alliance’s in-house tax-shelter operation, is a bit of a question mark right now, but Haines: ‘We’ve always had a plan to expand Equicap and take advantage of similar types of opportunities in other countries. They will continue to do business in Canada with whatever products possible and probably expand in terms of international scope a little faster than we had originally intended to.’

Not all of the six major companies have had a full fiscal go at being public yet, but the perception is that the industry has shown itself worthy of its investors. In addition, the fact that these companies are public is creating a new dynamic that has attracted a lot of attention to the industry.

Charest sums it up: ‘I would like to think, that we have made some real progress in delivering to the financial community the industry we said we had and the industry we convinced them to invest in. We have delivered the goods and exceeded expectations.’

What lies ahead? A continued effort to educate analysts and institutional investors on the stability and worth of the business of Canadian film and television.