Many questions are hanging in the air following Nelvana’s disclosure that it’s in discussions concerning a proposed merger transaction with New York-based Golden Books Family Entertainment, the largest children’s book publisher in North America. Golden has offered $140 million for all shares of the Toronto-based company, translating into about $27 per share.

Nelvana decided to release word of the discussions after rumors about a potential buyer drove the company’s stock beyond the offering price on the Toronto Stock Exchange.

At press time, both Eleanor Olmstead, Nelvana’s chief operating officer, and Tracy Reese, senior vp of corporate marketing and communications for Golden, declined comment on how the deal might affect Nelvana’s Canadian production and Nelvana’s 10% ownership of teletoon, the recently licensed animation specialty service.

Nelvana shares ownership of teletoon with Cinar, ytv and Family Channel, and it has recently expressed interest in increasing its stake in the service. Nelvana chairman Michael Hirsh, who stands to make a cool $22 million should the Golden transaction go ahead, is the chair of teletoon’s board of directors. crtc allows 33.3% foreign ownership of specialty services and Golden has made it clear its offer is for 100% ownership of Nelvana.

Golden’s holdings and expertise raise some interesting access scenarios should the deal become reality. Golden is a major publisher of Sesame Street, Walt Disney and Richard Scarry characters and stories in certain formats, and Nelvana’s merchandising could use a boost – the company recorded a loss from its merchandise licensing activities in 1995.

With the recent surge of vertical integration in the u.s., and the resulting network lock (for example, Disney’s purchase of abc), building bridges with the u.s. is a tough task for Saturday morning supply studios, which makes capitalizing on Golden’s distribution relationships a timely prospect.

There’s no word from either partner as to whether Nelvana’s production volume would increase or decrease after the proposed merger, or whether a deal with Golden would give Nelvana better feature standing.

The merger transaction, should it take place, could also have ramifications for Cinar, Canada’s other large animation producer. Cinar already has ties to Golden through production of the children’s series The Busy World of Richard Scarry. As well, Cinar’s live-action series Lassie is a collaboration with New York-based Broadway Video. Golden recently paid us$91 million to acquire Broadway Video Entertainment, Broadway’s family program library.

Simon Lussier, a broker with Sprott Securities in Montreal, says getting more information from Golden has been frustrating. He says management of entertainment companies in Quebec, including Cinar Films, have been buying class a multiple voting shares in their own companies.

‘If an American wants to buy Cinar, Cinar will lose ownership in Quebec,’ says Lussier. ‘So they would have to arrange a deal to keep the ownership in Quebec, which is very hard to do, especially when an American firm wants to buy something.’

Lussier says publicly based incentives for certified Canadian companies make up 15%-20% of current revenues.