Montreal: The year just out was nothing short of spectacular for Canada’s publicly traded entertainment companies. From January to December, nine pubcos, including four new ones, raised an unprecedented $400 million-plus in the private and institutional investor markets.

In an informal survey, Playback was able to identify more than $419 million in new investment in Canadian pubcos in calendar 1997, more than double the ctcpf-enhanced annual budget of federal funding agency Telefilm Canada.

Among established companies, Atlantis Communications issued some two million new shares, raising $20 million at year’s end, while among other arrangements, Alliance Communications raised $61 million (at $18 a share) in a new share offering in October and November. Cinar Films raised an unprecedented $134 million in a North American-wide share offering in ’97.

Now on the selling block, Paragon Entertainment raised $9 million through the sale of special warrants (exercisable at $2.60 a share up to March ’99), while Vidatron Entertainment Group raised $6 million.

As for newly launched pubcos, they raised close to $190 million in ’97.

Overall, the cumulative industry figure would have been even higher but new capitalizations for both Nelvana and Coscient Group were formally closed late in ’96.

Karen Fisman, an analyst with Marleau, Lemire Securities in Toronto, says the production industry has an interest in the fate of the pubcos.

‘More and more private companies are looking for innovative ways to finance their productions, and in order to retain an upside they have to be plugged into what the big companies are doing,’ she says.

Lions Gate Entertainment became a publicly traded company in late ’97 in a reverse takeover procedure, bringing solid assets into the fold including North Shore Studios, Mandalay Television in the u.s. and Montreal-based integrated producer/distributor Cinepix Film Properties.

A number of industry analysts believe more acquisitions by cash-rich Lions Gate are a near certainty. The company and its ceo Frank Giustra raised more than $120 million in two financings in ’97.

Montreal-based Telescene Film Group went public (at $9 a share) in mid -’97, closing its ipo July 3 for total gross receipts of $29.3 million, including $3.6 million for the shareholders.

Production for ’98 includes seven tv projects, including a major series coproduction deal with MediaLab, a tv movie and series output deal with DirecTv, and three feature films with combined production budgets of $56.6 million.

Telescene’s stock has risen in value more than 40% since its July ipo.

David McFadgen, an analyst with Griffiths McBurney Partners in Montreal, says new production is the pipeline. ‘Student Bodies is being taken to natpe by Fox,’ pointing to ongoing interest in the syndicated teen sitcom,’ he says.

Fisman says the stock has been performing very well. ‘I think with Telescene we’ll want to see if they can maintain their consistent delivery of results. What they have to show the market going forward is that they are able to – as a pure production company and a company that doesn’t really have a distribution business – keep their pipeline full and grow their margins. I’d like to see a bit more of a track record.’

Roger Dent, an analyst with Yorkton Securities in Toronto, takes note of the pressure to perform. ‘It will be interesting to see if they [Telescene] can turn that [the supply deal with DirecTv] into practice. The market is assuming they can do it, but the current share price [$13] is not leaving any room for error.’

Fireworks Entertainment is another newly listed entertainment pubco on the tse. It raised $11.5 million in a ’97 ipo.

Mainframe Entertainment, founded in ’93, closed its ipo June 17 selling three million shares at $9.75 a share. In its first quarterly report as a pubco in late August, the company said it had raised over $55 million before expenses of the offering in the past year.

Mainframe’s pioneer ReBoot franchise is into its third season and the company has a growing number of deals for Imax Ridefilm installments and computer games.

Vancouver-based Vidatron Entertainment Group was listed on the tse Nov. 28. It raised $6 million in equity financing in ’97. Vidatron’s entertainment division, Sugar Entertainment, headed by veteran producer Larry Sugar, is set to deliver 22 one-hour episodes of the sci-fi series First Wave, sold to Space: The Imagination Station in ’98, as well as two new family tv movies.

Revenues stood at $23.5 million for the year ending Aug. 31.

‘On a speculative play I would look at Vidatron in Vancouver,’ says Dent. ‘From a practical standpoint it’s only been in the production business for a year. The key individual is Larry Sugar. It’s a pretty exciting growth story that is basically as yet unrecognized by the market.’

And while Vidatron is a much smaller operation than most other Canadian pubcos, its share value could rise (‘double’) significantly in ’98, says Dent.

Like Montreal’s Covitec Group, which trades on the mse, Rainmaker Digital Pictures’ core business is post-production. The company had nine-month revenues of $18.5 million, up from $11 million last year.

Fisman says with the almost unlimited potential to do low-margin work in heated environments like Vancouver and Toronto, the bottom line is more important than the top line, generally true for all the pubcos, and especially for a service provider like Rainmaker.

‘Rainmaker’s margins are outstanding for a post-production company, and I think its management has an excellent track record,’ says Fisman.

In ’97, Covitec completed the successful integration of three of Montreal’s leading post houses (Supersuite, cme and Sonolab). From an investor perspective the company is still not well known.

In late November, Malofilm Communications changed its name to Behaviour Communications, with its stock trading in the $0.90 to $1.05 range at year’s end. The company is currently selling a rights offering exclusive to shareholders. It’s projected to close this month with receipts as high as $30 million.

‘I’ve been focusing on companies where I see a solid performance, good assets, good product, so I haven’t been looking at Behaviour,’ says Fisman.

Some investors in the market might see a turnaround as the only option for Behaviour, while others might consider the role of Richard Szalwinski, Behaviour’s chairman, and what he did with Discreet Logic.

‘Maybe some people will be hanging their hat on that,’ says Fisman.

‘It’s been a very disappointing performance,’ says Dent. ‘They have obviously reduced head counts significantly, and they have exited some businesses like animation [Desclez Productions].’

(The company’s distribution division also dropped its deal with Paramount for French-track home video rights in Quebec.)

Looking forward, the situation at Behaviour seems more stable following a $25.5-million write-off in operations, but Dent says, ‘It remains to be seen if they’re going to be able to grow the business that they have today.’

McFadgen says because of vertical integration it will be increasingly difficult to penetrate the u.s. market, ‘a key to being successful.’

He is recommending three entertainment stocks in ’98, Cinar, Nelvana and Telescene.

Cinar has a projected delivery of 212 half-hours in ’98 and McFadgen says the company has two solid book publishing deals (for production titles) upcoming with u.s. educational publisher Carson-Dellosa, which Cinar acquired for $40.5 million in ’97.

McFadgen’s 12- to 18-month target price for Cinar is $64. The target for Nelvana is $37. Both Cinar and Nelvana recently exercised their options to increase ownership in teletoon to 20% each. teletoon is shaping up to be ‘a successful venture [and] a significant outlet for their programming,’ says McFadgen.

Dent says Cinar remains entirely consistent in its reporting and targets. ‘If a lot of people think the stock is expensive, it has not disappointed anyone to date,’ he says.

In ’97, Cinar forged new partnership links with PolyGram Filmed Entertainment, Reader’s Digest and Time-Life Kids, and secured a $110-million line of credit with Royal Bank and a u.s. bank.

Nelvana clearly made a lot of progress in 1997, and Dent says the stock should perform well in ’98. ‘They made some significant personnel changes and hired a very sharp new cfo,’ he says.

Nelvana’s ’98 volume points to an almost 50% increase, with the focus exclusively on proprietary production and the building of the company’s library asset. Nelvana staked out solid ground in the 3D business with the acquisition of Windlight Studios.

‘If you look at Nelvana and their problems in ’96 they were tied to management,’ says Fisman. ‘Nelvana has always been a great producer of animation, but without the management that is able to communicate with investors, give them the comfort that there are not going to be surprises, and implement a strong strategic plan for the company, you just don’t have a complete picture.’

More choices

In animation terms, Dent says Nelvana rates a top performance mention in ’97 while Alliance has done especially well in diversification terms, he says.

Fisman’s purely speculative choices in ’98 are Rainmaker (‘even today it should be trading a couple of bucks higher’) and Nelvana.

She says Nelvana has significant upside, and that investors are waiting for that company to deliver a couple of solid quarters. Fisman has a 12-month target of $34.50 for Nelvana. Speculation is one thing, but Fisman makes the point institutional investors are in for the longer term.

A new TSE listing

Coscient Group gained its tse listing on Dec. 10, a step that should help improve visibility, a key issue according to Dent, as well as the company’s liquidity and investor appeal.

Major developments in ’97 include the acquisition of the production and distribution divisions of Owl Communications, more English-language production at SDA Productions, an output deal with DreamWorks skg for the Quebec market, a strategic shift to produce a greater number of lower-unit-cost films, and the formal announcement of a new l.a.-based production company, Legend Entertainment, headed by producer Tom Berry.

Fisman says she will be looking closer at Coscient in the weeks ahead, but already likes what she sees. She says the company is actively leveraging its Astral Distribution asset. ‘I think the Astral deal has done wonders in terms of establishing connections and relationships,’ she says.

Dent says Coscient’s activity in animation is of interest and points out that the company has been making inroads into the English broadcasting market. (Popular Mechanics for Kids and Bob Morane will be on Global this year.)

‘They’re moving in the right direction, and while the stock has not done terribly well, at the current price there is probably some good value,’ he says.

Coscient had revenues of $100 million in ’97.

Diversification

Alliance again had an industry-best price/earnings ratio in calendar ’97, 9.0, while its stock edged out the tse 300 Index with a 108 rating. Nelvana led the rounds in this category with a 120 rating.

Fisman’s pick for ‘best diversification’ in ’97 is Alliance. ‘Their various businesses are tied together in a very cohesive way. Look at what their broadcast assets give them. They have shelf space. The licence has an intrinsic value but they didn’t have to pay for it because that’s the way we work in Canada. [And] library revenues flow straight to the bottom line.’

The year included important acquisitions for Alliance including Citadel Entertainment, Electric Pictures, the u.k. distributor, and at year’s end, Norstar Entertainment.

‘Alliance really seems to be on a bit of a roll I would say,’ says Dent.

‘Investors have come to realize that production companies can generate very lumpy revenues and earnings and that if a series is bumped from one year to the next that will have an important impact,’ says Fisman. ‘And if you have a broader revenue base, some broadcast interests, a production business and a distribution business, then for the investor all the eggs aren’t in the production basket.’

Appealing programs

Atlantis has much stronger tv production margins than in previous years, in part because of the commercial appeal of Gene Roddenberry’s Earth: Final Conflict, with very strong sales up front, says Fisman.

In a late ’97 report, RBC Dominion Securities ranked Atlantis ‘as our top pick in the entertainment sector due to the company’s strong production slate, growing broadcast operations and attractive valuation.’

The rbc report says the Roddenberry series and Nightman are the two top-rated new one-hour shows in u.s. syndication, and ‘excluding renewals, Atlantis already has a solid backlog of production lined up for ’98. Distribution operations were also strongerÉreflecting a positive contribution from Atlantis’ contract to distribute cbs programming in Canada.’

On its specialty broadcast assets, a recent report by CIBC Wood Gundy says Life Network is well positioned to ‘step up its advertising revenues,’ while HGTV Canada (67% owned by Atlantis) ‘looks very promisingÉjudging from the experience of hgtv u.s.’

The company also diversified last year, making an important stake in animation and special effects in ’97 with the acquisition of Calibre Digital Pictures, and named cfo Lewis Rose as its new president.

New focus on margins

In general, says Fisman, the more a production looks like a service deal with rights sold off up front, and little or no back-end revenue potential, the lower the margin.

‘That’s why the animation companies like Cinar and Nelvana, where they retain their rights, have the potential to generate higher margins and to grow their margins because in year three they can generate library sales from product produced in year one,’ says Fisman.

‘The other thing of course is the more highly commercial your product is the more you can generate a high demand even in year one and you’re going to get a higher price.’

Other prominent players on the Canadian pubco front are Paragon Entertainment, big-screen producer Imax Corp., Astral Communications, which has broadcast and service assets, Vancouver-based International Keystone, producer of the ’97 box office hit Air Bud, newly merged exhibition company Cineplex Odeon, post manufacturer and service company Cinram, and Devine Entertainment.