Montreal: An instant roadshow ensemble of Michael MacMillan, Robert Lantos, and the cfos of their respective merging companies, Kerri Golden and Roman Doroniuk, chartered a private jet July 21 and 22 for a series of meetings with brokers in New York, Boston, Montreal and Winnipeg.

At the reporter-free information sessions, brokers were told of forward benefits of the merger, and the synergies expected to drive earnings.

Fundamental to the future of Alliance Atlantis Communications – in its new tier position as a North American major – will be its ability to grow deeper roots in the u.s. To do this, analysts say, a new u.s. equity offering must be part of any future game plan.

Royal Bank senior manager Robert Morrice says the new company’s increased market capitalization, $750 million, could bring about broader investor coverage in the u.s., with the hope that ‘it will start to trade at a u.s. (much higher) multiple.’

On fundamentals, David McFadgen, an entertainment analyst with Griffiths McBurney Partners, says the acquisition looks good especially if the merged entity can attain the expected synergies. ‘It could be very positive in terms of creating shareholder value. One of the questions is, Will they continue to be able to source the level of Cable Production Fund (ctcpf) and Telefilm money that they have been?’ he says.

David Doft, an analyst with ING Baring Furman Selz in New York, says the deal puts Alliance Atlantis in the ‘top 10 to 15 production companies in the world with revenues of about US$500 million,’ equilvalent in size, he says, to a company like Spelling Entertainment.

New threshold

Doft says further acquisitions by Alliance Atlantis for more rights ‘is probably likely.’

‘Alliance has been fairly illiquid in the u.s.,’ he says. ‘If they were to pursue additional acquisitions and given current debt levels, I wouldn’t be surprised if something like that [a new equity offering] happened.’

The merged company’s market capitalization has passed an important threshold, he says.

Despite strong fundamentals, so far, Doft says the capitalization level has been ‘too small for many institutions.’

‘Every $50 million to $100 million in additional u.s. market cap opens up more and more potential investors and I think $us500 million is the key threshold because liquidity is an issue, especially with the larger funds.’

Size equals clout

Summarizing the main feature of the mega deal, George Burger, executive vp, Alliance Communications, says size counts.

‘Size and scale give one tremendous advantage in terms of leverage in dealing with the market at large, particularly internationally,’ he says, adding,’In this business, the competitors are just so big. While it’s unlikely that in the near future we are going to match them in size it’s certainly important to become big enough so you don’t get trampled underfoot.’

Analysts concur.

‘If you really believe that size counts, which investors – who say `give me value,’ do – then this is great,’ says a senior analyst in Toronto, who requested anonymity.

‘They’ll be able to pare down costs and improve overall profitably. Size equals clout and diversification of risk. They were both globally competitive before, but now they’re a hell of a lot better.’

Fundamentals in place

On the potential for a u.s. equity financing, the fundamentals – a nasdaq listing ‘and a good story’ – are arguably now in place.

At this point, McFadgen says he is going to wait to see if u.s. analysts ‘are all of a sudden going to get on board.

‘The only thing that would entice them to do so is if the stock traded a lot on nasdaq,’ he says.

To interest American brokers and incite them to prepare equity research, McFadgen says the stock needs to be traded in significant volume, ‘and then you need a (u.s.) financing public offering.’

If there’s no volume trading in the financing, u.s. analysts won’t be paid and they won’t do the research needed to attract investors, says McFadgen, adding, ‘You need another offering in the u.s. to get more u.s. coverage.’ One model cited by several analysts interviewed by Playback is Cinar Films, which has raised between $1 billion and $1.5 billion in the investment market, a considerable share in the u.s.

‘They did all their financing in the u.s. That’s how they got their coverage, [Bears Stearns, Furman Selz] and these other guys, they paid them,’ says McFadgen.

In market capitalization terms, Royal’s Morrice says because of its u.s. build, Cinar ‘is head and shoulders over eveybody else in Canada.’

‘In fact, at different times the market capitalization of Cinar has exceeded that of all the other companies in the (Canadian) industry combined,’ he says.

And in Cinar’s case, it hasn’t been just one u.s. financing, it was many.

A new offering

Brokers seen ready to accept the view that Alliance Atlantis is preparing to go to market for as much as $200 million in additional capitalization, in the near or very near future.

‘Maybe they’ll do it in the u.s. Who knows?’ says McFadgen.

‘Atlantis has always wanted non-voting shares because they’ve never traded properly in the States,’ says a Bay Street analyst. ‘Now it’ll be part of the Top 300 and all the Index Funds will have to own it. It’s a much bigger market capitalization, so their ability to raise financing will expand exponentially.’

On the direct subsidy issue, Alliance is Canada’s most diversified pubco, and reported direct or discretionary subsidies represent as little as 6% of its business.

The level of discretionary public incentives, other than the tax credits, could become a significant issue if funding policy makers respond to criticism from competiting producers who argue the merged company is receiving too much money, and decide, under pressure, to place a cap on funds available to any one producer.

Impact on pubcos

Further ahead, the merger is likely to create increased competition for other packaging and distribution companies who won’t have the leverage to attract the best independently developed Canadian properties.

The deal could also impact investors’ thinking, leading to an increased focus on the merged company, and a decision that effectively translates to ‘hold the big guy, forget about the small guy,’ says McFadgen.

‘There are some smaller players seeing this as a potentially risky situation,’ says one analyst. ‘The fear is that financial players are going to use this company as a proxy for the whole sector – that is, if I’m going to invest in film and television, I’ll invest with the biggest to the exclusion to the others.’

‘But I can’t see that happening,’ he says. ‘The smaller companies are still attractive. It’s easier for a $20 million market capitalization to double to $40 million than a $600 market cap to double to more than a billion. The bigger you get, the harder it is to add to percentage growth, so I think investors will remain active in the other companies. Really, it’s a win-win for the whole industry.’

This deal between Alliance and Atlantis – number one and two in the Canadian production industry – on the heels of Telesystem and Charles Sirois’ successful bid for Coscient Group, previously the number-three leading producer, is provoking a new round of talks on the issue of ‘bigness.’

‘It’s probably not unlike the bank mergers, when Royal Bank and Bank of Montreal decided they were going to merge and it took everybody by surprise,’ says Morrice.

‘People will look and try to decide if there are as logical pairings as (with) Alliance and Atlantis,’ he says. ‘The two companies have a lot of similarities and are a very good fit. When the other companies look around, they may not see such a good fit anywhere.’

Impact on producer

As for independent producers, Morrice says a stronger industry leader should generate even more openings. He says literally dozens of smaller producers do business with either Atlantis or Alliance.

‘It’s interesting to note that Michael MacMillan has already (prior to the merger press conference) contacted the producers association [cftpa] basically to say he is sensitive to the issues of the smaller producers and make sure there is a very open line of communications on those issues,’ says Legend Entertainment president Tom Berry.

‘Michael’s model has always been to have real geographical reach,’ says Berry, a member of the Coscient Group Board. ‘He’s always had working relationships in most provinces with local producers. That’s the m.o. that Atlantis has had for a while.’

‘The big companies realize they are not going to have sufficient creative ideas to fill all the projects that they need,’ Morrice says. ‘They (Alliance Atlantis) very much look forward to smaller companies bringing ideas to them. That’s been on going for several years now, when they went public, and Alliance went over $300 million in sales, then close to $400 million, people were saying they are too big.’

‘And the small producer has thrived in that environment. In my opinion that will continue and small producers will continue to thrive even with the combined entity,’ says Morrice.

As reported in the ‘Summary of the Material Terms of the Merger,’ Lantos and Loewy receive $23.3 million in cash from the sale of shares including $9.6 million from six senior Atlantis managers and $13.7 from a syndicate lead by CIBC Wood Gundy. Lantos and Loewy will also receive additional shares in the new company valued at between $36.9 million and $51.7 million. Those shares have a three-year term, but of note – can be bought back within one year.

In the u.s., Alliance’s stock price on nasdaq rose from us$8 in January `97 to close to us$22 following the merger, including a us$3.75 hike on July 20.

On the tse, Alliance was up 18% to $31 million on July 20 and up again to $32 at Playback press time. Atlantis stock was up about 10% and trading at $16 at press time

‘The stock is building-in the expected synergies,’ says McFadgen.

In revenues, for the period ending March 31, 1998, Alliance reported $385 million while Atlantis had $211.6 million for a combined top line of just under $597 million.

Reflecting its more diversified nature, tv production represents only 47% of all Alliance revenues, 86% in the case of Atlantis.

Alliance reported $146 million in revenues from motion pictures, $17.3 milion in equipcap financing, $15.4 million in multimedia, mainly animation, and $23 million in broadcasting.

Atlantis had no revenues in either motion pictures or financing, and $27.4 million broadcasting and $2.2 million in multimedia.

Alliance Atlantis has combined assets of $850 million and market capitalization of $750 million. editda is $50.4 million (Alliance, $34.2 million/Atlantis $16.2 million) and net earnings (profit) of $30.9 million including $24.3 million from Alliance and $6.6 million from Atlantis.

Through economies of scale, the merged company would have had additional $20 million in editda in fiscal `98.

While there are always questions when a principal effectively cashes out, Bay Street appears to like the new management team.

Made it possible

In fact, the reorganization at Atlantis in the past 18 months has made it possible for the merger to take place under Atlantis management-control. A key development has been the hiring of president Lewis Rose who brought a ‘never-have-believed’ level of stability to the company, says Atlantis Releasing president Ted Riley. Lewis subsequently brought in cfo Kerri Golden.

‘So Lewis has brought a real quality to the operation,’ says Riley.

Per Riley, the addition of the Bay Street elements in the front office, along with four or five major distribution deals in the past 12 months (with cbs, Endomol, Tribune and upn), and the subsequent healthier earnings set the stage for ‘more stability which probably, from Robert Lantos’s perspective, meant more credibility, and a safer haven for his baby.’ [See distribution story, pg. 5]

Lewis is a former exec with Maple Leaf Foods and CIBC Wood Gundy.

‘I think the telling and conclusions of this story [the merger] will not probably be able to be drawn for a couple of years,’ says Riley. ‘It’s going to take us time to see what the implications of the merger are and what it means in terms of next steps. I don’t believe everybody understands that this is just the first of many steps.’

‘It’s a great deal for now but we are going to have to build it. Get it stabilized and strong,’ he says.