CanWest: The Winner Canada Needs?

VANCOUVER -- In the race to media convergence, Canada has typically placed as an also-ran on the world stage. While industry battles and deal-making have raged within the Great White North over the past few years, the impact of the chaos has rarely been felt across the border.

Even though Quebec's Seagram (VO Quote) and France's Vivendi are on the brink of a merger, few people recognize the Canuck connection because Seagram's media holdings are so closely associated with the U.S.

But that could soon be about to change, thanks to the emergence of Winnipeg-based CanWest Global Communications (CWG Quote). Last week, Canada's largest broadcaster established itself as the Great White North's chief media force by acquiring all the major Canadian newspapers held by Conrad Black's Hollinger (HLR Quote) -- including The Ottawa Citizen, The Montreal Gazette, The Vancouver Sun and a 50% holding of Hollinger's flagship daily, The National Post. The $2.4 billion deal -- the largest of its kind in Canadian history -- also includes Hollinger's Internet properties, including Canada.com and the hockey portal Faceoff.com.

Being the King of CanCon (the government-coined term for Canadian content) doesn't appear to be good enough for CanWest, however. The ambitious firm looks poised be a cross-media powerhouse on the global stage -- so long as it can figure out how to leverage its assets, integrate its newfound holdings and keep a lid on burgeoning debt (now projected to increase eightfold to about $2.7 billion because of the Hollinger acquisitions).

The latter questions have given way to a rather lukewarm response from Wall Street, despite CanWest's ambitious growth prospects. "While we believe that the possible online synergies between local papers and TV assets are worth exploring, we would have preferred to see it accomplished through alliances in major markets," wrote Andrew Mitchell of brokerage Scotia Capital in a recent report. The Toronto-based analyst maintains a hold rating on the stock, and a target of $C21 ($14.25). Scotia Capital's parent, Bank of Nova Scotia, maintains a banking relationship with the company.

Shares of CanWest, which have a 52-week range of 10 1/4 to 16 1/6, currently trade at about 12 3/4. So, for the few American mutual funds that count the company among their holdings -- including (FLPSX Quote)Fidelity Low-Priced Stockfund and (SMCWX Quote)Smallcap Worldfund, the waiting game for a CanWest payoff will continue.

Concerns about debt management and asset integration don't seem to be holding the company back, at least not yet. The Canadian media heavy indicated last week that it intends to beef up its holdings in larger markets, such as Europe and the U.S. CanWest president and chief executive Leonard Asper said that CanWest's new ties to Hollinger -- which still owns Britain's Daily Telegraph -- could provide the company's entry point into the European market. That same thinking might see CanWest gain a foothold in the American market, thanks to Hollinger newspapers such as The Chicago Sun-Times.

"I think that this [Hollinger] acquisition has got a number of financial merits -- forget the strategic part of it," says Tom Strike, CanWest's chief operating officer and a man instrumental in negotiating the deal with Hollinger. "This will build a war chest for us in terms of cash flow and financial capacity that's required to play in larger markets."

As it stands, CanWest's presence in the U.S. is minimal. It currently owns movie distributor Fireworks Pictures and has stakes in Internet companies LifeServ and Internet Broadcast Systems.

That's a far cry from the massive American holdings of media conglomerates like the proposed AOL/Time Warner or Tribune (TRB Quote) and Viacom (VIA Quote). But with key positions in every important Canadian market, it may just be a matter of time before the Winnipeggers stake their claim south of the border. "I think we've seen a lot of merit in what Tribune, and Time Warner for that matter, are doing," says Strike.

And in the spirit of Rupert Murdoch or Ted Turner, the company is looking to professional sports as another means to build brand and add to its programming repertoire. Baseball's Toronto Blue Jays, and hockey's Vancouver Canucks and Montreal Canadiens, are all possible candidates for acquisition.

Scooping up Les Canadiens -- a national icon and the most winning team in hockey history -- could prove to be as symbolic as it is strategic. In the media sweepstakes, Canada is looking for a winner. CanWest may finally prove to be it.