Canwest Media and Goldman Sachs
The failure and resurrection of Canwest provides a microcosm of the 2008-2009 recession. Bloated with debt from acquisitions in broadcast and publishing, starved for advertising revenues by retrenching customers, and plagued by uneconomical newspapers and local television stations, Canwest fell into default of its financial obligations in early 2009. By then, the vultures were circling and the Asper family was facing the demise of its media empire.
As it turned out, the salvation of Canwest’s media business depended on the assimilation and growth of its most recent acquisition, a specialty television business purchased from Alliance Atlantis in 2007 that included History Television, Showcase and HGTV. During the recession, traditional, "free to air" broadcasting over Canwest’s Global Television Network had suffered serious declines of revenue and profit, but the specialty television business was barely touched. While advertising revenues declined, subscription revenues kept rolling in.
Canwest had not financed its acquisition of the specialty television channels from Alliance Atlantis in 2007 with debt — the financing route it had taken when building its publishing business. Rather, Canwest funded the acquisition through an equity co-investment with Goldman Sachs. Goldman Sachs provided almost $500 million for a 65 per cent equity stake in the new specialty television holding company, CW Investments. Canwest put up the remaining 35 per cent but, in order to meet Canadian control requirements imposed by the CRTC, Canwest owned 66 2/3 per cent of the voting shares. Canwest’s business plan was to consolidate its conventional television business with the newly acquired specialty stations and to buy out Goldman Sachs’s interest by 2013.
As temporary capital in a CRTC-regulated cultural business controlled by Canwest, Goldman Sachs needed the protection of a contract that provided basic governance rights and the right to sell its shares in CW Investments. To meet these needs, Goldman Sachs negotiated a multi-party shareholders’ agreement, the CW Agreement, which gave Goldman Sachs representation on the board and a right to put its shares to CW Investments, half in 2011 and half in 2013. After the put rights were exercised, Canwest would be the sole owner of specialty television and Goldman Sachs would have received a pre-determined return on its investment.
When the recession hit in 2008, Canwest’s financial picture had changed. While the specialty television business was the one bright spot in the troubled media empire, the rest of Canwest was suffering from the effects of the weakened economy and declining advertising revenue. Desperately in need of cash to meet the demands of its lenders, but owning a potentially viable business, Canwest attracted the interest of distressed-debt investors who look for opportunities to invest in undervalued debt of troubled companies. In Canwest, distressed-debt investors saw an opportunity to buy publicly held Canwest Media notes at a steep discount, then force the sale of non-strategic assets to pay down debt and convert the remaining debt into ownership of a restructured Canwest media business — a "loan-to-own" strategy.
One of the most attractive features of Canwest’s media business was the still very profitable specialty television business that Canwest co-owned with Goldman Sachs. If the distressed-debt investors, affectionately known in the industry as "the vultures," could force Goldman Sachs to sell its 65 per cent interest in CW Investments for a low price, the vultures could realize a profit of many times their initial distressed investment by converting their notes to equity of restructured Canwest Media. The stumbling block was the CW Agreement, which guaranteed Goldman Sachs a minimum return on its investment through the exercise of its right to put its shares to CW Investments at a set price.
Undeterred (or possibly not fully aware of Goldman Sachs’s contractual rights), the vultures constructed a plan to gain control of Canwest’s restructuring process and pressure Goldman Sachs into giving up the rights it had carefully negotiated and protected by the CW Agreement.
Through the early part of 2009, they bought up Canwest Media notes at steep discounts, consolidating control of the notes in the hands of a few distressed investors who could act in concert. In May 2009, they provided Canwest Media with secured bridge financing to repay its existing secured bank debt. In the bridge loan agreement, they negotiated effective control of Canwest’s every move in its restructuring process. Next, they forced a sale of Canwest’s control position in Australia’s Ten network. The proceeds were used to repay the bridge loan and to pay down $400 million, or about 50 per cent of the face amount of the notes. Since many distressed investors had bought the Canwest Media debt at 15 to 25 per cent of its face value, they were already winners from the sale of Ten. The final step was to force Canwest Media to file Companies’ Creditors Arrangement Act (CCAA) restructuring proceedings and to take on Goldman Sachs.
By good luck or by deft management, the distressed investors got a gift from the Canadian government, who brought into force extensive amendments of the CCAA on September 18, 2009. The amendments added new provisions dealing with "disclaimer or resiliation" of agreements that had not been interpreted or tested. By filing on October 6, 2010, Canwest Media became the first substantial company to file for CCAA protection under the amended CCAA.
Leveraging off the amendment, Canwest’s distressed investors, through their Ad Hoc Committee, insisted that Canwest either disclaim or renegotiate the CW Agreement to, among other things, cancel the put rights that set Goldman Sachs’s guaranteed exit price. Canwest needed the support of the distressed investors to complete its restructuring, and so began its campaign to force concessions from Goldman Sachs, using the threat of disclaimer of the CW Agreement as a weapon in the negotiation.
Step one in the campaign was to portray the 2007 acquisition of the specialty television channels as an improvident foray by Canwest into the M&A boom that was at its height in 2007. This portrayal ignored the fact that specialty television was Canwest Media’s only bright light and the foundation of its future success as a restructured business.
Step two was to manage the marketing process for new investors in Canwest Media to permit participation by only Canadian investors interested in buying 20 per cent of restructured Canwest Media (leaving 80 per cent for the creditors).
Step three was to exclude Goldman Sachs from the restructuring process by prohibiting anyone with confidential information about Canwest from speaking with Goldman Sachs.
Step four was to foreclose the possibility of any competing deal by rushing to court for approval of a deal with Shaw Communications, the Canadian partner identified in the Ad Hoc Committee-controlled marketing process. The Shaw agreement, predictably, required a disclaimer of the CW Agreement or capitulation by Goldman Sachs. With the approval of the Shaw agreement, the stage was set for the final battle with Goldman Sachs.
Goldman Sachs’s put rights required CW Investments to buy the shares Goldman Sachs owned. CW Investments, a party to the CW Agreement, was fully solvent and able to meet all of its obligations under the CW Agreement. Of course, if CW Investments were to be relieved of its obligation to buy Goldman Sachs’s shares, the value of Goldman Sachs’s shares would plummet, with all of the lost value going to Canwest Media and its new owners, the vultures and Shaw. Goldman Sachs argued that Canwest Media could not use its own insolvency and the amended CCAA to release CW Investments, a solvent company, from its obligations under the CW Agreement. So the battle lines were drawn. Goldman Sachs appealed the approval of the Shaw agreement, and readied itself to defend the CW Agreement and its put rights to the Supreme Court of Canada, if necessary, to protect its investment.
In an effort to save Canwest Media’s restructuring from complex and contentious litigation, the court ordered all of the key participants — the Ad Hoc Committee of noteholders, Canwest Media, Shaw, the Monitor and Goldman Sachs — to participate in a mediation conducted by Ontario Chief Justice Warren Winkler.
The mediation created the first and only forum for effective negotiation and, to the surprise of many, resulted in a restructured deal that all of the participants were prepared to support. In the deal, Goldman Sachs sold its interest in CW Investments for the accrued value of that interest, using the formula in the CW Agreement plus compensation for its costs. The noteholders gave up their dream of becoming shareholders of restructured Canwest, but agreed to accept payment in full of the remaining balance of the notes. And Shaw got what it really wanted — 100 per cent ownership of Canwest Media, subject to CRTC approval.
Because of the settlement, the scope of the new statutory disclaimer powers was never tested in the Canwest Media restructuring. However, the terms of the settlement suggest that Goldman Sachs’s litigation position — that the obligations of a solvent party in a multi-party agreement cannot be disclaimed under the CCAA — was vindicated, at least in this case.
Unfortunately, this case underlines the precarious state of contractual rights under Canada’s insolvency laws. Instead of improving predictability and protecting the substantive and procedural rights of parties with ongoing contractual relationships with insolvent companies, the CCAA amendments appear to have provided an opportunity for creative distressed-debt investors to exploit the imprecise language of the amended provisions and the uncertainty surrounding its scope and application.