We have always believed that CanWest Global traded at a significant discount to its net asset value. Our calculations were based on conservative cash flow multiples on the Company’s core operations, the current market value of the publicly traded subsidiaries Network TEN and CanWest MediaWorks NZ and the book value of the remaining small, miscellaneous businesses. We then deducted CanWest’s net debt to arrive at a net asset value around $17 per share. Over the past few months, several catalysts materialized to drive the market price closer to the net asset value. Investors applauded record results from CanWest’s international operations, debt refinancing at lower interest rates, asset sales and the exchange of the Company’s PIK notes. Leonard Asper’s strategy has been quite simple: surface value, monetize non-core assets and reduce the Company’s debt load.

We now believe that perhaps the most anticipated strategic initiative is pending. Investors, both retail and institutional, and investment bankers have been fantasizing about the possibility of CanWest’s newspaper assets being placed into a stand-alone income trust. On an April 7th conference call Leonard Asper said, “we think there is significant merit to doing some kind of an income trust with our assets” and “we will make decisions on this sooner rather than later”. Subsequently, at a May 5th investor’s meeting Leonard Asper suggested that a decision would be announced “within 30 to 60 days”.

Management is currently dealing with three difficult but not insurmountable issues. They need consent from the high-yield debt holders, most likely in exchange for a fee. They must also resolve the cross currency interest rate swap liability related to US denominated debt. Finally, they must decide on the appropriate payout ratio that is sustainable yet provides some leeway to grow the business. Once these issues are settled, we believe that the income trust issue will proceed. Remember, although we are optimistic regarding the income trust, the announcement may only confirm the go-ahead rather than the definite timing due to current market conditions.

From a CanWest shareholder’s perspective, value creation is two-fold. First, quality trustable assets, like CanWest’s newspapers segment, could be offered to the public at yields in the 8% to 9% range, implying a higher cash flow multiple than we are using in our net asset value calculation. Therefore, the assets themselves are worth more when valued based on income potential rather than cash flow. Second, by shifting related debt into the newspaper trust and by using the proceeds of the issue to reduce debt at the parent level, CanWest becomes less leveraged. Therefore, the remaining assets should trade at a higher cash flow multiple because of lower financial risk. All in all, we believe that the income trust scenario might add $2 to $4 per share of value to CanWest.

November 18, 2005

As was widely expected, CanWest Global finally created an income trust out of its newspaper and interactive media businesses excluding the National Post. Unfortunately, just a week later the Minister of Finance Ralph Goodale announced that he had requested that the Minister of National Revenue postpone providing advance tax rulings on flow-through entities such as income trusts. The fallout across the entire income trust sector was swift and ugly.

Although CanWest’s income trust IPO was not affected by the Minister’s announcement since they did not seek an advance tax ruling, they were forced to reduce the size of deal and improve the terms of the offering to get it done. At the end of the day, the Fund completed a $550 million IPO of 55 million units yielding 9.25% with CanWest retaining approximately 74%. Proceeds from the issue along with $850 million of debt at the income trust level were used to reduce leverage on CanWest’s balance sheet.

We have always viewed CanWest as a sum of the parts story and we were puzzled to see the shares decline dramatically after the trust IPO. This transaction was accretive to CanWest’s NAV since it was completed at 10.5x EBITDA, a couple multiple points higher than we had used in our financial model. Further, the debt reduction implied lower financial risk and greater flexibility for the Company. Aggressive traders and hedge funds have simply bailed from the stock due to the uncertainty regarding income trust regulations.

Crunching the numbers after the selloff, we believe that CanWest now trades at or slightly below the value of its publicly traded assets Network TEN, CanWest Mediaworks New Zealand and CanWest Mediaworks Income Fund. The rest of the Company, including the core Canadian television assets and the National Post, can now be purchased for free. Traditionally, this has been an excellent entry point for value investors.

July 21, 2006

Shares of CanWest Global have had a rough ride over the past year; however we are not about to throw in the towel on our investment. To put it mildly, the Company’s third quarter results demonstrated the challenges the operations have been facing all year. Disappointing ratings and the ensuing tough ad markets have taken their toll. Earnings before interest, taxes, depreciation and amortization (EBITDA) were down across all segments and corporate costs were higher. But we believe that these results represent the trough for what is undoubtedly a cyclical business. Eventually, program spending will lead to positive ratings momentum and the ad dollars will follow.

So what positives can we point to in the meantime? On May 19th, CanWest announced the sale of TV3 Ireland for $198 million. This price was well above an EBITDA based valuation that we used in our model for CanWest. The implication is that buyers are looking through trough EBITDA levels and valuing media assets at more normalized levels. Further, the sale proceeds will be used to reduce debt, which improves CanWest’s financial flexibility and should alleviate concerns regarding the rising debt to EBITDA ratio.

Perhaps the recent difficulties will lead to even greater changes down the road. Possible changes to Australian media ownership regulations would improve the public market valuation of CanWest’s stake in Network TEN. Currently, we believe that the asset is worth $1.5 billion CDN but a takeover premium could boost this significantly. The Asper family may not seem to be a seller of such a major asset or even the entire Company but stranger things have happened. With the passing of CHUM’s founder Allan Waters, the heirs of the Company made the decision to sell the TV and radio broadcaster. Bell Globemedia made a friendly bid worth $1.7 billion and offered a premium of over 50% to the Class B shareholders. Who knows if CanWest’s controlling family would ever make such a dramatic decision? Only time will tell.

October 27, 2006

Leading up to October, shares of CanWest Global languished for almost a full twelve months. Investors, and the Company, were sideswiped by the Minister of Finance and his threat to postpone advance tax rulings on income trusts just one week after CGS announced the creation of CanWest Mediaworks Income Fund. Although the income trust spinoff was completed successfully, frustrated investors focused on disappointing results from Global Television and unloaded stock.

However, our thesis that CanWest trades at a significant discount to its sum of the parts was validated recently. On October 12, the Australian Senate approved changes to relax foreign and cross-ownership restrictions on media assets. Although the changes will not be enacted until 2007, shares of Network TEN rocketed from AUD$2.70 on September 1 to a 52-week high of AUD$3.57. Remember that CanWest owns 56.4% of Network TEN, which is worth approximately $1.5 billion at current levels.

On October 12, CanWest disclosed that it had retained Citigroup to “explore opportunities in the South Pacific after Australia loosened media ownership laws”.
We expect that management will look to create value by monetizing some of its media holdings. Despite appreciating over 25% on the back of this news, we continue to believe that CanWest Global trades below its net asset value. Patient, long-time investors should be cheered by these developments.

December 15, 2006

On December 7, CanWest Global and Ten Network Holdings Limited provided greater clarity regarding opportunities stemming from a change in Australian media ownership regulations. In a joint press release, the companies announced an agreement to work together when evaluating various options or transactions. CanWest also agreed that in the event of a divestiture of Network Ten, any acquirer would be obligated on “fundamentally equivalent terms to acquire all of Ten Holdings’ and Ten Group’s issued shares”. We believe this signals that the entire business, not just the control block, would be up for sale and that minority shareholders would receive equitable treatment. From a CanWest shareholder’s perspective, this transparency bodes well for the successful monetization of the asset.

With all of the excitement surrounding the Australian assets, it seems that investors looked through CanWest’s fiscal 2006 results, ended August 31, 2006. The financial results generally met expectations, with the weakness in Canadian television well telegraphed over the course of the year. Consolidated revenues totaled $2,879 million for the year, down 5% from the $3,032 million in fiscal 2005. Net earnings of $179 million or $1.01 per share included a $164 million gain on the sale of TV3 Ireland in the fourth quarter. Consolidated EBITDA for fiscal 2006 was $509 million, a disappointing 28% decline from last year. Canadian television EBITDA declined a dramatic 75% year over year but we believe that we have seen the worst for this division. An extremely low base implies easy quarterly comparisons in fiscal 2007 and advertising revenues are expected to recover on the back of better ratings.

Although we follow the Company’s financial results closely, we still believe that our sum of the parts analysis is the most appropriate method to value the stock. We look for corporate news, such as the monetization of the South Pacific assets, to drive the CanWest story in 2007.

May 25, 2007

Since early April, shares of CanWest Global have weakened, falling from almost $11.75 to just above $10.00 before stabilizing. We believe that, in addition to the Company’s seasonally soft second quarter results, several corporate developments have muddied the story in the near term.

CanWest, along with Goldman Sachs Capital Partners, has bid for Alliance Atlantis Communications Incorporated. Once the plan of arrangement is completed, CanWest will hold an economic interest of approximately 29% in exchange for a $200 million equity stake in the specialty television broadcaster. The details of the transaction are complicated; however the final price tag will be determined by the relative EBITDA contribution of CanWest’s current television assets and the new specialty channels at December 31, 2010. This structure creates incentive to improve CanWest’s existing television EBITDA while protecting the balance sheet by not requiring a large initial cash outlay. Unfortunately, the market always hates uncertainty, especially when the ultimate cost of an acquisition cannot be determined for almost four years. From a longer-term perspective we like the deal because of the potential for programming cost savings and revenue growth through cross promotion.

In the most recently announced transaction, CanWest privatized CanWest MediaWorks Income Fund at $9.00 per unit after months of speculation. The income trust was spun out at $10.00 per unit and was hit hard by the October 31 income trust ruling from the Federal government. CanWest took advantage of the depressed share price to repurchase the 26% interest in the trust that it did not already own. Buying the units and refinancing the trust’s existing credit facility will be funded with a $1.3 billion short-term debt facility. Once the deal closes on or about July 10 and the short-term debt is restructured, we think the transaction will be accretive to CanWest’s net asset value.

Now that we have discussed two significant purchases, we want to alleviate any concerns regarding the Company’s debt levels. On May 7, CanWest announced the sale of its stake in CanWest MediaWorks New Zealand Limited to HT Media Limited for C$314 million. On per share basis, the transaction was done at NZ$2.43 per share, which is roughly where we carried the asset in our model. However, the shares have increased 49% from the closing price of NZ$1.63 on October 20, 2007, the day when CanWest first announced that they had retained Citigroup to “explore opportunities”. We think management freed up some cash and created some decent value for shareholders with this relatively small disposition.

The next piece of the puzzle, and most significant for the health of the balance sheet, will be the sale of CanWest’s stake in Network TEN. Rumours regarding the potential bidders and the price range have even been reported in the Australian media. It was estimated that the final price tag could be approximately AU$2.7 billion, implying CanWest’s 56.4% stake could be worth AU$1.5 billion or C$1.3 billion. In the absence of official news, shares of Network TEN have declined from a high of AU$3.65 to the current price of AU$3.09 as the process drags on. At the end of the day, the most likely scenario entails a bid at a small premium to the current trading price, but hopefully close to the AU$3.50 price level. We believe that an agreement is close to being reached and just depends on negotiating the final price.

Finally, it has been reported in the Canadian media that CanWest could partner with Cerberus to bid for BCE. In our opinion, we believe that this is an extremely low probability event. As some commentators have noted, this is either total speculation or at best an excuse for CanWest to get an inside look at BCE’s books. With so many transactions just completed or about to be completed and with a debt reduction agenda, we question whether CanWest’s management would pursue another blockbuster deal at this time.

Examining all these transactions, some of which have yet to close, we can see how the story is coming together. CanWest is looking to retrench back to Canada and focus on its Canadian television and newspaper divisions while at the same time deleveraging its balance sheet. Although the shares have recently weakened, the Company’s net asset value has not been eroded and most likely has grown on a per share basis. The trading discount to net asset value has simply expanded as investors have become confused and overwhelmed with all of the moving pieces. Once all of the transactions close and CanWest’s structure becomes cleaner, we expect that the shares will approach net asset value.