Grow big or go home by Matthew Fraser

by Matthew Fraser

With $650-million in his pocket, Randy Moffat can look forward to an opulent early retirement in sunny Florida, where earlier this year he was expanding his U.S. broadcasting interests with a purchase of local cable TV systems.

At the time, Mr. Moffat looked like a buyer, not a seller. But at the right price, everyone is a seller.

Indeed, Mr. Moffat's $1.2-billion sell-out to the Shaw family last week furnished a familiar example of how proud family dynasties, no matter what they state publicly, will cash out when the price is sufficiently rich. Earlier this year, when cable baron Jim Shaw bought a 9.9% stake in Winnipeg-based Moffat Communications Inc., Mr. Moffat declared: "My interest is not for sale, period."

That's precisely what other mid-sized, family-controlled media groups were claiming a few months ago when their stock price shot up in the wake of media mega-mergers. Allan Waters insisted that CHUM Ltd. wasn't for sale. Ian Greenberg said Astral Media was not on the block. Louis Audet ruled out a sale of Cogeco Cable. And Michael MacMillan denied rumours that Alliance Atlantis might be looking for a suitor.

Mr. Moffat's family had been in broadcasting for more than 50 years – longer than Greenberg, Waters, and Audet. If there is a lesson in Moffat's fate for these second-tier media groups, it's that you survive by eating others, or get gobbled up by bigger players.

Who is next to surrender to this harsh Darwinian reality? My guess is that it's only a matter of time before Ted Rogers buys Louis Audet's cable group. Mr. Rogers already has 12% of Cogeco Cable's shares and 17% of parent Cogeco Inc. The addition of Cogeco's 907,000 cable subscribers would allow Mr. Rogers to cluster and bulk up in Ontario and Quebec with more than three million subscribers.

When asked about a possible sell-out last week, Mr. Audet replied: "You have to keep your options open." Those are the words of a man who is about to cash out – and maybe join Randy Moffat on the golden beaches of south Florida.

Jim Shaw, who inherited his Calgary-based cable empire from his father J.R. Shaw, is in aggressive acquisition mode. After swallowing Moffat Communications, the burly Mr. Shaw boasted: "In Western Canada we are probably the Arnold Schwarzenegger of cable" – though it wasn't clear whether he was referring to the Terminator or Conan the Barbarian.

Interestingly, Mr. Shaw's buyout of Moffat will likely throw two lucrative broadcasting assets on to the market, and their sale could have far-reaching consequences for the Canadian media industries.

The first is the Moffat-owned specialty channel, Women's Television Network. The obvious buyer for WTN is Corus Entertainment, the Shaw-owned content group that already controls a stable of specialty TV channels, including YTV and TreeHouse. WTN would be a coveted addition to Corus's growing content holdings. In 1998, the channel earned a 20% operating margin on revenues of $25.6-million.

There's only one problem. Ottawa regulators have blocked Corus from buying more specialty channels due to concerns about vertical integration with Shaw's cable interests. For example, Corus has been forced to divest a 50% stake in Family Channel by Jan. 6. But after BCE Inc. won regulatory approval last week for its $2.3-billion takeover of CTV Inc., it's virtually certain Corus president John Cassaday will ask regulators for an extension on the Family Channel divestiture.

The timing is good for Mr. Cassaday, for regulators just announced a public process to examine cable ownership of specialty channels. Mr. Cassaday will argue Corus should be allowed to keep Family Channel and, what's more, buy WTN from parent Shaw Communications Inc. He will be vigorously opposed, however, by groups such as Friends of Canadian Broadcasting, who will cite a litany of past examples of extortion, undue preference, and other market abuses by big cable groups such as Shaw and Rogers.

The other Moffat asset up for sale is CKY-TV, the Winnipeg affiliate of CTV Network. Curiously, CTV doesn't own any affiliates in Manitoba, and presumably would want to buy CKY. But CTV does not have a first right of refusal on CKY, which means the station could be snapped up by other broadcasters, such as CHUM Ltd.

As it happens, CHUM Television has quietly embarked on a strategy to build a nation-wide network of local, Citytv-style television stations. The company has already expanded into Ottawa, just won a licence for the Victoria-Vancouver area, and is also looking at Montreal and Halifax. CKY would give CHUM a strategic entry point into the Prairies, and would be a direct challenge to CHUM's main second-tier competitor, Manitoba-based Craig Broadcasting.

The CHUM-Craig rivalry opposes two family-owned companies, and it's inevitable one will end up buying out the other. If CHUM's Waters family can overcome their longstanding conservatism, CHUM Television could be poised for bigger and better things.

Whatever the outcome, there can be little doubt the pace of consolidation in the Canadian media industries will accelerate. And since foreign ownership restrictions limit the number of buyers, it will pay to be either big or bold.

© The National Post