Alliance move harsh reality show by Richard Blackwell

The closing of award-winning Halifax production company Salter Street Films underlines a new reality in the media business: Making shows and films, no matter how good, doesn't always generate enough profit to satisfy investors in a public company.

Salter Street's owner, Alliance Atlantis Communications Inc., has been trimming its production slate for months, and last week the company said it was going to make more substantial cuts to its entertainment group. But it was the word late Monday that Salter Street would be shuttered that made it crystal clear the company really is getting out of the business that gave it its start.

With the exception of the highly profitable CSI: Crime Scene Investigation television franchise, Alliance Atlantis's film and television businesses just don't generate enough cash, chief financial officer Judson Martin said yesterday.

"It's incumbent upon us to focus our capital spending and future investment on high-return businesses," Mr. Martin said. "We haven't been doing that in the past, and we have to do it in the future, for the sake of our shareholders who we work for."

Alliance Atlantis executives have likened the success of CSI to winning a lottery, but there is virtually no prospect that win will be repeated with any other productions. "The high-cost, low-margin, prime-time drama business is not a good business now, and hasn't been for some time," Mr. Martin said. "The time was ripe [to make cuts]."

About 10 people will lose their jobs at Salter Street early next year, along with as many as 60 others in Alliance Atlantis production offices in Edmonton, Vancouver, Toronto, Los Angeles and London.

Salter Street has shrunk substantially since it was acquired by Alliance Atlantis in 2001, but has kept a hand in some high-profile productions, including Michael Moore's Bowling for Columbine and the CBC comedy show This Hour has 22 Minutes.

This Hour has 22 Minutes, which is not produced on the Salter Street premises, will continue production, Alliance Atlantis spokeswoman Kym Robertson said yesterday.

For Alliance Atlantis, the winding down of production marks a sharp contrast to its origins. When the company was formed in the merger of Alliance Communications Corp. and Atlantis Communications Inc. in 1998, it was a powerhouse of film and television programming.

Atlantis chairman Michael MacMillan ended up in control of the company's voting stock, along with colleagues Peter Sussman, Seaton McLean and Edward Riley. All had their roots in the production business.

Mr. Sussman and Mr. McLean will leave the company at the end of the year, although their role as shareholders after that point is not yet clear.

Mr. Martin said that Mr. Sussman and Mr. McLean understand and support the changes at the company. The two have not been available to comment for themselves, however.

While "it's very difficult to deal with people's lives . . . when you have to let 70 souls go," Mr. Martin said the move was supported by all the company's managers. "What I hate is that sometimes the chief financial officer is viewed as the black hat on this [kind of action], but this has been a team decision from all of our executives."

In the new year, the vast majority of Alliance Atlantis's business will be in broadcasting (it owns five specialty television channels and seven digital channels) and movie distribution (through its new Movie Distribution Income Fund).

Some documentary and children's programming will continue in production, along with the CSI shows.

Analysts who follow Alliance Atlantis stock praised the firm's move to cut production back to the bone, although some expressed surprise that the firm actually followed through on its earlier promise to trim that business.

With several of the controlling shareholders in the production division, "it seemed a stretch to suggest that management would actually make and implement a plan that would see at least two of those executives essentially put out of a job," RBC Dominion Securities Inc. analyst Megan Anderson said in a recent report. "Our skepticism in this regard has been overturned."

Ms. Anderson said it is good that the firm is shutting down most of its production because it "has been a constant source of uncertainty and more often disappointment."

Another analyst, Andrew Mitchell of Scotia Capital Inc., agreed that Alliance Atlantis has "essentially swallowed the bullet" and responded to concerns that "non-CSI production ventures generally represented a poor allocation of shareholder resources."

The changes should speed the firm's transition to a "nearly debt-free specialty broadcaster," he said.

Unfortunately, said David McFadgen of Sprott Securities Inc., who is less enthusiastic about Alliance Atlantis stock than many other analysts, "people are casualties in these kinds of things."

While Alliance Atlantis has not said how much of a charge it will take for the restructuring costs, analysts' estimates range from $20-million to more than $30-million.

Once any charges are dealt with, Mr. Martin said Alliance Atlantis will have "more predictable and stable earnings and cash flow, which our investors want to see from us."

Alliance Atlantis's class B non-voting shares closed down 17 cents at $19.33 on the Toronto Stock Exchange yesterday.

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