To understand why this is a banner day in the storied history of Goldman Sachs, recall for a moment why the Wall Street investment dealer got tied up in media company CanWest Global Communications in the first place.
Here's the headline numbers: Goldman Sachs put $450-million into CanWest in 2007, and is taking out $700-million. Against a backdrop of what's played over the past three years, this is a terrific pass.
But here's why this deal should really be seen as an example of an investment bank using its capital in a creative way for a client.
Recall that back in the winter of 2007, CanWest CEO Leonard Asper wanted to acquire the country's premier lineup of specialty stations - History Television, Showcase, HGTV - by taking out Alliance Atlantis Communications.
Mr. Asper faced two challenges: His debt-heavy company would struggle to foot the $2.3-billion price tag. And CanWest had no interest in Alliance Atlantis' minority position in the CSI television series, or its movie distribution business.
Enter Goldman Sachs. The New York investment bank bought CSI and the film distribution unit to support CanWest's play. And the investment bank struck a somewhat complicated but sensible arrangement to help Mr. Asper buy the specialty TV channels. In simple terms, Goldman Sachs put up $450-million for a minority of the votes in CanWest's specialty division, known as CW Media, but a majority of the equity.
CanWest had the opportunity to buy out the investment bank, based on a pre-set formula, down the road. The better CanWest performed in the future, the better the terms of the buyout. Goldman Sachs' upside was capped in that 2007 deal.
However, Goldman Sachs did negotiate downside protection, with the investment bank holding the right to sell its portion of the specialty TV unit at pre-set prices. That's what's known as a put option. As of June, 2010 - a month from now - sources say the value of the put option would be $736-million.
Now, with hindsight, we know who ended up with the valuable option. Downside protection became extremely important when CanWest filed for creditor protection last October, after the recession took down advertising revenue and crippled the company's ability to service its debt.
Despite the parent's troubles, CW Media did exactly what was expected, generating consistently improving profits. The specialty TV unit steered clear of creditor protection when the parent company and its newspaper unit both filed.
With creditors such as U.S. distressed debt fund Angelo Gordon & Co. calling the shots at CanWest, there was a concerted push to rework ownership at CW Media. The goal was simple: take money out of Goldman Sachs' coffers and deposit it into hedge fund pockets.
When Shaw Communications arrived on the scene back in February, it took much the same view as the hedge funds. If there was an opportunity to extract a pound of flesh from the New Yorkers, the Calgary cable boys were going to use it.
Goldman Sachs, understandably, was not amused.
After several testy court fights, an arbitrator was called in, with Ontario Chief Justice Warren Winkler asked to help the factions settle their feud.
Just what the judge did is confidential, but he clearly knocked heads together. With the threat of a lengthy court fight hanging over everyone's head, Shaw decided to cash out Goldman Sachs and take full control of the TV unit. With tons of capital on hand, Shaw has no need for a financial partner.
Goldman Sachs, which has spent more time than it would like in the headlines of late, decided to take $700-million now, rather than fight on for a pot that may grow larger, but could be snatched away. In the past, Canadian courts have torn up contracts such as the put agreement, done with companies that go on to file for creditor protection.
CanWest's creditors got taken out at the face value of their debt, plus accrued interest. Some of these funds bought the media company's bonds for just 20 cents on the dollar, and extracted cash last year when Australian TV assets were sold. This holding has been a huge win for the hedge fund crowd.
To the extent Goldman Sachs left anything on the table, sources say the numbers work out this way: Shaw would inherit the right to take out the investment bank late in 2011 - four years after the Alliance Atlantis takeover - for $825-million.
In Shaw's conference call with analysts on Monday, executives at the cable company went out of their way to praise both Mr. Winkler and Goldman Sachs managing director Gerry Cardinale, who ran the CanWest relationship over the past three years.
From the investment bank's point of view, exiting the CanWest adventure with a 55 per cent gain over three years, plus the CSI stake and the movie distribution business, along with kind words from Shaw, qualifies as a happy ending.
Andrew Willis