Alliance Films gets new Canadian partner


GRANT ROBERTSON AND GAYLE MACDONALD
GlobeandMail.com
January 13, 2008

The Canadian partner who stepped in last summer to help Goldman Sachs Group Inc. meet foreign ownership requirements on its purchase of Canada's largest film distributor, Alliance Films Inc., has pulled out of the investment.

EdgeStone Capital Partners Inc. has sold its 49-per-cent stake in Alliance Films, the former movie distribution arm of Alliance Atlantis Communications, to an undisclosed buyer.

However, in a deal that could be announced as early as this week, the investment arm of the Quebec government, the Société générale de financement du Québec, is expected to be unveiled as the new owner. Industry sources indicate SGF is spending between $70-million and $100-million to buy a stake in Alliance Films. Reached in Montreal, SGF officials would not comment.

Gil Palter, chief investment officer and managing partner at EdgeStone, confirmed the Toronto-based private equity firm has divested its stake in Alliance Films.

The deal would mark the latest investment in the entertainment industry for SGF. In August, it announced a $400-million agreement with Lions Gate Entertainment Corp. to help fund production costs on films shot in Quebec over the next four years. The holding company invests in projects that further economic development in Quebec. The Alliance Films deal would see SGF take an ownership stake in an extensive library of Canadian movies, including one of the country's largest collections of French titles.

Goldman bought 51 per cent of Alliance Films in last year's $2.3-billion takeover of Alliance Atlantis with CanWest Global Communications Corp. But it needed a Canadian partner to come into the deal on the film assets, since foreign ownership rules say movie distributors operating here must have domestic ownership and management.

The deal was controversial since critics within the film industry, including several producers, raised alarms that New York-based Goldman would dictate how the Canadian assets are administered, fearing that any domestic partner was merely there to satisfy government ownership policies.

This sale will give Goldman a long-term partner in the business, after EdgeStone decided to move on.

The relationship between EdgeStone and Goldman Sachs, announced in June, is believed to have soured early on, according to people close to the distributor. “This marriage failed before they even went to bed the first time,” said a source who spoke on condition of anonymity because the deal has not been announced.

EdgeStone has a track record of turning unwanted assets into profitable ventures, from waste management to cheque printing businesses and hair replacement companies.

Alliance Films, which has roughly one-fifth of the Canadian film distribution market, has been slumping this year after some of its highly touted titles failed to meet box office expectations.

The new owners of Alliance Films are contributing an extra $20-million to the company because it has been losing cash, a source close to the company said.

Once among Alliance Atlantis's most profitable divisions, the movie distributor's operations in Spain and Britain are slumping, while new titles from some of its biggest studios – including New Line Cinema, Focus, the Weinstein Co. and Miramax – have struggled in theatres over the past year.

New Line's big-budget film The Golden Compass has disappointed at the box office, resulting in at least a $6-million loss for Alliance Films. Meanwhile, Miramax is releasing fewer titles now.

The Quebec operation at Alliance Films is the more profitable side of the company. SGF's involvement is likely to see the distributor do more business in Quebec.

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