Alliance Atlantis's film distribution unit, Motion Picture Distribution, will be acquired by private equity interests, and its former senior executives will return to head the unit, said financier and media-focused investor Richard Dorfman.

At least two new bids for the unit are imminent, according to a recent report in the Canadian press that cited unnamed sources. Marwyn Investment Management, a UK-based hedge fund, has announced its intention to make an offer for the company, but no formal offer has yet been submitted. Goldman Sachs is also rumored to have tabled a bid for the company, according to a previous unsourced report in show biz trade paper Variety.

"It is inevitable" that private equity will acquire the Alliance Atlantis unit, "and you can underline it and put in an exclamation mark," said Dorfman, also a former co-head of Jefferies Group's New York-based M&A group and a former board member of Institutional Shareholder Services, whose current portfolio includes both ISS and Curious Pictures.

Without Loewy in particular, the "business goes into a tailspin," Dorfman said, referring to a widely reported "key man clause" in the contractual relationship between Alliance Atlantis and New Line Cinema, a unit of Time Warner. Alliance Atlantis could lose New Line, Dorfman added, and that means Loewy is "holding all the cards."

Whoever ends up with Motion Picture Distribution, "it is more than likely to be a private equity firm or a hedge fund backing management [i.e., Loewy and Theroux]," Dorfman said. "Business can walk away if he [i.e., Loewy] walks away, and he walked."

One veteran entertainment attorney who does a lot of business with Canadian entertainment companies expects the Canadian government to look askance at, and perhaps block, any acquisition by a non-Canadian entity.

Canadian law makes it "pretty difficult for a foreign entity to maintain majority control," said Harris Tulchin, who heads Harris Tulchin & Associates, an entertainment law firm with offices in Los Angeles, Paris, Rome and other cities.

Alliance Atlantis is such an important buyer and distributor of film and TV product, Tulchin said, that the "government is going to look at things closely and say, 'Do we really want this major entity to be under foreign control?'"

However, an industry banker not involved with the transaction but familiar with the space disagreed, pointing out it would not be difficult to structure around regulatory hurdles imposed by Heritage Canada. The source suggested a foreign bidder could use a combination of non-voting shares and governance controls to assuage regulatory concerns.

"Any potential transaction is considered from the perspective of will it be of net benefit to Canada," said Rick McQuaig, Deputy Director of Investments and Acting Director, Cultural Sector Investment Review at Heritage Canada. McQuaig would not comment on the Alliance Atlantis situation, in particular.

Recently, the CFO of Canadian-based Alliance Atlantis told the National Post, a Canadian newspaper, that it would be "premature" to accept any takeover offer for the film distribution unit before completion of a review to determine the unit's value. Those comments were in response to other press reports that a USD 400m bid by London-based Marwyn Investment Management was being readied. The two former heads of the film distribution unit -- Victor Loewy and Patrice Theroux, the CEO and COO, respectively -- left the company shortly before the first public word of the Marwyn bid, which surfaced in Variety. Variety also reported that Goldman Sachs was preparing a second bid. One feature of both the alleged Goldman bid and the Marwyn bid was that the new PE would-be owners were expected to re-install the two executives, according to both Variety and other press reports. According to Alliance Atlantis, however, it has received no formal bid for the film distribution unit.

M&A activity in Canadian media is heating up, Tulchin added. "It's looking like the United States," he said. "There's not a lot of room for independents."

According to Tulchin, any bid for Alliance Atlantis' film distribution unit is just the beginning of industry consolidation in Canada. One Tulchin candidate for Canada's ultimate media consolidator: Lionsgate. "They're buying up everything in sight," he said. "They're a player."

A senior Lionsgate executive did not reply to requests for comment. Dorfman dismissed the possibility that Canadian regulators would try to block a non-Canadian-based bid for Motion Picture Distribution, saying it was only media-content producers who Canadian regulators try to protect, not distributors. He also predicted that Lionsgate or another strategic would not end up with the unit. Loewy "obviously wants to own the company," he said. "He can't do a strategic deal. He can't end up owning the company, or a substantial part of it, with Lionsgate for example."

Alliance Atlantis would not comment on the situation.

by Louis Chunovic and Alex Welsh