Good morning, everyone. I'd like to welcome you here this morning to meeting number 18 of the Standing Committee on Canadian Heritage.
Just before we do our orders of the day, I'd like to do a quick rundown on where we are heading down the way.
Next Thursday, senior officials from Industry Canada will be available for that meeting. It's going to be my suggestion that Industry Canada officials be here next Thursday.
I suggest, on Tuesday, a meeting on future business in order to discuss the following items: interim report; the continuation of the public hearings next fall; and perhaps Mr. Angus will ask for a report, we don't know, on Lionsgate. So next Tuesday will be committee business, where we are going forward. Including today, I think we have five meetings left, and if we're doing an interim report, we cannot do that on the fifth meeting or we won't get it to the House.
With that, I will carry on.
Pursuant to Standing Order 108(2), the orders of the day are a study on the attempted takeover of Canadian film production and distribution firm, Lionsgate Entertainment Corporation.
This morning our witnesses from Lionsgate Entertainment Corporation are: Jon Feltheimer, chief executive officer; Norman Bacal, member of the board; and Phyllis Yaffe, member of the board. Welcome.
Who is going to lead off with the presentation?
Jon.
Thank you very much, Mr. Schellenberger.
Monsieur le président, mesdames and messieurs, bonjour. Good morning.
My name is Jon Feltheimer. I'm the co-chairman and chief executive officer of Lionsgate Entertainment, Canada's leading independent filmed entertainment company.
I also want to introduce Phyllis Yaffe and Norman Bacal, who are members of our board of directors. Phyllis and Norm will be well-known to many of you by virtue of their longstanding roles in the Canadian film industry.
Let me begin by thanking members of the committee for extending this invitation for us to appear today and to discuss our concerns with the unsolicited takeover bid by the Icahn Group to purchase up to all of the shares of Lionsgate. As members will well know, the implications of the offer, were it to be allowed to proceed, go far beyond our company and will have significant ramifications for the Canadian film industry as a whole. As a result, Lionsgate believes that the offer, if successful, will not be of net benefit to Canada.
Members will have received some background information on Lionsgate, but I would like to take a moment to highlight what our company is about and our contribution, since our creation a little over a decade ago, to the film and television industry in Canada.
Let me start by stating the obvious. Lionsgate is Canadian. That's why we are here before you today. Lionsgate is a Canadian company incorporated in British Columbia. Two-thirds of our board of directors is made up of Canadians. Equally important, in our investments and our presence we are active and proud contributors to the film industry in Canada.
Senior management does work out of our California offices in order to be close to the epicentre of the film and television industry, but my colleagues and I, in New York, London, Toronto, Sydney, and Hong Kong offices, report to and answer to our board of directors.
Since its creation in 1997, Lionsgate has grown into a nearly $2 billion diversified global entertainment corporation. We have grown Lionsgate from a little independent studio, distributing primarily art house films, into a leader in motion picture production and distribution, television production and syndication, home entertainment, digital distribution, and new channel platforms.
One of the primary catalysts of this growth has been our ability to produce films and television projects with the participation of Canadian talent and crews, the benefit of federal and provincial funding, and the support of four of Canada's great cities--Vancouver, Montreal, Toronto, and Edmonton.
Our record of our contribution to the Canadian industry is clear, and indeed our growth has been inextricably linked to Canada...from the Lionsgate brand, a name reflecting its Vancouver roots, to the 48 films and television series we have produced here over the past 10 years, to our fast-growing Maple distribution company in Toronto, to our partnership with the Société générale de financement in Quebec, and our long-standing association with the Toronto International Film Festival, with which our shareholder meeting coincides each year and where we acquired our Academy Award-winning film Crash just a few years ago. We are also proud sponsors every year of the Banff TV Festival.
We are here today not only to remind you that Canada has been an important component of our success, but to make the point that we have also contributed to the success of the film and television industry in Canada. We have invested more than $800 million in movie and TV projects that were produced here in Canada, and we have created over 20,000 jobs, according to the standard CFTPA multiplier.
While we are here today due to the uncertainty created by the takeover attempt of Lionsgate currently under way, there is nothing uncertain about the message that we have brought the government officials and parliamentarians in recent weeks, or to you today. That message is that we value Lionsgate's Canadian heritage, we are proud of the role we have played in Canada's economy, we are proud to contribute to the cultural legacy of Canada and Quebec, and we are committed to the continued growth of our film and television businesses. This sustained growth, coupled with our recent expansion into channels, enables us to position ourselves to provide continued growth of our involvement in the Canadian film and television industry in the future.
In preparing for today's meeting, I took careful note of the debate that preceded the unanimous adoption by the committee of the motion that led to these hearings. Wisely, the committee was explicit that this hearing was not about blocking any kind of foreign investment in any circumstance. Canadians can and indeed should be proud of the fact that Canadian companies attract significant foreign investment. Rather, the issue before you and before the government is whether this specific proposal constitutes a net benefit to Canadian artists and Canadian industry. We believe that it simply cannot, based on what, if anything, Mr. Icahn has said in this regard.
Ladies and gentlemen, the Government of Canada is faced with a simple choice, a choice between Lionsgate as it stands today and Lionsgate as it would operate under the control of the Icahn Group. On the one hand, we are a Canadian company with a 10-year track record of very meaningful investment in Canada. We have spent close to a billion dollars in production in Canada, generated hundreds of hours of television and feature film product, and created tens of thousands of jobs in Canada.
On the other hand, our suitor has no track record of investment in the Canadian entertainment industry, no history of producing movies and television shows in Canada, and no legacy of creating jobs in the Canadian media industry; in fact, no relevant experience in the entertainment industry at all, here or anywhere else. In fact, in a recent interview with CNBC, Mr. Icahn himself suggested that Lionsgate should get out of the business of production altogether. That would mean no more $800 million spent on film and television productions filmed in Canada and no more creation of 20,000 jobs in Canada.
As Mr. Icahn has chosen not to share his plans with this committee or Canadians, or even accept the invitation to appear before this committee, we cannot see how he intends to exceed this benchmark, if at all, to satisfy the requirements of the law.
Furthermore, Mr. Icahn proposes to sell Lionsgate's Canadian film distribution arm as a feature of this offer. He is not doing this in the interest of enhancing the Canadian industry, or indeed Maple, as his representative suggested to you on Tuesday. He is simply doing it to avoid the provisions of the federal government's long-standing film policy, which prohibits foreign acquirers from buying Canadian film distribution companies. This fire sale of Maple will have a negative impact on the Canadian film industry as the divestiture will either mean that Maple will be sold to a competitor—therefore removing a potential outlet for Canadian productions—or, if sold to a company that is not engaged in film distribution, it will be a weaker player in the industry without Lionsgate's support and involvement.
We hope you will agree that the choice is clear. Allowing Lionsgate to fall under foreign control under these circumstances cannot be of net benefit to Canada and will have a significant impact on the industry as a whole.
Merci beaucoup. Thank you.
My colleagues and I are now delighted to take your questions.
Actually, in contrast to what I believe would happen with the consolidation of Maple with another buyer, we've actually expanded our Maple business. I can't tell you the exact amount of employees we have in our Toronto office. My guess is it's around 40, but we've actually expanded their business.
As you may or may not know, our business in Toronto, our distribution, is actually a number of different activities. It's not only distributing the Lionsgate films, but actually we've expanded this year, and a full third of our business, from a revenue perspective, was actually films that were not Lionsgate. You may or may not know that we also distribute all of the French language films from Equinoxe. We are the English Canada distributor of those films. Together with Lionsgate, Maple goes out into the international market and acquires third-party films. Frankly, it's very much because of the other rights that Lionsgate is able to buy that Maple is able to finance those films.
So our whole idea with Maple over the last two or three years is to give our Canadian employees an ownership interest, and to incentivize them to grow well beyond just the Lionsgate product and to build their overall business as a Canadian company.
:
When you put shares on the market, especially if you're going to extend ownership of the company to such a degree that somebody could in fact come over and take over the company, that is a risk you take on the market.
We heard testimony the other day--no offence to the board members present--that the board doesn't know what they're doing, the company is making bad investments, and you're the reason why the stock, of which Mr. Icahn owns 20% of the shares, roughly, is undervalued. He's not happy about it, so he's going to fix it, and he's a value investor.
I think you've indicated he's in a whole bunch of different companies. He thinks he knows better how to run them. He seems to have made a bit of money. Maybe he knows a thing or two about business. I follow the market quite a bit. I think he probably does.
My concern when I'm reviewing this, and Mr. Rodriguez has adequately put this into perspective, is that we're at a point now where we're just looking at net benefit to Canada. Ultimately my concern is that sometimes companies like yourself could be perceived as Canadian by convenience. Four percent of your shares are actually Canadian. You're producing things in Canada, but lots of companies are producing films in Canada, because we have great incentives. I think we have a pretty good industry that we've worked on building. So it's not exclusive. It's not like you're the only company that's producing films in Canada.
It's delicate, because if we operate the rules like it's a kangaroo court and we say we're going to protect these guys just because we think we should, foreign investment is looking at it and saying, wait a minute, there are rules, you've set up the rules, and you argue that this is how it should work, but then you make special exemptions to it because you're not prepared to accept a commitment from somebody who's prepared to say... And I'll agree with you 100%, they have not indicated what their commitments to Canada are. They must be making those commitments to the department and to the ministry. We're not entitled to know what they are.
But if outsiders are looking at this, frankly, there's some danger to a country that fashions itself as being a free market economy that wants to build itself by both making investments into foreign jurisdictions and receiving foreign direct investment into its country. I'm just concerned.
My first question is, are you Canadian by convenience? Is this your corporate head office? They said it's a mailbox in Vancouver.
:
Let's not minimize what it's taken.
I've been involved in the company now for 10 years. For five years I was counsel and for the last five years I've been on the board of directors. I don't think we should be minimizing the effort and contribution that management has made to building up what is truly a Canadian success story, in part because of what they've done for Quebec.
For anyone to pretty much start from scratch and build the whole thing over again is a monumental undertaking. Where we are today and what Lionsgate has meant to Canada for the last 10 years is an enormous achievement. To be starting it all over from scratch...
Someone who has publicly said he's not quite sure about the value of film libraries is looking at a company that has one of the largest Quebec film libraries. He would probably not recognize any of the titles, but Mr. Feltheimer made reference to a number of them. They include, for example, the television series concerning the life of René Lévesque, as well as Mon oncle Antoine--which is a Quebec treasure--and numerous other titles. What happens to those in the future?
We can't predict, first of all, what he's offering. We don't know what his discussions have been with Canadian Heritage or what the future may bring for Lionsgate, but I think it would be understating the achievements of management over the last 10 years to suggest it could be easily repeated by anyone.
I very much appreciate all of you coming today. I especially appreciate having the CEO come before us. Clearly you take this very seriously.
I am in a quandary, as every independent filmmaker is both an entrepreneur and of course an artist. I come at it from both perspectives. I don't think it's a good idea for Canadian politicians to impede the economic opportunities of investors, so I stated that at the last meeting, that we had a significant investor come to our country. I think it's a good thing to at least let them perceive there's a market here and Canada is open for business, open for investment.
At the same time, I obviously appreciate all the things Lionsgate has done over the years. How did we get here as a committee? I think we're definitely way ahead of where things should be. The cart is before the horse in this situation, and for the record, I want to say again that I think this hearing is not a good precedent for what should be negotiated at the very least behind doors and with the Government of Canada as needed. So putting that on the table, I think that's my perspective coming at this as a business person and as somebody who's also in the film industry, because I don't think it benefits our industry a lot having these types of predetermining discussions among a group of politicians who really don't have the information.
Having said that, I want to move on to some of the positions that were put forward by the Icahn Group, appreciating that you don't want them to buy the company. I know you suggest that the net benefit to Canada is really the key argument, and I think you're right. I think it's pretty clear that the Icahn Group wouldn't be able to sustain the idea that they would provide net benefit to Canada above and beyond what your board is already doing. But it seems to me, based on the testimony we heard from them, that's not their tack. They are strongly suggesting that the status of your position as a Canadian company is where they want to go with their argument.
How do you pursue that through the means you have, referring also to Mr. Blais, the ADM, whom we also had at committee? When some questions were put to him as to your company being Canadian, he was unable to provide a clear answer to that. What does your company have to do to establish that with the department, to quash that line of attack the Icahn Group is putting at you?
:
You said on the west coast.
Well, we have a $400 million film and television fund with SGF. We used that fund to produce the first season of Blue Mountain State. We will hopefully use it again for the second season, but in any case we are going to produce the second season in Quebec.
We are awaiting a pickup from Epix, a pay television channel, of a miniseries we've been developing called Atlas Shrugged. That would be about a $25 million or $30 million production.
Again, we don't make and have not made separate plans to convince anybody that we will continue to produce and distribute in Canada, because I think it's a given: it's our business, it's part of our business plan, it's ongoing. But I would say something—again, I think this is very important—going back to the Maple conversation, which is that part of our growth in Canada is the support and expansion of Maple.
Having Maple become stronger, having Maple pick up many more films that are non-Lionsgate films—third-party films and English Canada rights for French language films from Quebec—is actually a tremendous benefit to filmmakers, French and English, all through Canada. The strength of Maple is a tremendous benefit to them, so selling it or consolidating it is clearly the opposite.
:
Well, every time we have a movie that doesn't work, I feel that I've learned a lesson. But the lesson isn't not to do those movies.
What we have done is balance our slate; we have a portfolio approach to our business. Mr. Icahn recently talked about one of our films that was more expensive, but he didn't notice that, as we put out in our shareholder presentation, our average exposure on production risk after international sales, for our entire slate of pictures, is around $13 million. It's probably a third of that of the major studios.
I feel as though I learn something every single day in all of our businesses. But it's a little outrageous to hear that our overhead is high, when our overhead on a percentage basis is the lowest in the business.
We certainly see that in order to weather certain economic downturns we have to be smart: smart about spending, smart about overhead. As I say, any time a film or television project doesn't work, I feel that I've learned something, and I try to apply it with our entire staff and board the next time.
But I think the key thing I've learned is that we need to keep growing our business, and when you start cutting back and trying just to show financial metrics, as opposed to growing your core business—and our business is a cultural business, the film and television business, supporting great writers and great directors: I've learned that at the end of the day that leads to making money. But the most important thing is to actually be true to what your business is, and in our case, it's an artistic and cultural business.
:
There are changes happening to the legislation right now. The threshold is being increased, and there are two clauses. The current threshold is around $300 million, and it's going to go up to $600 million eventually. I think it's important to talk about those numbers, because Canadians need to realize that this is really what's at stake here.
The other clauses regarding security—that would be the review—are automatically triggered by the Minister of Industry, not by Heritage.
Once again, there have to be elements that show the net benefit to Canada. So your coming to the Hill and doing this actually is helpful, because Canadians don't need to be confused about the fact that there's going to be a corporate raider or a hostile takeover or whatever, and that there's no role at all for this democracy to be involved in this discussion. The rules need to be clear there.
You haven't really detailed your future in terms of Canada. I think it would help. You've talked about an extensive library platform that you have.
Is there any guarantee or commitment to look at expanding the production in Canada through Telefilm or some other type of distribution or production element? I think that would help: the assurance that Lionsgate has a business plan for Canada that includes Canadians. I think that's what you're missing here today: our understanding where your company is steering towards and what role it will play. That's why I asked about production values in Canada versus the United States and so forth.
If you don't have that here today, I guess my advice is that you say, and what I'm hoping to hear is, something about what the next step is for Lionsgate and Maple in Canada, to be able to understand it.
:
Without spending too much of the committee's time, we certainly would have no problem following up with a compendium of all the Canadian talent that we are in business with. You would find it very extensive.
I've tried to put this in buckets for you, in a sense. I've talked about what we are currently producing in Quebec and our partnership with SGF. I talked about a recent production in Vancouver. You mentioned--I forgot, but thank you for reminding me--that Saw VII, which we're shooting in 3D, is actually shooting right now in Toronto. On a production scale of television and film, we just keep doing it. I haven't picked a number, partly because in television you mostly have to have shows ordered by networks in order to commit to a production, so there is a variable that one really can't put a finger on.
In terms of our ongoing commitment, I would also say that in connection with the expansion of Maple Pictures as opposed to the contraction of Maple Pictures, I perhaps inelegantly have not explained the connection between the financing of movies in Quebec and English Canada with their distribution. We are involved very often not with just finished films but with providing a piece of financing through our distribution apparatus at Maple Pictures to support the actual production of those films. Without a strong distribution partner, those films would not get made. It is a very extensive list. I can certainly supply that list for this committee. I'd be happy to do it.
I mentioned as well being involved with Paul Haggis from the theatrical point of view and also in developing television with him. If you're looking for a number, it would be very difficult to give to you, other than to say that $800 million is something you might want to focus on.