Corus tops list of mystery companies in the hunt for Canuck co.

MONTREAL — Canadian animation producer Nelvana said Friday that it is in discussions to merge with or be acquired by another company, but Nelvana did not reveal further details of the negotiations.

There has been widespread speculation in the financial sector here that the Toronto-based producer and distributor of kids TV programming was set to be acquired. The speculation has helped drive Nelvana’s shares on the Toronto stock exchange to record levels. (On Friday, however, the stock closed down 2% at C$40.45 ($27.21); the 52-week low was $12.)

In a statement, Nelvana said it is “in discussions with a third party to investigate the possibility of a business combination.” The company noted, however, that “there can be no assurance that these discussions will result in an agreement or transaction.”

Most observers believe the most likely candidate to acquire Nelvana is Toronto-based Corus Entertainment, the company spun off from Shaw Communications to house all of Shaw’s specialty TV and radio holdings. Corus owns youth webs YTV and Treehouse, and it also has stakes in all-cartoon network Teletoon, Telelatino and the Comedy Network.

Execs from Corus were not commenting on the speculation. But analysts say acquiring Nelvana would make sense for Corus since it lacks a production and distribution division and is already in the kids broadcast biz via YTV and Treehouse, both of which would provide natural homes for much of Nelvana’s programming.

Other rumored suitors include Paris-based StudioCanal and two German companies, Kinowelt Medien and EM.TV.

“I think Nelvana management should be pleased with the valuation of the shares,” said analyst Adam Shine from CIBC World Markets. “At these prices, we’re beyond fundamental valuation.”

Shine said the deal may be tied to the mess at rival Canadian animation producer Cinar of Montreal. Most feel Cinar will sooner or later have to auction off its lucrative assets as a result of its financial scandal, and Nelvana would need a strategic partner to be a serious bidder for those assets. Nelvana is also benefiting from the takeover fever sweeping the Canadian entertainment and media biz, with numerous recent major-league mergers in the sector.

Nelvana has a library of more than 1,400 half-hours of kids programming. Its best-known series include “Franklin,” “Little Bear,” “Babar,” “Rupert” and “Pippi Longstocking.” It recently acquired rights to the Japanese-made series “Cardcaptors,” which airs on the WB Network; its new production, “Pelswick,” from controversial artist John Callaghan, makes its bow on Nickelodeon in late October.

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