With Postmedia’s revenue deteriorating rapidly, the media company appears to have little value to salvage, sources say.Chris Bolin/The Globe and Mail
A major American investor scrambling to unload its stake in Postmedia Network Canada Corp. is facing significant hurdles as the newspaper company grapples with crumbling finances and a massive looming debt payment.
In a bid to exit its position and salvage what value it can, GoldenTree Asset Management LP has approached a mix of investment funds and strategic players. David Kassie, who serves as executive chairman of Canaccord Genuity Group Inc. and has relationships with both Postmedia chief executive officer Paul Godfrey and GoldenTree, is overseeing the file. He also stickhandled Postmedia's acquisition of the Sun Media chain in 2014.
But the response so far seems to be muted, according to conversations with key players. Several potential investors contacted by The Globe and Mail said they had been approached by GoldenTree but were not interested in making a deal.
Postmedia appears to have little value to salvage – and what does exist will take a lot of heavy lifting to unearth, sources said.
Because Postmedia's revenue is deteriorating rapidly, there is a chance the company will have to restructure its balance sheet before the $313-million debt maturity in August, 2017, wiping out much of GoldenTree's investment. Postmedia hopes to refinance the terms of its debt before then.
Asked whether he is confident the company can meet its interest obligations in the meantime, Mr. Godfrey said in an interview on Tuesday: "So far, we haven't missed a payment. Hopefully we won't miss a payment."
Exact figures are hard to nail down because debt holdings aren't made public, but GoldenTree owns 52 per cent of Postmedia's variable voting shares, as well as a large chunk of second-lien notes. Multiple people have already written the shares off, and the notes could become worthless when the first-lien debt, majority-owned by Ontario-based Canso Investment Counsel Ltd., gets repaid next year.
Even worse, there are worries a creditor protection filing could occur before then, according to people who have examined the financials, because continuing to make interest payments could prove challenging.
And then there is the problem of potential suitors, a relatively select group of investors – many of whom have been burned by previous media investments.
"Definitely, there are people [distressed debt players] who are out there who like newspapers," said a hedge-fund manager in New York who is familiar with Postmedia. "The problem is that most people who do like newspapers have gotten their heads blown off."
Fairfax Financial Holdings Ltd. declined to comment for this story, but the firm's media-asset woes are well documented. The company made a bet on both Torstar Corp. and CanWest Global Communications Corp., the prior owner of many of Postmedia's newspapers, and has lost money on both. In 2010, Fairfax wrote off $121-million from its investment in CanWest shares.
Fairfax has warned before about the problems of tacking on too much debt to a media asset's balance sheet. When the CanWest shares were written off, chief executive Prem Watsa admitted that "we should have been a lot more careful, both about the newspaper business as well as the ability of management to navigate" the situation – something that rings true for anyone eyeing Postmedia today.
Torstar, one of the country's largest newspaper owners, has also drawn speculation as a possible buyer but declined to say whether it has been approached by GoldenTree. "Torstar does not comment on rumours or speculation," a spokesperson said.
Postmedia's acquisition of Sun Media was designed to add some much-needed cash flow, but it hasn't staved off plummeting advertising revenue. On the cost front, there is little else Postmedia can do before slicing through bone.
For years now, Postmedia has been in a state of perpetual restructuring to try to mitigate its stark financial realities. Print-advertising revenue continues to decline by double-digit percentages, including a nearly 18-per-cent drop in 2015, while digital ventures have failed to take up the slack.
In 2012, the company launched a "transformation program," which included selling production facilities and cutting staff. Postmedia plans to sell further real estate, having acquired a million square feet of properties, valued at an estimated $50-million, in the Sun deal. To date, proceeds from real estate sales have been mostly put toward debt repayments.
The cuts keep coming. In January, Postmedia executives pushed up the target for additional cost savings to May 31 of this year, and promised a further $30-million in cuts by the end of August, 2017.
Postmedia's "big bet on the future of this industry," as Mr. Godfrey put it, was the $316-million purchase of Sun Media assets from Quebecor Inc. in 2014. That deal closed last April, adding 175 newspapers and digital properties, as well as, crucially, the cash flow that came with them. Whether the acquisition will be deemed a success will depend on whether it can leverage its massive scale, both by squeezing out additional revenue from advertisers and by spreading costs over dozens of Canadian newsrooms.
So far, the marriage is showing signs of stress. When the deal was first announced, a Postmedia investor presentation outlined combined operating income of $210-million – an appeasing figure for investors. But the advertising revenue for Postmedia's legacy business has been in steady decline. Similar woes are plaguing Sun Media, as well.
This sharp decline in earnings and the ever-onerous debt load, some of which is payable in U.S. dollars, make owning these high-yield bonds even less appealing.
With a report from Joanna Slater
Tim Kiladze
James Bradshaw