Someone just made the wrong call on newspapers.
CanWest Global Communications' stable of 46 dailies and weeklies sold Monday for $1.1-billion. That's somewhere in the neighbourhood of $175-million more than the most optimistic of ink-stained analysts forecast these assets would change hands for.
The proud owners of a nationwide stable of publications are CanWest's unsecured creditors - a collection of distress debt-focused U.S. hedge funds led by Golden Tree Asset Management.
These financial players beat out a strategic buyer, Torstar, to win the prize. It's not supposed to work this way, not when private equity and hedge fund types are still suffering through the hangover from a buyout boom that went bust in 2007. Torstar should have been able to pay top dollar in this auction, given the potential cost savings.
So what's going on? Did Torstar offer too little, or did Golden Tree and the rest of the creditors pay far too much?
The answer to that question reflects where various players got involved in this game, and when they plan to exit.
Torstar arrived late, and was offering something in the $900-million range for CanWest's papers. Had Torstar been successful, it would have made a bet-the-company wager on these papers, making a generation-long commitment in an industry facing serious headwinds.
On the other hand, Golden Tree and friends bought into CanWest months ago, by purchasing bonds with a face value of $450-million for something in the range of 30 cents on the dollar. As for their intentions, well, cue up '70s rockers Trooper, and their classic tune: "We're here for a good time, not a long time."
CanWest's unsecured lenders - the hedge funds - will flip their loans for all the equity in this reborn media company. They have assembled a new group of lenders to help raise the cash needed to buy out existing senior lenders, owed $925-million.
If CanWest begins to trade on the Toronto Stock Exchange in July, as scheduled, hedge funds will be able to cash in their holdings. If that IPO does value the company at $1.1-billion, the hedge funds stand to make a 30-per-cent plus return on their investment. If the gods of finance smile on this crew, the company could be worth a tad more.
The whole game for the hedge funds is to get CanWest's papers back on public markets as quickly as they can, positioning the new company as a classic pure play on print media and a rebound in the economy.
The eminently credible Paul Godfrey is at the helm. CanWest's product shows up on doorsteps across the nation each morning. Canadian investors know exactly what they are getting: this is Southam, The Sequel.
At this point, it's worth noting that some of the biggest players in Canadian distressed debt took a pass on this CanWest recapitalization, on fears that the price was too rich.
Here's a rough take on the numbers: CanWest is expected to turn in $180-million of EBITDA in the coming year - that's earnings before interest, taxes, depreciation and amortization. Optimists will say that with continued strength in advertising, $200-million in EBITDA is achievable.
Using the more pessimistic forecast for a valuation on CanWest's papers - the $180-million figure - the unsecured creditors value this company at 6.1 times EBITDA. If CanWest does a little better - hitting $200-million-plus - the multiple falls to 5.5 times EBITDA.
The average multiple for major North American newspaper chains - Torstar, The New York Times, Gannett and McClatchy - is 6.4 times EBITDA. Obviously, that's above the valuation this deal put on CanWest's papers.
If stock markets hold in, and newspaper advertising continues to pick up, CanWest's collection of papers could be worth $1.15-billion to $1.28-billion once the company is public this summer. That would mean the hedge funds made the right call.
If anything goes wrong with this sunny scenario in coming months - a slump in equities or signs of a double-dip recession - then the value of CanWest's papers will slide, and the hedge fund crowd could take a beating. In that case, Torstar gets another shot at buying these papers for a bargain-basement price.
Two groups greeted all of Monday's news on the papers with a smile. CanWest's secured lenders, led by Bank of Nova Scotia, are getting paid back 100 cents on the dollar for a $925-million loan that caused all sorts of heartache. And RBC Dominion Securities, the adviser that ran this auction, deserves credit for a sale that raised far more for creditors than initially expected.