Jonathan Nelson is bearish on the future of newspapers.
He's far from alone in that camp, but what Mr. Nelson thinks of the dead-tree media actually matters.
In fact, Mr. Nelson's distaste for tabloids and broadsheets is shaping the auction of CanWest's newspapers, and just may end up playing a role in delivering 11 big city dailies into the hands of Torstar Corp.
Mr. Nelson is the founder of Providence Equity Partners, a 20-year-old private equity fund that focuses on media and telecom. No one in this world has a better track record. Providence has invested $22-billion (U.S.), and past wins include a spectacular pass in Canada on phone company MetroNet, sold to AT&T back in 1999.
Providence's Canadian content also includes a deep relationship with the Ontario Teachers' Pension Plan: The two funds teamed up to take that failed run at BCE in 2007. Mr. Nelson and his partners also enjoy strong ties to several other domestic private equity funds - it's a small community - and to legions of Canadian media executives, financiers and lawyers.
Anyone who needs capital for a big-ticket media deal is likely to show up at Mr. Nelson's door. A number of wannabe press barons have made that pilgrimage in recent months, after CanWest's lenders put the publishing company on the auction block with a $1-billion (Canadian) reserve bid. And sources say that Providence's CEO had a definitive response on requests for support, or even advice, on a CanWest purchase: Forget it.
It's not that he's averse to getting a little ink on his fingers when he reads. The issue for Mr. Nelson and his crew is that buying newspapers violates just about every tenet in the private equity takeover textbook.
In Buyouts 101, buyers learn that debt-financed acquisitions require companies that generate dependable cash. That isn't newspapers. Traditional media is getting a shrinking slice of the advertising pie. Many newspapers will see ad revenues fall if the economic recovery slows. And the basic cost of printing is going the wrong way, with newsprint prices rising.
Look at the track record. One of the ugliest buyouts ever done saw storied investor Sam Zell fall flat on his face after buying Tribune Co. in 2007 in an $8.2-billion (U.S.) deal. The Chicago Tribune parent went into creditor protection less than two years later. That high-profile disaster helped shape thinking at Providence and other private equity players.
CanWest's creditors, led by the Bank of Nova Scotia, want to sell the stable of papers for a price that's north of seven times earnings before interest, taxes, depreciation and amortization (EBITDA). One banker with close ties to Providence said the private equity fund told anyone willing to listen to avoid paying anything over four times EBITDA for newspapers.
So where does that leave the CanWest auction? Sources say that with one notable exception, the private equity crowd is heeding Mr. Nelson's advice and steering clear.
The only public-sector fund said to be kicking tires at CanWest is Alberta Investment Management Corp. (AIMCO). That's because the $70-billion (Canadian) fund features a head of private equity, George Engman, who scored big in 1996, while at Teachers, by backing the buyout of Toronto Sun Publishing.
An absence of financial players clears the patch for Torstar, the largest strategic bidder in this contest. For better or worse, the company is deep in the newspaper game. Torstar, by the way, commands a relatively weak multiple of five times EBITDA.
Torstar executives can justify their bid for CanWest on the logic that markets will give a higher valuation to a national media play than to a company that is heavily dependent on the Southwestern Ontario economy. And the stars seem to be aligning for Torstar, with the deadline for a second round of CanWest bids coming next week.
Torstar's stock price doubled in the past three months, on an unexpected spike in advertising sales, which can only help finance a successful offer. If it does win the auction, sources say Torstar can count on support from value investor Fairfax Financial, which also helps in financing what's likely to be a cash offer to CanWest creditors. And finally, if Torstar wins CanWest, it can likely raise cash quickly to offset part of the purchase price by selling some or all of CanWest's weekly papers to Vancouver-based Glacier Media.
If CanWest does go Torstar's way, and the deal works out for all concerned, a thank you card to Mr. Nelson may be required.