Postmedia and Toronto Star owner Nordstar talks broke down over debt swap, sources say

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Merger talks between Canada’s two largest newspaper publishers were scuttled because the major lender to one of the companies wanted to hold on to a significant amount of debt rather than convert it to equity in a possible new entity, according to two sources familiar with the situation.

Postmedia Network Canada Corp. PNC-A-T and Nordstar Capital LP, which owns the Toronto Star, said Monday that they had ended discussions to merge and would not pursue a deal because they were unable to agree on the terms. A major sticking point was how much debt would be held by Postmedia’s biggest lender, New Jersey-based hedge fund Chatham Asset Management, according to the sources. The Globe and Mail is not identifying the sources because they were not authorized to speak publicly about the matter.

The companies first announced they were in talks in late June. Key to making a deal work would be an agreement that would see Postmedia’s lenders swap a portion of their holdings for equity in the new company, easing a major burden on the publisher, which owns some 130 titles, including the National Post. The company has $288-million in debt and has incurred about $198-million in interest expenses since 2017, hamstringing its ability to invest in operations.

Chatham is owed $263-million of that amount and wanted to retain a larger portion of the debt than executives at Nordstar were comfortable with, especially given the uncertainty facing the news industry, according to the sources.

But Postmedia chief executive Andrew MacLeod said concerns about the amount of debt of the merged company did not scuttle the deal. “The assertion is incorrect. The debt stack was fully negotiated and agreed to by both sides,” he said. What prompted the talks to end, he said, was the uncertainty in the industry and the “unstable landscape as it pertains to Google and Facebook and the potential impact on the environment that precluded us being able to realize models that made sense.”

While Postmedia’s Monday news release said the parties could not agree on terms, Mr. MacLeod would not elaborate on where the two companies were at odds.

A representative for Chatham did not respond to a request for comment. Nordstar also did not reply.

Both Postmedia and Nordstar, which is controlled by Jordan Bitove and owns dozens of community and daily publications under Metroland Media Group, in addition to the Toronto Star, have been grappling with declines in print advertising and circulation revenue as digital ad dollars have overwhelmingly shifted to platforms such as Google and Facebook.

The federal government has attempted to help the industry by introducing Bill C-18, the Online News Act, which will come into effect by the end of the year and compel tech platforms to strike financial agreements with publishers for posting or linking to their content. Postmedia and Mr. Bitove have been strong supporters of the legislation. But Facebook parent Meta Platforms Inc. and Google said recently that, in response to the introduction of the act, they would block access to Canadian news for domestic users on their platforms.

Chatham has a long history with Postmedia and acquired a majority interest in 2016 as part of a court-approved restructuring. Most of Postmedia’s loans from Chatham comprise $241-million of secured notes that pay 10.25-per-cent interest. The debt is denominated in U.S. dollars and is due in 2027.

The notes have a payment-in-kind (PIK) feature that allows Postmedia to pay interest by issuing more debt, and the company is making use of the PIK option. In the first six months of the year, Chatham received an additional $12.6-million in notes from the PIK program, up from $10.7-million during the same period in 2022.

Chatham also owns about 63 per cent of Postmedia’s publicly traded shares and controls 31 per cent of the voting rights. The hedge fund has shown an affinity for media assets, having acquired the publisher of the National Enquirer in 2014 and U.S. newspaper chain McClatchy Company through a bankruptcy auction in 2020.

Owing to its debt load and challenges facing the industry, Postmedia has shed more than 1,200 full-time employees between 2017 and 2022, along with selling assets, centralizing editorial operations and shuttering some newspapers. Nordstar’s properties have made similar moves over the years to cut costs and stay financially viable.

But the uncertainty in the industry and competition from Google and Facebook prompted the two companies to look at consolidating, with Mr. MacLeod saying last month that the industry is under “existential threat.”

Under the terms of the now-cancelled merger, existing Postmedia shareholders were to own a 56-per-cent economic interest in the new entity, with Nordstar holding the remainder. Mr. Bitove would have retained a 65-per-cent stake in a new company set up to manage the editorial operations of the Toronto Star.

With a deal off the table, both companies will have to go it alone. “To be clear, we still face much turbulence in our industry,” Mr. Bitove wrote in a memo to employees Monday. “Be assured that we will continue to seek ways to ensure that we can continue to provide reliable, trusted journalism to all communities, both big and small.”