The potential merger of the country’s two largest newspaper chains will lighten a crippling debt load for one of the partners, Postmedia Network Canada Corp., but industry experts say the union would do little to address the media companies’ structural challenges.
Postmedia PNC-A-T, which is making interest payments on its $288-million in debt by borrowing more money from hedge fund lenders, is in talks to combine forces with Torstar owner Nordstar Capital LP. Postmedia owns 130 properties, including papers in most major Canadian cities, while Nordstar owns about 70 titles. On Tuesday, the two companies said a merger would better position the business to compete with global digital platforms.
After borrowing to pay for a series of takeovers, and going through two previous financial restructurings, Postmedia is now working on a transaction the company said will see a “significant reduction in overall debt through a conversion of a portion of the outstanding debt to equity, resulting in significant economic dilution to existing shareholders.”
New Jersey-based hedge fund Chatham Asset Management LLC will swap almost all of its $262-million in loans to Postmedia for equity in the combined companies, according to two sources familiar with the terms of the proposed transaction. The Globe and Mail agreed not to name the sources because they are not authorized to speak for the companies.
In the first six months of the year, Chatham’s loans to Postmedia increased by $12.6-million as the media company issued more payment-in-kind bonds to the hedge fund, rather than making interest payments. The bonds pay 10.25-per-cent interest. Postmedia lost $36.6-million in this period, up from a $23.5-million loss in the same period a year ago. Chatham first invested in Postmedia in 2016, and also owns the National Enquirer and McClatchy chain of media properties.
Postmedia also owes $26-million to Toronto-based asset manager Canso Investment Counsel Ltd. and the sources said this loan will be paid down by the combined companies.
This is not the first time Postmedia has attempted to improve its fortunes by scaling up. Postmedia bought the Sun Media newspaper chain in 2015 in a $316-million deal – and borrowed $140-million to complete the transaction. In 2017, it swapped 41 newspapers with Torstar and last year paid more than $16-million to acquire Brunswick News Inc.
But these deals have not staunched the bleeding. Revenue has continued to decline and the company regularly loses money. Since 2017, print advertising revenue has fallen 60 per cent while circulation revenue has dropped 34 per cent. Postmedia has boosted digital revenue, albeit slowly, increasing it by 13 per cent over the same time period. Headcount has shrunk, too. Postmedia employed 2,098 full-time employees as of August, 2022, down from more than 3,300 a few years ago. Meanwhile, Postmedia has spent $180.8-million since 2017 on interest payments on its debt.
Postmedia’s track record does not inspire confidence that a merger with Nordstar’s newspaper properties will reverse these trends, said Dwayne Winseck, a journalism and communications professor at Carleton University. “Postmedia has now had a run at this since 2010,” he said, referring to the company’s formation out of the bankruptcy of Canwest Global Communications Corp. “The Postmedia properties have gone from being a venerable publishing group to being decimated.”
The companies’ contention that the merger will “strengthen our democracy and protect the fabric of our country” is directed toward the Competition Bureau, Prof. Winseck said, which he expects to review any transaction. “I don’t think the Competition Bureau will go lightly on this,” he said.
Commissioner Matthew Boswell has been more willing to challenge mergers, Prof. Winseck said, and past mergers in the newspaper industry have not resulted in financially sound companies. “They’ve been crippled by consolidation,” Prof. Winseck said.
Postmedia and Nordstar, which is controlled by entrepreneur Jordan Bitove, are attempting to expand their digital platforms and maximize revenues from print products in the face of competition from social-media giants such as Facebook parent Meta Platforms Inc. META-Q and Google owner Alphabet Inc. GOOGL-Q.
On Wednesday, Prime Minister Justin Trudeau declined to comment directly on the proposed merger at a press conference in Mississauga. “I know the Competition Bureau and others are going to be taking looks at it, because this is a significant step,” Mr. Trudeau said. “I will say we need to continue to make sure we are supporting the ability of Canadians to get local news, to get quality journalism.”
The federal government recently passed the Online News Act, which would force internet platforms such as Facebook and Google to pay Canadian publishers for linking to news content. Last week, Meta Platforms said it would block Canadian users from accessing and sharing news rather than comply before the law takes effect in six months. “It is extremely disappointing to see that Facebook continues to refuse to accept its responsibility towards our democracies by refusing to pay the fair share,” Mr. Trudeau said.
On Tuesday, Postmedia and Nordstar said if their marriage takes place, the two companies will share operating control of the merged company. Postmedia shareholders would own a 56-per-cent economic interest and Nordstar will hold a 44-per-cent stake.
Nordstar would retain a 65-per-cent stake in the Toronto Star, which would remain a separate company, a structure that the sources said is designed to give Mr. Bitove control of the business. The remaining 35 per cent would be owned by the new media company, which means Postmedia shareholders would hold about 20 per cent of the Toronto Star.