Marc Edge is the author of seven books, including this year’s The Postmedia Effect, and is the media columnist for Canadian Dimension. He lives in Ladysmith, B.C.
Postmedia is in a crash dive, having posted operating income of only $13-million last year while receiving $9.9-million in government aid. That was nowhere near enough to cover its more than $30-million a year in debt payments, which required moves such as closing a dozen Alberta community newspapers in January and selling its Calgary Herald building to U-Haul for $17.25-million. The company then announced chain-wide staff cuts of 11 per cent, which have yet to be finalized.
Postmedia’s PNC-B-T best hope now is for Google and Facebook to subsidize it under Bill C-18, the Online News Act, for which it and its peers have been lobbying. But even if that legislation passes, Postmedia will remain under water if Google and Facebook stop carrying links to Canadian news stories, as they have threatened to do.
Ottawa will then have to choose between bailing Postmedia out again or letting it founder further. The latter could be the only way to help wean the country off the influence of U.S. hedge funds over the company. These funds have owned Postmedia since 2010 and have been bleeding it dry ever since with the hundreds of millions in high-interest debt they also hold.
This is the money-making method of the hedge funds, which cannot be blamed for caring only for returns and nothing for journalism or Canada. They had bought up the distressed debt of Canwest Global Communications on the bond market at prices reportedly as low as 5 to 10 cents on the dollar as it was facing bankruptcy. They then acquired its newspaper division – the former Southam chain, which would become Postmedia – at its bankruptcy auction.
Few other parties were able to step up, to be sure. So this newly bought asset now owed money to its owners, for a debt bought on the cheap. All the hedge funds had to do to cash in big was keep the company alive long enough to collect on their loans. A bond paying 12.5-per-cent interest bought for 10 cents on the dollar, after all, theoretically provides a return of 125 per cent a year. And when Postmedia struggled to make payments, the debt was refinanced on favourable terms for its holders.
Canada limits foreign ownership of newspapers to 25 per cent, but the hedge funds got around that by starting a publicly traded company in which their shares were limited in voting power. Control of the company thus resides in the Canadians who own 2 per cent of its shares, but the funds have outsized influence over who runs Postmedia and how much they are paid.
Former Postmedia chief executive Paul Godfrey worked furiously to keep the company alive and send interest payments south. He was paid well to do so. He first cut costs by centralizing production in Hamilton and shedding dozens of local editors. In 2014, he acquired Canada’s second-largest chain, Sun Media, to provide more runway. It was another purchase that exposed weakness in the Competition Act, which has regulators now clamouring for its repair. Mr. Godfrey then reneged on a promise to the Competition Bureau to keep separate Postmedia and Sun newsrooms in Ottawa, Edmonton, Calgary and Vancouver, where Postmedia thus owned both dailies in each city.
Mr. Godfrey also engineered a tricky 2016 debt restructuring when Postmedia’s profits first fell to where they no longer covered its interest payments, halving the company’s debt load but giving the hedge funds even more shares. His 2017 trade of 41 titles – of which 36 were closed – with rival Torstar resulted in a criminal investigation by the Competition Bureau that ultimately ended with no charges.
The hedge funds have unfortunately followed the “harvesting” strategy of cutting costs and selling off assets on the assumption that newspapers are dying. Publications which have instead invested in quality content and developed a loyal base of online subscribers, however, have found that there is still a solid business model for newspapers, even in print.
Time will soon grind further upon Postmedia, and it should be allowed to decline. Federal subsidies work only to keep payments flowing to hedge funds, with debatable returns for taxpayers.