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CanWest-owned newspaper boxes in Vancouver

DARRYL DYCK/Darryl Dyck/The Canadian Press

Torstar push to become the biggest newspaper publisher in Canada is in danger.

With bidding set to close tonight in the auction of chain of 46 newspapers, the parent company of the Toronto Star is on the brink of losing its key financial backer.

Fairfax Financial the deep-pocketed insurance company that teamed up with Torstar to make an offer on the newspapers, has told bankers it has decided against bankrolling the purchase, according to sources close to the matter.

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The chain of papers includes 11 large dailies such as the National Post, Vancouver Sun and Ottawa Citizen, along with 35 community papers. At the heart of the matter is the financing Fairfax hopes to arrange. The newspapers are being sold off by CanWest's creditors, which include Canada's largest banks, who are trying to recoup $950-million they are owed by CanWest.

The Torstar bid would see the sellers paid entirely in cash, which makes it attractive to the creditors selling off the papers, since they would get their money up front.

However, Fairfax wants to finance the offer with a mixture of equity and bank financing, which has become a sticking point. Banks that have been approached by Fairfax are cautious about lending money to buy newspaper assets that have struggled, and are unable to see eye-to-eye with Fairfax on the terms of the financing.

Hampering matters are the debt troubles in Greece, which illustrate the potential danger still lurking in the global financial system. That uncertainty is making both financial institutions and prospective bidders more cautious.

According to sources, Fairfax has said it will not submit an offer unless the banks are willing to bend to offer more-attractive financing terms. The move is being viewed by some as posturing by Fairfax to force better lending terms, but also points to a reluctance by Prem Watsa's company for big bets on media investments, without attractive terms.

Fairfax owns nearly 19 per cent of Torstar's non-voting shares, but has lost $175-million on that investment as media stocks fell last year. Fairfax also bet on CanWest shares in recent years, acquiring a 22-per-cent stake before CanWest filed for creditor protection in the fall.

In both cases, Fairfax believed the media companies' shares were undervalued and poised for a rebound.

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Torstar Corp. owns the Star and 97 other newspapers in Ontario and would become the largest publisher in Canada if it completed the deal. If Fairfax pulls its support of the bid today, that would leave four bids in the process, based on the group that submitted non-binding bids in March.

The other bids include one by B.C.-based newspaper publisher David Black; and another by former CanWest chief executive officer Leonard Asper, with backing from both Australia's Macquarie Group and the Serruya family behind CoolBrands International Inc.

The remaining two bids are from financial investors, including one led by the unsecured creditors of the newspaper business and another by an unnamed player.

The unsecured creditors are led by hedge funds Golden Tree Asset Management of New York and West Face Capital Inc. in Toronto. These firms, both specialists in distressed debt and corporate workouts, paid 20 to 40 cents on the dollar for CanWest paper with a face value of $450-million.

If successful, the funds would take out senior lenders for 100 cents on the dollar, then hope to eventually sell CanWest LP for more than the discounted price they paid for the company's bonds.

The preliminary bids are said to have ranged from $850-million to $925-million, according to sources close to the auction.

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To be considered, each group must submit a final binding bid Friday to RBC Dominion Securities Inc., CanWest's adviser on the sale process.

The bank will spend the next few weeks sifting through the final offers and determining which one is most palatable. Because the secured creditors don't want to stay on as operators or part-owners of the newspaper business, offers that include the most cash up-front are said to be most favourable.

Analyst Tim Casey at BMO Nesbitt Burns Inc. said in a research note this week that it is unlikely Torstar could do a deal without the backing of a well-heeled partner.

"In their totality, the assets represent a major acquisition for Torstar that would increase its exposure to daily newspapers and increase leverage," Mr. Casey wrote. "A potential deal with Fairfax seems credible, but obviously we need information on terms and structure to assess its impact."

If it proceeds, Torstar may also face regulatory challenges to its bid from the Competition Bureau, as a successful takeover of CanWest's newspapers would give the company the lion's share of daily newspapers in Central and Western Canada.

CanWest's lenders, who currently control the chain, want a clean, quick deal. To help meet this goal, Torstar was urged by RBC to get preliminary guidance on its plans from the federal Competition Bureau, according to one executive familiar with the bidding process.

Torstar decided not to approach the competition watchdog, said the source, and that could introduce uncertainty into its bid that does not exist with rival bids.

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