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When Postmedia Network Canada Corp. sealed its $316-million purchase of the bulk of the Sun newspaper chain in April, its chief executive officer cast the deal as a necessary step to scale up and compete in the ever-more-crowded market for digital news. Analysts too hailed the acquisition as a smart move that bought Postmedia breathing room as it tries to cope with a heavy debt load.

But the transaction also set the clock ticking on Postmedia’s future prospects – and perhaps even its survival – as Canada’s largest newspaper publisher.

For some time, Postmedia has been caught in a cash-sapping cycle. Despite owning daily newspapers that reach 6.3 million Canadians weekly, revenue has steadily fallen and the company has had to constantly cut costs to keep generating cash flow to service its total long-term debt – which stands at $652-million and mostly dates from the company’s 2010 emergence from the bankruptcy of CanWest Global Communications Corp.

Now, Postmedia has reached a pivotal moment as it looks to refinance its steeply priced debt, on which it pays sky-high interest rates of 8.25 to 12.5 per cent and which has cost the company more than $60-million annually in interest payments. Much of the debt comes due in 2017 and 2018, but company executives are looking to refinance the loans in the next year or perhaps even sooner, in the hope of securing lower rates.

“Right now, that’s the key risk,” said Peter Adu, a Toronto-based analyst at Moody’s Investors Service Inc. “If they’re able to get over that hurdle, then they could still keep investing in the business until such time that the revenue decline levels off.”

The company’s debt grew with the Sun deal and the weaker Canadian dollar. It is in two main tranches – $269-million (U.S.) and $324-million (Canadian) and much of which is owned by a pair of fund managers specializing in distressed assets: Richmond Hill, Ont.’s Canso Investment Counsel Ltd., and New York-based GoldenTree Asset Management.

Postmedia’s executives have begun meetings to test the mood in the markets and president and CEO Paul Godfrey is planning a “road show” with chief financial officer Doug Lamb to drum up interest in the refinancing. “It all depends what the marketplace is,” Mr. Godfrey said. “Who knows?”

For now, there are few indications the plunge in revenue has reached the bottom. Postmedia’s revenue marched steadily downward for 17 straight quarters, a trend that ended only with the most recent quarterly results, which included revenue from Sun Media properties. Excluding the acquisition, revenue fell $23.1-million (Canadian) in the third quarter. As long as that continues, so must the cutting to sustain the cash flow that pays Postmedia’s creditors.

In the past three years, the news organization has slashed 20 per cent of its costs – or $136-million in annual spending – by outsourcing or consolidating printing, production and administrative jobs, while drastically reshaping its newsrooms. Now, with the Sun deal done, Postmedia is undertaking a two-year “integration” plan that is expected to yield another $50-million in savings.

“The integration is going well,” Mr. Godfrey said in an hour-long interview at the company’s Toronto headquarters. “I think it probably bought us three to four years of runway to find a solution. We also realize that we need new revenue streams.”

Some observers think the turnaround must come faster than that – in the next 18 months to two years. Either way, it is clear that Postmedia’s ability to find a better deal in the form of lower interest rates will be a key factor with a lasting impact on the journalism at a company that now controls much of the daily printed news from Montreal to Vancouver.

“I think it’s essential,” Mr. Godfrey said. “That’s why you have to time this thing right. You can’t leave it too late because the longer you leave it, the more risk you’re at.”

An exterior shot of the Postmedia offices in Toronto on Aug. 20, 2015. (Chris Young for The Globe and Mail)

The road to here

The anchor that weighs Postmedia down was cast even before the company had a name.

Its roots reach back to the Southam Inc. newspaper chain, founded in 1904 and built on the strength of titles such as the Calgary Herald, Edmonton Journal and Ottawa Citizen. Southam was sold to Conrad Black’s Hollinger Inc. in 1996 and then to CanWest in 2000. By then, the stable of papers stretched across the country and included the National Post, a national paper founded in 1998.

GoldenTree began buying CanWest’s debt issues around 2007. The hedge fund was no stranger to the Canadian media scene, having been co-founded by Steven Shapiro, a former head of media and telecommunications at CIBC World Markets. As CanWest’s financial picture soured in 2008 and 2009, GoldenTree bought more debt in anticipation of a restructuring. Some loans were paid back in full. Other bonds were converted to equity ownership.

CanWest’s lenders finally pushed it into bankruptcy in 2009, as the economic downturn made its $4-billion debt unmanageable. In 2010, GoldenTree and other bondholders emerged as the de facto owners of the defunct company’s newspaper division, renamed Postmedia, with a $1.1-billion cash bid. Mr. Godfrey, who had known Mr. Shapiro since the 1990s, was installed at the helm of the new company.

The purchase faced one hurdle as Canadian tax laws discourage foreign control of newspapers by placing a heavy burden on advertisements placed in non-Canadian publications. Postmedia sidestepped that issue with a dual-class structure for its 281 million shares: A small cache of about one million shares with full voting rights, owned by Canadians including an investment management firm and Mr. Godfrey, and a large subordinate class of shares, of which GoldenTree owns nearly 150 million.


Postmedia’s long-term debt, which includes $140-million in new borrowing to finance the acquisition of Sun Media properties earlier this year.


Estimated interest payments since 2010 on Postmedia’s long-term debt.

8.25 per cent, 12.5 per cent

The high interest rates on Postmedia’s debt.


Postmedia’s share price, down from a high of $17.75 in 2011.


Number of consecutive quarters in which Postmedia’s revenue declined, between 2011 and 2015.


Number of full-time equivalent positions cut from Postmedia, some through the sale of newspapers, in a five-year span.

The notion of U.S. owners steering Canada’s largest newspaper chain – which, combined with the Sun papers, owns both major dailies in Vancouver, Calgary, Edmonton and Ottawa – has raised eyebrows.

“I was always told, these New York hedge funds, you’ve just got to be careful. You miss two quarters in a row, you’ll find yourself on a curb: Either you’ll slit your wrists or they’ll slit your throat. That wasn’t true with these people,” Mr. Godfrey said. “It just wasn’t true at all.”

GoldenTree’s managers have been “terrific partners,” Mr. Godfrey said. But the asset manager has been well paid for its patience: GoldenTree, Canso and other investors have, between them, collected $325-million in interest since 2010, even as the price of GoldenTree’s shares in Postmedia plummeted from $9.26 to 59 cents.

On Postmedia’s 10-member board, Mr. Shapiro represents GoldenTree with a single seat. He can be hands-on about finances, asking questions about advertising, outsourcing or property sales, for example, but has “never asked me an editorial question,” Mr. Godfrey said.

That could also be seen as worrisome – that GoldenTree, as an owner and secured lender, is concerned solely with the bottom line, extracting steady interest payments and sitting at the head of the line to collect on debts if the company falters. “These guys are in it for the business side of it. And I’m not sure that they love newspapers, but they see this as an opportunity,” Mr. Godfrey said.

Mr. Shapiro and Canso president John Carswell, a former Royal Canadian Air Force navigator, both declined to comment on their positions or portfolios, citing company policies.

Many analysts are hesitant to discuss Postmedia, in part because its stock doesn’t trade. But those who still follow the company worry that its current track is unsustainable.

“We have been struggling with the status quo at Postmedia given the intersection of [10-per-cent-plus] revenue declines and elevated balance sheet leverage,” Haran Posner, an analyst at RBC Dominion Securities Inc., said in a research note.

In a 2010 interview, Mr. Shapiro said he didn’t believe “you can cut your way to greatness in these businesses.” Yet ever since, Postmedia has had little choice but to try.

Staff cuts at some papers have been “incredible,” as one former company executive put it. At inception, Postmedia had a full-time equivalent staff head count of 5,400. That had been slashed by more than half to 2,500, through cutbacks and the sales of some B.C. papers, before the Sun deal added 2,300 new staff to Postmedia’s ranks.

“What I am concerned about, apart from when we hit the bottom, is when do they hit a spot where there’s nothing to cut?” Mr. Adu said. “Because I still don’t know when revenue is going to level off.”

While the company has hunted in all corners of the business to root out legacy costs, the editorial and sales departments have faced the fewest cuts, according to Mr. Godfrey.

“We’ve said over the last five years, three or four times, God we can’t go any further [with cuts], we can’t go any further. And yet we always have been able to,” he said.

But at what cost?

“That’s the big question,” he said. “I don’t think anyone knows when they’ve gone too far until they’ve gone too far.”

A passerby gets a free newspaper and a coffee from the National Post truck in Toronto on Aug. 20, 2015. (Chris Young for The Globe and Mail)

The road ahead

In July, Mr. Godfrey received a sobering assessment of the company’s newspapers from National Post founder Conrad Black while investors and analysts listened in. Mr. Black – a shareholder, columnist for the Post and former owner of many of Postmedia’s papers through Hollinger – dialled in to the typically tame quarterly conference call, voicing his concern that “we’ve got our feet stuck in cement here.”

“Some of those newspapers have deteriorated a long way from what I remember,” Mr. Black said on the call. “Some of it you can’t avoid; some of it, you can. But please build the quality. Otherwise, you’re going to retreat right into your own end zone, if you’ll pardon the sports metaphor.”

Mr. Godfrey knows his papers, like many others, have lost talent through layoffs, poaching by competitors and departing staff who didn’t see a future in the industry. In response, Postmedia has recruited some prominent new writers, including columnist Colby Cosh and prolific Parliament Hill journalist Kady O’Malley.

Faced with the criticism that Postmedia executives have been too passive in the face of industry pressures, Mr. Godfrey turned introspective in the interview.

“I think there’s a level of confidence in my track record – I’m a straight-up guy,” said the 76-year-old CEO, whose contract was recently extended until 2018. “That I’ve had more wins in life than losses, that I don’t want my career to end, as I say, being the Bill Buckner of the industry – in the World Series, have the ball go through your legs.”

But the challenge remains finding a way to keep up journalistic quality while generating enough cash to pay creditors.

“We’ve said over the last five years, three or four times, God we can’t go any further [with cuts], we can’t go any further. And yet we always have been able to.”
Postmedia president and CEO Paul Godfrey

Postmedia has a sizable real estate portfolio, including an estimated $50-million worth acquired in the Sun deal and a 36,000-square-metre building in Calgary, some of which could be sold to pay down debt.

The most promising avenue to boost revenue is in the digital business, which is forecast to bring in more than $100-million in 2015 and perhaps $120-million in 2016, but it has struggled to take off.

“We have yet to see any sign suggesting a sustainable period of improvement on the digital side,” said Aravinda Galappatthige, an analyst at Canaccord Genuity Group Inc.

Mr. Godfrey is pressing ahead with a “four-platform” revamp, which has built new apps for smartphones and tablets and redesigned print editions and websites at the Calgary Herald, Montreal Gazette and Ottawa Citizen.

The rollout has been on pause while the company retools some aspects – “We learned a lot; everything we did wasn’t great,” Mr. Godfrey said – but will resume soon with the Edmonton Journal and Windsor Star. According to figures from the Alliance for Audited Media, however, daily circulation of digital editions on phones and tablets at the Citizen and Gazette are about 11,000 for each paper, excluding copies used for education, compared with about 65,000 and 55,000 copies respectively for print.

Postmedia’s newspapers are now competing in an online market increasingly dominated by Google, Facebook and Apple, companies with hundreds of billions of dollars in market capitalization that are building their own platforms to deliver news. So can the promised new initiatives turn the tide?

“I think in some areas we can be competitive enough to make up the difference between surviving and not surviving,” Mr. Godfrey said. “I really believe that.”