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david milstead

I have little doubt that Postmedia's 2016 restructuring took an immense amount of time, planning and negotiation, and put the company in a better place than it had been before.

Is it in a good place, now, however? I'm afraid that less than six months after the plan was completed, the continuing deterioration of the company's financials suggest Postmedia may yet face another reckoning. The shares – not that there are many individual investors out there, anyway – are down nearly 70 per cent since Postmedia completed its restructuring Oct. 5. All told, the company's equity has declined a shocking 99.97 per cent since its all-time high in July, 2011.

And there are signs that the price of the company's newly reissued debt might begin to sink, as well.

To ensure management stability during that restructuring, Postmedia granted retention bonuses worth $2.3-million to its top five executives. Now that most of that cash is safely salted away in their investment accounts, three of those five have recently decided to become, um, unretained, with the company confirming last week that National Post president Gordon Fisher will retire April 30.

What kind of situation are they leaving behind? The culprit of this mess is familiar, if you have followed what has happened to legacy media, particularly the kind that is printed with ink on paper.

Newspaper advertising revenue has fallen sharply; circulation revenue is typically flat or growing modestly at best, as papers match subscription volume declines with price increases. Digital advertising revenue, if it has increased, has failed to compensate. The transformation to becoming "digital first" media companies has effectively traded print dollars for online dimes, to use a phrase used by Canadian executive John Paton, who was deemed a news visionary until it became obvious he had no better idea how to run a newspaper company than anyone else.

"I don't [care] whether it's print or digital – when your revenue, your top line, is declining between 5 to 15 per cent, has been for years and it looks like that's the trendline, that's all you need to know," says media analyst Tim Casey of BMO Nesbitt Burns, who no longer covers Postmedia and spoke only generally about the newspaper industry. "We're 15 years into this game at newspapers."

Ken Doctor, a news industry analyst and consultant, noted that Postmedia's circulation revenue dropped 9 per cent in its most recent quarter. Circulation revenue "is seen as a counterweight to at least slow down the decline of this industry." But the company lacks a viable digital subscription strategy.

"For Postmedia to be down [9 per cent] in circulation revenue, it means their strategy engine isn't working … from people I've talked to and what I've seen, in many of these cities they've passed the point of no return. They've cut so deeply into that product they have lost the ability to convince consumers – readers, citizens – to pay for that content whether it's in print or digital. Once you've passed that point you can't turn the business around."

A company spokeswoman declined to comment for this article.

Now that Postmedia has moved past the bump it got by adding the Sun chain of newspapers, it's back to reporting double-digit percentage declines in overall revenue. The next batch of quarterly numbers, for the first full three-month period after the debt restructuring, arrives April 6.

In the first quarter ended Nov. 30, Postmedia gross margin – the difference between revenue and the cost of the products sold – fell by five percentage points, year over year. Expenses did not fall as quickly, and the company's margin of EBITDA, or earnings before interest, taxes, depreciation and amortization, dropped from 15 per cent in the 2015 quarter to 9.5 per cent. (Figures provided by Standard & Poor's Global Market Intelligence.)

So, as Mr. Casey notes, the vicious circle continues: Revenue and margin declines lead to more cost-cutting, which causes the product to deteriorate, which turns away more paying customers. But the market is catching up to the fact the company's balance-sheet restructuring, in which it avoided the taint of bankruptcy by swinging a deal with its debt holders, may not have been enough.

To review, here was the plan: The company had $303-million in "first lien" debt due in August of this year. In order to stretch out the maturity to July, 2021, it paid off $78-million of the debt at par, even though it was trading in the market at a notable discount. The remaining $225-million has the new 2021 maturity.

Then, it rid itself of a $268.6-million (U.S.) "second lien" tranche of debt by giving its holders new stock in the company instead. (The debt was trading for about 8 cents on the dollar, indicating the slim chance Postmedia could ever repay it.) To make the share exchange work, it gave existing stockholders one new share for every 150 shares they owned. The issuance of stock to the debt holders gave them roughly 98 per cent of the company.

Blunting the effects of that transaction, Postmedia then issued $84.4-million (U.S.) in new debt. Befitting Postmedia's condition, the debt accrues interest, but the company isn't obligated to shell out any payments for three years.

The balance sheet is in better shape than in the beginning of 2016, certainly. And there are still some hard assets that could, and probably will, be sold to keep the cash flowing to bondholders. There was $51-million worth of land holdings as of last August, for instance.

Most of the company's debt metrics, such as a comparison of debt to EBITDA, are about where they were in 2013. One supposes most newspaper companies would love to be where they were in 2013. But the cracks continue to spread.

Postmedia's new bonds are illiquid, with trades few and far between, but the banks and other market participants who could trade them may be poised to sell at a discount. Eikon, the data product from Thomson Reuters, surveys these banks to get pricing "indications" for these bonds. Based on input from these market participants, Eikon suggested for much of the latter half of March that the bonds might be had for 93 cents on the dollar, an effective yield of nearly 10.6 per cent – not the 8.25 per cent they were designed to pay. (Eikon has since revised its price to close to par; we'll just have to see what happens if there's actually a trade.)

And that stock? It's gone from $2.25 on the day of the restructuring to 70 cents per share. Remember, since there was a 1-for-150 reverse split, the 2011 high of $17.51 equates to $2,626.50 – hence the 99.97 per cent decline.

At the time of the restructuring, CEO Paul Godfrey told The Globe and Mail that the plan gave Postmedia "stability and certainty." Just a few months later, the company's stability is already looking a lot less certain.

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