Quebecor Media Inc. paid nearly a billion dollars for Sun Media in 1999. Fifteen years later it is selling it for about a third of that price.
The decline highlights the freefall in the newspaper industry over the past decade. But the deal announced Monday also illustrates the fact that there are no bad assets, just bad prices.
Postmedia Network Canada Corp.'s purchase of Sun Media's English-language newspapers, associated digital properties and a Toronto printing plant for $316-million is being done at a realistic valuation, which suggests it is a low-risk gamble for the debt-laden media company even if the properties continue to fade.
According to Postmedia, the purchase price amounts to only 3.5 times the adjusted earnings before interest, depreciation and amortization (EBITDA) that the properties generated over the past 12 months. (The company added via e-mail that it is not taking on any existing Quebecor debt as part of the deal.)
By comparison, Torstar Corp. has an enterprise value (the total value of its net debt and equity) that is 5.2 times its trailing EBITDA, according to Bloomberg. Weighed on the basis of that metric, Postmedia is getting the Quebecor assets relatively cheaply.
In addition, Postmedia says it can wring $6-million to $10-million a year in savings out of the combined properties. If so, the math starts to look attractive – at least for an industry where the game is to manage declining assets.
To be sure, revenues for many print products are sinking, while revenues for digital media are growing only slowly. But if the pace of decline doesn't worsen, the cash thrown off by the new properties should be sufficient to justify the purchase price.
One asset that Postmedia possesses is about $250-million of tax loss carry-forwards, which will enable it to shield any profit from taxes for the foreseeable future. That may help it attract investors to the equity offering that will accompany the purchase.
In addition, the cash generated by the new properties, as well as the new equity that will accompany the acquisition, will bring the company's debt-to-EBITDA ratio down from a lofty 3.8 to a more manageable 2.9, according to Postmedia.
GoldenTree Asset Management LP, the U.S. hedge fund that is the largest investor in Postmedia, seems quite happy with the terms of the deal, judging from the fact that it has agreed to invest as much as $186-million in the associated equity offering if other buyers don't step forward and no real estate is sold.
As tough as the newspaper business has been over the past 15 years, the willingness of GoldenTree to pour more cash into the company suggests that it believes there is still money to be made.
But the question for retail investors is who will get that money. Even if Postmedia succeeds in selling $50-million of real estate, as it hopes to, and the equity offering shrinks to $136-million, there will be a dilution of existing shareholders.
At $1.10 a share, the maximum that Postmedia envisions, the offering will result in about 124 million new shares being issued, swamping the existing share base of roughly 40 million. It's probable that most, if not all, of those new shares will be owned by GoldenTree.
Of course, GoldenTree also owns large amounts of Postmedia's nearly half-billion-dollars in debt. It's quite likely that its major aim is to see the debt repaid. Gains in the share price would be a nice sweetener, but perhaps not essential.
For retail investors, betting on a renaissance in the newspaper business seems like the height of optimism, even if you assume rapid growth in digital revenue. For GoldenTree, however, this deal could work out just fine.