You can take Conrad Black out of business, but you cannot take the businessman out of Conrad Black.
The former newspaper industry executive has been crunching numbers on the purchase of 175 Sun Media Corp. newspapers by Postmedia Network Canada Corp. and argues the deal will "take a blowtorch" to Postmedia's shares, heating up interest and sending them higher.
Mr. Black said, who owns what he terms a "small number" of Postmedia shares, said the deal is a credit to Postmedia chief executive officer Paul Godfrey.
"I'd say Paul has done a first class job for shareholders – it's a smart deal," he said Wednesday during a break in his fraud hearing before the Ontario Securities Commission.
Mr. Black's analysis rests on the estimates of what the deal will do for Postmedia's earnings, coupled with the financing terms for the transaction. It also includes a number of assumptions.
The company plans to finance the deal partly through new debt and partly by issuing $186-million of new subscription receipts, which shareholders can acquire for a maximum of $1.10 per share. Each will be converted into a new variable voting share of Postmedia. Assuming Postmedia doesn't sell any of its real estate, that math suggests about 169 million more class B variable voting shares could end up being issued under the rights offering, on top of the existing 39 million class B shares and almost one million of class A shares, creating a new total of about 209 million shares outstanding.
Postmedia has estimated the company will have combined earnings of $204-million once the new publications are added to its stable. Mr. Black starts with combined EBITDA (earnings before interest, taxes, depreciation and amortization) of $210-million, and estimates expenses such as interest, capital expenditures and tax will subtract $105-million from that total, generating about $105-million of income or about 50 cents per share when the deal is completed. Assuming the shares trade at an industry multiple of five times earnings, he reckons the shares will be worth about $2.50 each.
The real benefit, he says, comes to those who buy the subscription receipts. If each shareholder opts to subscribe to his or her pro rata portion of the receipts – which is not required because the deal is optional – they would have about 4.25 new shares on top of each existing share outstanding, at a cost of $1.10 each or a total of $4.67 for 4.25 receipts.
Those shareholders would then have a total of 5.25 shares valued at what he estimates to be $2.50 each, which adds up to $13.13 of value. Subtracting the $4.67 cost to buy the receipts, the value is still around $8.46. The class B shares are currently trading at $2.49 each.
Mr. Black's assumptions don't take into account any external factors about the state of Postmedia's business, the higher debt the company is assuming as part of the financing, or the company's ultimate ability to extract synergies from the merger. But based on his valuation assumptions, his analysis of financing suggests the subscription receipts look like a good deal. "From $2.50 to anywhere near or above $8.46 is a good deal for the shareholders," Mr. Black notes. "Paul should be supported on this one."