The ownership picture at Postmedia Network Canada Corp. is increasingly uncertain as its largest U.S. shareholder actively hunts for buyers – but finding a partner may not be easy.
New-York fund manager GoldenTree Asset Management LP, which owns 52 per cent of Postmedia's variable voting shares, has hired investment bank Canaccord Genuity Group Inc. to gauge interest in a sale of its holdings, according to a source familiar with the talks.
GoldenTree manages more than $23-billion (U.S.) in assets, specializing in high-risk stocks and debt, and has a history of investing in troubled media companies. But its search for a buyer may face additional hurdles due to Postmedia's share structure, which was designed to fit within Canada's rules around foreign ownership of media assets.
Foreign control of newspapers is strongly discouraged by Canadian tax laws, which put a heavy burden on advertisements placed in publications that are deemed non-Canadian. As a result, Postmedia was set up with dual-class shares to ensure it remains beneficially owned by Canadians.
There are fewer than one million voting shares, with full voting rights, owned by Canadians, including Postmedia president and CEO Paul Godfrey and an investment management firm. (Canso Investment Counsel Ltd., the only company that owns more of Postmedia's $670-million in debt than GoldenTree, owns more than 100,000 voting shares). The remainder are variable voting shares, of which GoldenTree owns about 147 million, or 52 per cent. This is a subordinate class with restricted voting rights when they make up more than 49.9 per cent of total shares – as they do now, by a wide margin.
GoldenTree also owns an unspecified amount of Postmedia's debt, believed to be a substantial sum of second-lien notes, which are denominated (and pay interest) in U.S. dollars.
If a would-be buyer were American, it would presumably have to abide by this same structure and assume the debt GoldenTree owns, which is due to be refinanced no later than 2018. GoldenTree is believed to wield considerable influence in Postmedia's decision making, at least on financial matters, though its precise degree of control is uncertain.
If the potential buyer were to be Canadian – be it a strictly financial investor or a rival newspaper chain, for instance – the scenario becomes more complicated still.
If a Canadian acquires variable voting shares, like those GoldenTree is considering selling, "such shares will be automatically converted into voting shares," according to filings from Postmedia. But a buyer who makes such a conversion could be required "to make a formal takeover bid for the outstanding voting shares" under securities laws if they are deemed to own more than 20 per cent of the outstanding shares.
Even with Postmedia's share price looking emaciated – the variable class closed at 10 cents a share on the Toronto Stock Exchange on Monday – once the debt is added to the equation, that could prove an expensive proposition to acquire control of a company that has struggled to arrest a plunge in revenue and relentlessly cut from its ranks to reduce costs.
Mr. Godfrey has reportedly pushed for Canada's foreign ownership rules to be relaxed – in a company memo on Feb.1, he called it "a fair and debatable issue" – but successive governments have shown little interest in pursuing such a policy shift.
The end result is that any potential buyers kicking the tires on Postmedia will have to check their passport as well as their appetite to take a risk on a company with a less-than-promising outlook.