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In a battle that makes for great tabloid fodder, the auction of CanWest Global Communications' newspapers now pits former Torstar colleagues against one another.

The Star vs. Star smackdown stems from the fact that David Galloway, CEO of Torstar for 14 years, is working with private equity firm Birch Hill Equity Partners on a leveraged buyout of the CanWest papers, according to sources working on the deal.

Mr. Galloway is now the chairman of Bank of Montreal, and the 66-year-old Harvard MBA is a respected player in corporate Canada. (Mr. Galloway is out of the country this week, and could not be reached for comment.)

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The tight-knit (read, self-absorbed) newspaper community has much to chatter about as this auction plays out, as Birch Hill has also signed up support from Michael Sifton and his employer, private equity fund Beringer Capital. A veteran owner and operator of papers, Mr. Sifton led a successful leveraged buyout of Osprey Media.

The private equity players are up against a formidable strategic bidder in Torstar, and many of these executives went to M&A boot camp together. As Wellington Financial's Mark McQueen explained Wednesday in a wonderfully colourful blog, Mr. Galloway and Torstar chairman John Honderich were side by side when the company took an unsuccessful run at the Toronto Sun chain back, in 1998.

CanWest's stable of 46 papers is being sold by creditors, who are asking $950-million. The big issue for the seller - Bank of Nova Scotia is lead lender - is how to balance cash against paper in the bids they receive.

At least two potential buyers - Birch Hill and a group of unsecured creditors to CanWest - will likely table offers that are long on promises but short on cash. These financial players will ask lenders to swap debt for equity, and cash out when the newspapers are taken public.

Torstar, on the other hand, enjoys the support of Fairfax Financial as it bids, and is likely to have the highest cash component to its offer. Torstar is also the only bidder with potential synergies - the combined chains can achieve $50-million in annual savings, according to estimates from the Torstar camp.

RBC Dominion Securities is advising CanWest's lenders, and sources say the investment bank pushed potential buyers to include a minimum of $300-million in cash in their opening offers.

Could it be coincidence that Fairfax is said to have pledged $300-million to Torstar?

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There are too many sub-plots in this drama to sum up in one place, but here's one to watch: Mr. Honderich is the son of larger-than-life Toronto Star publisher Beland Honderich, who passed away in 2005. The elder Mr. Honderich dominated a city's print media. The son, a passionate journalist, has a chance to own and influence what Canadians read from Montreal to Victoria.

The second round of bids on CanWest's papers went in last Friday, and we should have a winner in this battle by late June, or July.

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About the Author
Business Columnist

Andrew Willis is a business columnist for the Report on Business at The Globe and Mail, based in Toronto.He has been in business communications and journalism for three decades. More

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