Struggling Torstar wagers $200-million on a niche digital company

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Torstar Corp. is betting some of the money it reaped from bodice rippers on the growth potential of other obsessions, such as muscle cars and golden retrievers.

The newspaper publisher announced on Wednesday it is spending $200-million for a 56-per-cent stake in VerticalScope Inc., a Toronto-based digital media company that operates hobbyist and niche-interest websites on subjects ranging from cars and sports to pets and collectibles.

The investment is Torstar's first move to spend a part of the proceeds from its sale of Harlequin Enterprises Ltd., a publisher of the famed romance novels, to Rupert Murdoch's News Corp. for $455-million last August. But it also deepens the publisher's stake and expertise in digital publishing and advertising, creating the potential for future collaborations with Torstar's existing properties.

"We've been assessing opportunities to employ capital that resulted from the Harlequin sale for over a year now," David Holland, Torstar's chief executive officer, said in a conference call with analysts on Wednesday. "It's an important step forward in the transformation of Torstar, positioning the company for growth and its more digitally oriented future."

Torstar's acquisition comes at a moment when the company is struggling with a plunge in print advertising revenues and trying to pivot to a more stable digital future with the planned launch of a new tablet edition of the Toronto Star, its flagship newspaper, this fall. The Star is hiring new journalists even as it cuts costs elsewhere in the business.

Second-quarter results for Torstar, also reported on Wednesday, continued to suffer. The company booked a net loss of $1.1-million, or a penny per share, compared with an $18-million profit, or income of 23 cents a share, in the same quarter last year.

Operating revenue was $206-million, down from more than $225-million a year earlier. Segmented revenue fell 8.6 per cent to just under $217-million for the quarter, which ended June 30.

Print ad revenue at the Toronto Star was down 11.4 per cent for the quarter, a slight improvement compared with recent quarterly results. Publisher John Cruickshank said he is cautiously optimistic the recent "easing" in print ad declines is continuing in the current quarter.

Subscriber revenues at the Star were down 3.5 per cent and are expected to fall further with the arrival of the new tablet edition, which will be free to readers and is to launch in mid-September. Digital revenues were effectively flat, year over year.

VerticalScope, which is based in Toronto and has about 130 staff, provides some hope for growth in the coming quarters. Mr. Holland declined to reveal its revenue, saying only that it operates at "a pretty healthy margin." But Cormark Securities analyst David McFadgen said in a research note: "We believe the acquisition goes a fair way in transforming Torstar."

The site has more than 600 online forums catering to enthusiasts on a range of topics, such as The Truth About Cars, PetGuide.com and ElectricianTalk.com. Torstar says the forums collectively attract 80 million unique visitors and 500 million page views each month, with much of that traffic flowing from the United States.

It will be run as a separate business, led by current president Rob Laidlaw. One of VerticalScope's strengths is in the automotive space, with sites such as AutoGuide.com – also a key advertising category for Torstar.

Mr. Holland praised VerticalScope for its "expertise in the development of audience," and said "there may be opportunities for collaboration [with other Torstar properties] over time."

But he stressed that for the time being, the new acquisition is a separate, profitable venture. "As of today, we are not sitting back counting on lots of cross-pollination," he said.