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The Toronto Star newsroom.

Torstar at a crossroads

A drawn-out CEO search, a circling institutional investor and the struggle to reconcile an ink-soaked past with a pixelated future

The stage was set for Michael Cooke. It was Oct. 7, 2015, and The Toronto Star's editor was making a spirited pitch to analysts and investors at Toronto's King Edward Hotel, showing off the sleek and costly tablet edition his newspaper had launched three weeks earlier.

This was more than a product launch. Mr. Cooke was holding up a new vision for a storied media company in the midst of a jarring transition from a past rooted in print to an uncertain digital future.

Torstar Corp.'s stock price was tumbling, and the Star's parent company needed Bay Street to believe again. Executives were convinced they had a good story to tell at the lunchtime presentation, with two all-in bets that pointed to a more hopeful digital future: The tablet edition, called Star Touch, and the company's purchase of a majority stake in a publisher of niche online forums called VerticalScope, at a total cost of more than $200-million.

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There was only one problem: Hardly anyone turned up to listen. A smattering of sell-side analysts asked questions and took notes, but almost no institutional investors came. Torstar's leaders might have thought the company was turning a corner, but money managers were skeptical. Fifteen months later, with Star Touch floundering and the shares down another 56 per cent, they still are. Except one.

Last fall, Torstar struck up talks with Fairfax Financial Holdings Ltd., the firm led by value investing guru Prem Watsa, sources say. Fairfax has deep pockets and a long-standing interest in Torstar. For several years, it has been the newspaper publisher's largest public shareholder, and after boosting its stake to 27.4 per cent of all class-B shares last year, Mr. Watsa's team was angling for a takeover.

Fairfax’s growing stake in Torstar

Fairfax’s position

(in millions of Class B shares)

Torstar share price

$25

20

20

15

15

10

10

5

5

0

0

‘07

‘08

‘09

‘10

‘11

‘12

‘13

‘14

‘15

‘16

Data compiled by Bloomberg based on historic insider information

details recorded by the System for Electronic Disclosure by

Insiders (SEDI).

Position at end of quarters.

Fairfax’s growing stake in Torstar

Fairfax’s position (in millions of Class B shares)

Torstar share price

$25

20

20

15

15

10

10

5

5

0

0

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Data compiled by Bloomberg based on historic insider information details recorded by the System for Electronic Disclosure by Insiders (SEDI).

Position at end of quarters.

Fairfax’s growing stake in Torstar

Fairfax’s position (in millions of Class B shares)

Torstar share price

$25

20

20

15

15

10

10

5

5

0

0

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Data compiled by Bloomberg based on historic insider information details recorded

by the System for Electronic Disclosure by Insiders (SEDI).

Position at end of quarters.

Fairfax’s growing stake in Torstar

Fairfax’s position (in millions of Class B shares)

Torstar share price

$25

20

20

15

15

10

10

5

5

0

0

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Data compiled by Bloomberg based on historic insider information details recorded by the System for Electronic Disclosure by Insiders (SEDI).

Position at end of quarters.

John Sopinski/THE GLOBE AND MAIL, SOURCE: BLOOMBERG


Discussions advanced far enough that Torstar temporarily put its pursuit of a new chief executive officer on hold. But at least some of the families that control the company resisted a sale, the two sides couldn't come close to agreeing on Torstar's true value, frustration set in and the process stalled.

Farifax did not respond to requests for comment, but the company has recently made a renewed push to invest in the rapidly changing media industry, despite enduring a rough ride on some media investments over the past decade – including its shares in Torstar. Mr. Watsa has a reputation for believing beleaguered companies can be turned around with time, money and the right people in charge, and has placed bold bets on firms such as BlackBerry Ltd.

Meanwhile, Torstar's CEO search is back on – a telltale sign that talks with Fairfax are dead, at least for now, and that no other serious suitors have stepped forward. Interviews with shortlisted candidates start Monday.

"It's not our practice to comment on corporate development," said John Honderich, chairman of Torstar's board, in an interview.

Torstar has a chance for generational change, but also faces very real questions about whether it is sustainable in its current form. A voting trust comprising five families controls the public company through a special class of shares. As the value of the business has eroded dramatically, pressure is rising to make a sharp change of course – which could persuade the families to loosen their grip.

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"I believe that it's time to open … voting by all shareholders, and at the same time, to try and bring in younger directors to cope with the future," said a non-voting shareholder who spoke out at the company's annual general meeting last May – the average age of Torstar's directors is 63. "Because, frankly, with 90 per cent of the value to date already gone, we don't have a lot of time left."

Whoever lands the CEO job will inherit a mighty challenge to dig Torstar out of its current predicament. Doubts about Torstar's viability are partly a function of wider forces reshaping global media with wrenching speed.

Revenue has been eroding by double-digit percentages, year-over-year, and the slide shows no sign of abating. The stock price, which touched $30 a share in 2004 and was still as high as $7.42 less than two years ago, bottomed out at $1.38 last year, erasing some $2-billion in market capitalization, before rebounding somewhat. It closed at $1.86 on Friday.

If Torstar fails to chart a new course, the ramifications for Canada's newspaper industry could be profound. Aside from the flagship Toronto Star, which still reaches 5.6 million readers in print and digital format each week, Torstar owns the free Metro dailies, The Hamilton Spectator, a stake in Chinese-language daily Sing Tao, and more than 100 community papers. The Star is among a dwindling number of Canadian media outlets that still commits extensive resources to investigative and civic journalism, despite the high cost of doing so.

But concerns about Torstar's future are also entangled with the company's culture. For decades, the five families who have governed the Star according to a set of socially-minded principles traceable to Joseph E. Atkinson, or "Holy Joe," the paper's patriarch. Those tenets have defined Torstar's journalistic identity and mission, but some suggest they have also restricted its ability to change course.

And as Torstar turned public in 1970, and branched out into new ventures such as bodice-ripping book publisher Harlequin Enterprises Ltd., it developed a dual identity that wasn't easily reconciled – crusading newspaper publisher and corporate holding company.

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The Globe and Mail interviewed more than 20 people close to Torstar, including current and former executives, board members and Bay Street observers, most of whom refused to speak on the record. Almost all agreed that the sincere belief in Torstar's values as espoused by the Star over the last century, and codified in the Atkinson principles – social justice, individual liberties, civic engagement, the rights of working people and the necessary role of government – still runs deep among its owners.

It is the conviction that those principles would necessarily prop up a healthy company in a digital age that may have been misplaced.

"We really felt that we were doing God's work," said John Cruickshank, the former Star publisher who resigned last May, in an interview. "How could it not be a business that worked?"

Torstar chairman John Honderich is shown in his office at One Yonge Street on Nov. 28, 2016.

All in the families

There may be no one who believes in that mission more fervently than John Honderich.

At the age of 70, with his wide smile and ever-present bow ties, he is singularly invested in virtually every aspect of Torstar and its governance. As chairman of the board as well as the family voting trust, he is closely involved in day-to-day business across the executive offices, the boardroom and the newsroom. Multiple sources said no major decision is taken without first considering how he will receive it, whether it's openly stated or not.

His career and his family are both inextricably tied to Torstar. His father, Beland (Bee) Honderich, spent 52 years at the Star, starting as a reporter and serving as its crusading publisher and chairman. John Honderich started his own journalism career at The Ottawa Citizen, joined the Star's ranks as a reporter in 1976, led its bureaus in Ottawa and Washington, then served in a series of editor's roles before being named publisher.

And it is his family fortune, as much as any, that has taken a drubbing as Torstar struggles financially. The total value of the shares the five families collectively own has plunged by $386-million over the last decade, to less than $42-million.

"We've taken a huge hit," Mr. Honderich says, from his sixth-floor corner office at Torstar's One Yonge Street headquarters, "not only on dividend, but in terms of the stock price. And yet, throughout it all, there has been this tremendous commitment to the Star, to what it stands for, and the kind of newspaper it is in this city and this country. And that matters. And that's something that we feel very strong [about], that goes back to our history."

Family control has been a constant. When "Holy Joe" Atkinson died in 1948, he left the Star to his family's Atkinson Charitable Foundation, but a new provincial law soon banned charities from owning private businesses. In 1958, five of the foundation's trustees – Joseph S. Atkinson, Ruth Atkinson Hindmarsh, Beland Honderich, Burnett Thall and William J. Campbell – bought the Star for $25.5-million after swearing an oath to the Supreme Court of Ontario to uphold the newspaper's ideals. Fifty-nine years later, second- and third-generation descendants own 99 per cent of Torstar's voting shares.

The five families have rarely been a unified block, but for years, Mr. Honderich has taken chief responsibility for holding the factions together. In 2004, the board pushed him out as publisher after he clashed with then-CEO Rob Prichard over cost-cutting plans, and he was briefly sidelined. But he rallied the families' support to axe the Star's publisher, Michael Goldbloom, and editor Giles Gherson in 2006, despite Mr. Prichard's objections, and prevailed in the power struggle to take over as board chairman in 2009.

Since then, his dual role leading the board and the voting trust "has made sure there's been an alignment of interests," he said.

As a result, the family values passed down through generations are baked into Torstar's culture. A sense of purpose and public duty has anchored the company, fuelling its reputation for dogged investigations that seemed reinvigorated under Mr. Cooke's watch, including coverage of out-of-control Toronto mayor Rob Ford.

But some former insiders said Torstar was run with a mindset that resisted rapid change and consolidated decision-making among the board and voting trust, making the company slower to respond to the various upheavals in publishing in recent years. As new digital competition decimated large swaths of print publishers' revenue, first by wiping out newspapers' lucrative classified-ads business and then devaluing premium print ads, the board understood the threat at an intellectual level, according to a former director. But crafting a robust response proved difficult.

"People have asked, well, how do the families interfere, and what do they do, etc.? I know that is out there," Mr. Honderich said, though he downplays their influence in day-to-day matters. "I'm just saying the reality is a very different story."



The evolution of Torstar ownership

For more than a century, the Toronto Star and its corporate parent have been shaped and steered by five families who have closely guarded its distinctive principles. But now, facing unprecedented disruption from digital competitors, pressure to change is mounting at Torstar Corp. Here's how the company's keepers have handed down control through successive generations.



A cash cow romance

It was 1975, the year before Mr. Honderich joined the Star, when his father Beland made the investment that shaped the company for decades to come. Toronto Star Ltd., as the company was then known, bought a controlling interest in Harlequin Enterprises Ltd. for the bargain price of $3.67 a share. The high ideals that shaped the Star in Holy Joe's image would make their bed under the same roof as pulp-fiction tales of lust and longing.

"The idea was, here was an investment which was countercyclical," Mr. Honderich said, a "cash cow, and the insurance policy."

But it also cleaved the company's main purpose from its financial underpinnings. Whereas Torstar's mission has always been around the Star and its journalism, its value has been increasingly tied to other ventures.

Harlequin, the world's dominant publisher of mass-market romance novels, was a reliable source of cash for decades, a global business that proved to be more predictable than newspapers. In its heyday, in 2003, Harlequin accounted for 39 per cent of Torstar's revenue and nearly 46 per cent of its earnings before interest, tax, depreciation and amortization (EBITDA). At times, the free cash Harlequin generated was used to subsidize and sustain Torstar's newspapers – "on a temporary basis," Mr. Honderich said.

Then came the release of Apple Inc.'s iPhone and Amazon.com Inc.'s Kindle e-reader in 2007, both of which would radically disrupt reading habits.

Harlequin weathered the early stages of the digital shift better than most. As physical book sales began to sag, Harlequin sold digital editions from its back list and built a community around clubs of readers whose tastes the company knew intimately. Furthermore, its easy-reading romances were a natural fit for beach-bound e-ink readers.

The real disruption came not from digital books, but from Amazon itself. "It removes the readers from the content producer. It goes right in the middle and all of a sudden you have no way of knowing who your customer is," said Campbell R. Harvey, a voting-trust member and Torstar's longest-serving director, who teaches economics at Duke University.

From time to time, Torstar discussed selling the business. "We looked at it several times," one former director said. But the cash kept coming – with currency exchange factored in, Harlequin posted record earnings in 2011.

Looking back, some believe Harlequin's success was an anesthetic, dulling the pain of digital blows to print publishing's foundation, and slowing Torstar's response. "I've heard this," Mr. Honderich said, but "that's not my sense at all." The decisive nudge came in 2014, when publishing giant HarperCollins, a division of Rupert Murdoch's News Corp., came calling. Torstar ended its marriage to Harlequin that May, selling the division for $455-million, then used part of the proceeds to pay off $176-million in long-term debt left over from past acquisitions.

Looking back, there is wide acknowledgment that on the day of the sale, Torstar wrangled a good price. But many also think the sale came much too late, delayed repeatedly by Torstar's thirst for cash and its inability to find a new source to replace it. Between 2011 and 2013, Harlequin's revenue fell by $61-million or 13 per cent, and its EBITDA tumbled by $30-million or 35 per cent.

In its heyday under Torstar, Harlequin had a billion-dollar valuation, two sources said. But in no time at all, it sold for less than half that, depriving Torstar of much of the value it had built. Even so, several former executives and directors dismissed criticism about the timing of the sale as Monday morning quarterbacking. "The decline, when it hit, came pretty quickly," Mr. Honderich said.

Without Harlequin, Torstar's safety net was gone, and its leaders were left with a still sizable pile of cash and a ticking clock to find its next investment. The company could no longer wait to make some defining digital changes, and now it had the money to do it.

Executive Insight: The CEO Torstar needs won’t want the job Qualified executives may be out there. But why would they want this job?

High hopes, low returns

As Star Touch made its debut in 2015, a heavily-trafficked hallway off the Star's fifth-floor newsroom had a wall covered with eight-by-10-inch pages, each featuring biographies for the 60-odd journalists hired to get the tablet product off the ground. The tableau of smiling faces conveyed a sense of optimism and excitement, a "startup feel" that had been lacking in the newsroom, as one Star journalist put it. Less than a year later, the biographies were replaced by sheets bearing a different set of names – this time, it was the union's seniority list, outlining who was most vulnerable as the company cut 52 jobs, including 26 contracts to work on Star Touch.

The tablet edition's troubled launch was only the latest in an array of digital experiments Torstar has undertaken, but it produced a familiar result. Most of those ventures existed outside of the newspaper division, as the company searched for the next cash cow. Starting in 2000, when Torstar and The Globe created the job-search site Workopolis (The Globe later sold its stake), Torstar acquired, launched or invested in a number of businesses, such as Olive Media, Insurancehotline.ca, Eye Return Marketing, Wagjag.ca and Shop.ca Network Inc.. For a time, under Mr. Prichard, these investments were carved out under a separate arm, Torstar Digital, almost like a venture-capital shop.

The score card reveals few home runs, and some of the ventures have been outright failures: Shop.ca had backing from prominent investors and ambitions to create a billion-dollar e-commerce marketplace in Canada, but blew through $70-million in investor capital while piling up $72-million in losses, and wound up in bankruptcy court.

"Have we had a lot of successes? The answer is no. But we've gone out and we've tried," Mr. Honderich said. "I think you can see there's a history. We haven't been sitting back saying, oh my God, the world's falling down, what are we going to do?"

Mr. Harvey, the voting trust member, thinks even the unsuccessful ventures taught Torstar an important lesson about the speed with which new technology reshapes businesses. "You need to be able to pivot, and pivot far faster than in the past," he said.

By the fall of 2013, Torstar was hungry for a new revenue stream inside its newsrooms, and the Star launched a metered digital paywall with $9.99 monthly subscriptions. Even some of its own executives were skeptical. All major dailies in Toronto would try paywalls, including The Globe and Mail, but none would pull the plug so quickly as the Star.

Torstar reversed course after only 14 months. Paying digital subscribers numbered not much more than 10,000, and the Star had lost more online readers than expected, which was worrisome as the paper pivoted to offer a free, daily tablet edition – Star Touch. "Middle-level newspapers across North America have all discovered that paywall doesn't work. We all tried it," Mr. Honderich said.

The spring of 2014 brought the Harlequin sale, and with each passing quarter that followed, investors put pressure on Torstar's executives to spend the proceeds or return cash to shareholders. The board looked at a range of options, but Torstar's limited resources put some potential targets beyond its reach.

In July of 2016, Torstar spent $180-million to buy a 56-per-cent stake in VerticalScope, which publishes more than 600 niche online forums tailored to enthusiasts of automotive, technology, health and other pursuits. Some include car reviews or advice on where to go fishing this weekend, written by professionals. On other sites, the content is created by users themselves, who help each other figure out "how to change the brake pads on your Toyota Camry," for example, as CEO Rob Laidlaw explained at Torstar's last annual meeting. Advertisers are drawn to the sites because they are meeting places for consumers who are close to making purchase decisions.

But even after the investor presentation at the King Edward two months later, many in the investment community were still having a hard time seeing the logic. For starters, VerticalScope makes its money from the sort of high-volume, low-cost ads that had proven so problematic for media organizations. Torstar offered only sparse disclosure about its financial performance, and the company was hardly a household name. More recently, however, have been promising signs of growth. Torstar's digital-ventures segment, which is heavily weighted toward VerticalScope, posted a 32-per-cent increase in revenue in the past quarter. "I can tell you those trends continue just as strongly" now, Mr. Honderich said last week.

But Star Touch, which many expected would be Torstar's most important digital gamble of all, hasn't been so lucky. Inside the company, the wisdom of the tablet strategy was vigorously debated: Some worried that smartphones were already running away with the market, as growth in tablet sales was slowing noticeably. Torstar executives had mostly unfettered access to study La Presse+, the successful French-language tablet edition that provided the template for Star Touch, and were impressed. But they understood that Toronto and Montreal are dramatically different news markets.

La Presse axed its print edition from Monday to Friday, cutting ties with the past and driving readers to the tablet. But the Star still prints editions seven days a week, largely because 42 per cent of the company's revenue still comes from the print product. "While we were encouraged by the success of La Presse, there was a real acknowledgment by John Honderich and the board that this was a risky proposition," Mr. Cruickshank said. "There was no sense that, 'hey, we've got all the answers, here we go.'"

Ultimately, Torstar's board put their faith in the tablet. Star Touch arrived to great fanfare in September, 2015, with Mr. Cruickshank proclaiming it was "the biggest change in storytelling in a century," and a way to reach out to a new, younger audience.

The Star hired dozens of new staff and rolled out an aggressive marketing campaign, spending at least $25-million in the first year and then doling out another $10-million in 2016. But building a daily habit with readers was hard. Six months after the app's debut, it was being opened only 26,000 times each day, while 55,000 to 60,000 readers were using it each week – far short of internal projections. And while Torstar says it has had modest growth ever since, the total readership hasn't increased enough to matter.

The low readership is particularly frustrating to Torstar because many advertisers love it. The tablet offers large, rich, sometimes interactive ads that can command a cost per mille – or CPM, a measure of the cost to reach 1,000 readers – of between $50 and $90 for a full tablet page, depending on its placement, according to two sources. In some cases, that's more lucrative than a full page in print, which typically has a CPM closer to $70. At current levels, that means Torstar earns only a few thousand dollars a screen each day from Star Touch, which isn't nearly enough to justify the original investment, and the company has retrenched on its plans. "The numbers are just too small to make it a breakaway success at this point," Mr. Cruickshank said.

Crunch time

In late September, Mr. Honderich appeared before a parliamentary committee to deliver a stark warning: Canada faces "a crisis of declining good journalism" that is only getting worse. A decade ago, the Star had some 470 journalists, but its newsroom head count has fallen to about 170.

To make matters worse, in early 2016 the company shuttered the Guelph Mercury, one of Canada's oldest newspapers, then closed its printing plant in Vaughan, Ont., outsourcing printing to Transcontinental Inc. Both moves were largely a response to plunging print ad revenue, which fell by nearly $55-million or nearly 13 per cent between 2014 and 2015 alone, threatening Torstar's ability to fulfill its mandate.

"The number of places where you can advertise is now infinite," Mr. Honderich said. "I remember very proudly being able to say: You can't go around the Star. That is just no longer the case any more."

And if the financial woes and uncertainty around the CEO search weren't enough, Torstar has been coping with waves of angst and anger inside the Star's newsroom, which was rocked by the death of one of its reporters, Raveena Aulakh, who took her own life last May. The tragedy turned a spotlight on newsroom affairs between staff, and laid bare festering cultural problems that caused two senior editors to be pushed out. A third-party investigation is making slow progress, as Mr. Honderich and Mr. Cooke try to win back trust among staff, but many are still reeling from the revelations, and the mood at the paper has been unusually tense.

Torstar's financial woes have also dealt a blow to the voting trust families. When the dividend was at 52.5 cents little more than a year ago, the five families could count on a collective $11.7-million in annual payouts. But the dividend has since been cut twice, to 10 cents, meaning that less than $2.3-million is disbursed each year between the families, and the lower share price has further dented the families' wealth. "I'd be kidding you if I didn't say this has had a pretty dramatic effect, as it would on anyone," Mr. Honderich said. "It's bound to prompt discussion."

When the share price falls, "you have to notice that, that's obvious," Mr. Harvey said. He disputed the notion that the families' commitment has been shaken, adding, "There's no decrease in my enthusiasm." But the interest from Mr. Watsa and Fairfax makes it easier to envision a change in control, and it wouldn't be the first time suitors have kicked the tires.

"We could have sold out at a much higher price, way back. We chose not to," Mr. Honderich said. "We've chosen to stay with it, to try and make the difference."

Outgoing CEO David Holland was expected to retire in 2016, but is still in charge until the company's board meeting in late February. Mr. Honderich hopes to have a new CEO chosen within a month. In the meantime, the Star hired David Skok, a highly-regarded journalist and digital strategist, most recently of the Boston Globe, as associate editor and head of strategy for digital platforms.

One lingering question is whether there is another generation among the controlling families that is willing and able to take over. Mr. Honderich is 70, and not expected to stay past the age of 75. His son Robin works as a product manager for Star Touch, but few other families members are actively involved in the business. "I would tell you there are five or six people from the families who are emerging and who are sharing a great interest in the country and its future," Mr. Honderich said. "How will that manifest itself, I think, is unclear."

Torstar is debt-free thanks to the Harlequin sale, has cash on hand after selling its Vaughan, Ont. printing plant for $54.3-million, and executives are hopeful that Ontario government consultations could lead to relief on Torstar's costly pension liabilities.

But the time to make a turnaround is running short, as financial shortfalls squeeze Torstar's journalism ever more tightly with each passing quarter.

"Yes, we can still fulfill the mission," Mr. Honderich said. "Can we do it perhaps as completely as we once did? No."

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