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Report On Business U.S. junk-bond specialists behind Postmedia’s Project Canada

Postmedia Executive Vice President and Chief Financial Officer Doug Lamb, left, President and CEO Paul Godfrey, Chair of Postmedia Board of Directors Rod Phillips, and COO Wayne Parrish attend a press conference in Toronto Monday, Oct. 6, 2014 announcing Postmedia's purchase of Sun Media Corp.'s English-language operations.

Hannah Yoon/THE CANADIAN PRESS

A bid by Postmedia Network Canada Corp. to buy 175 newspapers and online news sites from Sun Media Corp., a subsidiary of Quebecor Media Inc., will hand a group of mostly U.S. investors significant influence over one of the country's largest media outlets.

The investors are a syndicate of little-known U.S. and Canadian hedge funds that specialize in buying high-risk stocks and debt, known as junk bonds, from distressed companies. Led by New York-based GoldenTree Asset Management LP, the funds financed the resurrection of Postmedia from a bankruptcy proceeding in 2010 by acquiring $700-million of the company's bonds. GoldenTree and other investors, including Canadian fund Canso Investment Counsel Ltd., have agreed to buy additional bonds and securities to help finance the Sun Media purchase.

Steering the GoldenTree investment is Steven Shapiro, a low-profile fund manager who began his career as a New York bankruptcy lawyer. He acquired a taste for media investments as a managing director with Canadian Imperial Bank of Commerce's U.S. brokerage arm, specializing in junk-bond financing for media and telecommunications companies. He has guided GoldenTree, which manages $21-billion (U.S.) of assets, to bet on other recovering media companies such as Reader's Digest Association.

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GoldenTree and other investors have pocketed an estimated $300-million since 2010 on Postmedia junk bonds that pay interest rates ranging between 8.25 per cent and 13.3 per cent.

Postmedia's proposed acquisition, code-named Project Canada, would create a national print and online media company with 191 newspapers and dozens of news websites. Backed by its powerful investors, Postmedia is in the process of transforming itself, and potentially Sun Media, from a traditional print newspaper business into a new, low-cost distributor of digital news. If the deal succeeds, it would rank as one of the largest mergers of newspaper assets in Canadian history, bringing rival Postmedia and Sun dailies in Toronto, Calgary, Ottawa and Edmonton under one roof.

The purchase is subject to approval by Canada's Competition Bureau, which is expected to spend months reviewing the transaction.

The federal government limits foreign control of Canadian media through Canada Revenue Agency rules that impose a tax burden on advertisements placed in foreign-owned media outlets. Postmedia's U.S. investors, which own the majority of the company's debt and shares, sidestepped the restriction by converting their stock into a new class of shares with reduced voting rights.

People close to Postmedia said that chief executive officer Paul Godfrey meets frequently with Mr. Shapiro, a company director, and other fund investors. In recent months, the fund managers pushed Postmedia's management to strike a deal with Sun Media despite frustrating delays in negotiations. "Paul doesn't make major moves without calling them first," one person close to the company said, referring to the fund managers.

In an interview, Mr. Godfrey described the funds as "hands-off investors" with whom he communicates regularly. "They've been very supportive. They believe in this industry." The Sun Media purchase, he added, would not have happened "without them."

Other Postmedia investors include Silver Point Capital LP, a hedge fund based in Greenwich, Conn. Another investor is Canso, a Richmond Hill, Ont.-based fund founded by former Royal Canadian Air Force navigator John Carswell. Canso has committed to acquire $140-million (Canadian) in new Postmedia junk bonds to help finance the Sun Media purchase. A spokeswoman for Postmedia did not disclose the identities of other investors.

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The funds are bullish on the struggling newspaper industry because they see potential to boost newspaper cash flows by shrinking traditional fixed newspaper costs and refocusing the business on low-cost online news sites.

Postmedia has struggled to make the shift while managing a crushing debt load as it continues to bleed losses. Since it emerged from bankruptcy in 2010, the company has drastically cut its operations to pay off expensive junk bonds which now total about $500-million.

Postmedia has outsourced printing at many of its publications, eliminated publisher positions, closed its wire service, sold its Toronto headquarters, cut some Sunday editions and centralized page production for the whole chain in Hamilton, Ont. It has nearly halved its work force in four years to 2,800. The company's payroll is about to nearly double as the addition of the Sun outlets will bring in roughly 2,400 employees.

With reports from Christine Dobby and Boyd Erman

Editor's Note: An earlier version of this story incorrectly said that the merger of Postmedia Network Canada Corp. and Sun Media Inc. would result in common ownership of two daily newspapers in, among other cities, Winnipeg. In fact, there is no Postmedia daily in Winnipeg. The Winnipeg Free Press does not belong to either company, but rather to FP Canadian Newspapers Limited Partnership.

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