Postmedia sale complicated by unsustainable debt and sagging business model: Don Pittis

Reports this week that the U.S. hedge fund GoldenTree Asset Management is looking to sell its stake in the Canadian newspaper chain Postmedia may be less important than they appear. And whatever happens, a Canadian businessman will hold the balance of power.

This development does, however, shine a light on a company that many financial industry observers say is so indebted that share ownership may be a moot point.

It is the holders of the debt that matter. And it reminds us of the uncertain future for a company that owns some of Canada`s most illustrious newspaper titles less than a year and a half after it announced a merger with the Sun chain would solve its financial problems.

• Postmedia lender GoldenTree reportedly seeks buyer for media firm stake
• Post and Sun merger a doubtful pursuit of size and synergy

Some harsh name-calling between Terence Corcoran at the National Post and David Olive at the Toronto Star recently has only drawn attention to the fact that the entire print newspaper business is in trouble.

Print chains across North America have been cutting staff and titles, desperately trying to find a business model that will attract readers and replace lost ad revenue.

It's not the fault of the chain's remaining journalists and those who support them. The problem is an overload of debt accumulated over years of leveraged takeovers. 

News that GoldenTree is trying to unload its stake is a reminder that the Postmedia chain has a special disadvantage. The mergers and takeovers that gave the company the title of the biggest newspaper chain in Canada were each predicated on an increasing load of borrowing which, as Paul Godfrey, president of Postmedia, hinted recently, may be unsustainable.

'A house with two mortgages'

"When you own a house with two mortgages, you're still bringing in income every week, but if your revenue starts to fall and you can't pay off your mortgages, what are you going to do?" asked Godfrey in a January interview. "You're going to keep cutting your costs or someone takes your home away from you."

An additional burden on Godfrey and the Post is that a lot of its debt, including the money owed to GoldenTree, was denominated in U.S. dollars. At the time that may have sounded like a smart deal, as in the autumn of 2014 everyone hoped for a rebound in the Canadian dollar from 89 cents US.

But a loonie now closer to 70 cents makes the debt even less sustainable.

In one possible future scenario, Paul Knox, former chair of the Ryerson School of Journalism, who has written for newspapers across the country, sees the papers and their associated websites being sold off to people with deep pockets who have a stake in keeping their local communities vibrant. 

Rabbit out of a hat

"There's going to be a period of a few months or a year where Godfrey tries to keep it together," says Knox, who remains plugged in to the world of Canadian newspapers.

"Maybe they can pull some rabbit out of some hat, keep making money, but I don't think anybody envisages that," said Knox in a recent phone interview.

Something well understood in the business world but perhaps less so elsewhere is that share ownership is not so important if a company's assets are worth less than its debt. In fact according to an analysis by Peter Adu, an analyst at Moody's Investors Service, those assets may be less than what Godfrey might describe as the first of two mortgages, called "first lien" debt in the business.

"First lien holders could come out whole if they take over the company, but there will be nothing left for everyone else." said Adu, as reported by the Bloomberg business news service last month.

The Star has reported that Godfrey has been in talks with the federal government to try to loosen foreign restrictions on Canadian media. 

Canadian control

If the scenario foreseen by Moody's comes true, foreign ownership will make little difference.

That first lien debt is mostly held by a Canadian company, called Canso, after the Second World War amphibious bomber. The company's founder and president, John Carswell keeps a relatively low profile, but contributes to the financial news website The Financial Pipeline.

After being left holding the debt of Yellow Pages, Carswell was instrumental in turning it from its paper form into a successful electronic product.

In the past, the Canso president has insisted that whether in paper form or electronically, people are going to be willing to pay for the news they want and need.

But whether by Godfrey or a successor, turning the Postmedia chain around while carrying so much debt will be a mammoth task.

Irremediable damage

As the ousted editor of the Edmonton Journal Margo Goodhand said on CBC's The Current recently, repeated cuts in local control and local employees may have done irremediable damage to the regional newspapers that used to be a power in the Canadian cities they dominated. She compares them unfavourably to the Winnipeg Free Press which has, despite setbacks, held its place in the community.

And yet she says more cuts are needed to cover a Postmedia debt pile of well over half a billion dollars.

"This is the scary part. It comes due in a year and I don't know how they are going to survive that," said Goodhand.

And while exactly who owns the shares in Postmedia may not matter to many, the survival of the privately controlled news media in so many Canadian cities — reporting on government, business and the local scene — remains important to all Canadians, whether they know it or not. 

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