Postmedia Doubles Bet on the Future of News: Corporate Canada

At least one company is betting that owning more newspapers is the key to survival in a dwindling industry.

Postmedia Network Canada Corp., with the backing of a New York-based investment firm, agreed to buy 175 publications from Quebecor Inc. for C$316 million ($282 million). Adding major daily newspapers such as the Toronto Sun and Ottawa Sun to its stable of publications, including the National Post, will help boost earnings and cash flow, the company said in a statement yesterday.

Paul Godfrey, chief executive officer of Toronto-based Postmedia, is wagering that consolidating the Canadian newspaper industry will help the outlets better compete in a digital world where consumers turn to Twitter Inc. and Facebook Inc. for news.

While circulation and advertising are falling across the industry, Godfrey said he has no plans to close any of the newspapers or cut jobs. He’s joining the likes of billionaire Rupert Murdoch and Amazon.com Inc. founder Jeff Bezos in betting on the survival of news companies that got their start in print.

“Why are we buying newspapers in a shrinking newspaper environment?,” Godfrey said to reporters in Toronto. “We’re not just buying a well-known newspaper brand in Sun Media. We’re evolving into a news media company with one strength in three digital platforms -- the Web, smartphones and tablets.”

Godfrey is no stranger to reinvention in the news business. A fixture in Toronto politics for decades, he became CEO of Sun Media and orchestrated the sale of the chain to Quebecor in 1998 for C$983 million, fending off a hostile bid from Torstar Corp. He then spent time as CEO of the city’s Major League Baseball franchise, the Toronto Blue Jays, before returning to newspapers in the same role with the National Post. After the Post’s parent company filed for bankruptcy protection in 2009, Godfrey took the top job of the resulting Postmedia.

Two Newspapers

Now he’s combining two of Canada’s major newspaper groups. If approved, Postmedia will own both major daily newspapers in Ottawa, Edmonton and Calgary. The company said it plans to operate the newspapers and their digital properties side by side. Canada’s Competition Bureau said in a statement it will review the deal to assess its effect on competition.

The deal means that in some major cities, there will be one publisher, Ivor Shapiro, chairman of Ryerson University’s journalism program, said by phone from Toronto. Postmedia will model the new operations after Vancouver, where it already runs two papers, he said.

“Two papers competing with each other editorially, but not on a business scale,” he said. “There’s a monopoly on the newspaper advertising market.”

‘Sunshine Girl’

Postmedia’s papers are broadsheets, focused on news and business, while the Sun tabloid-style papers have large sports sections and feature a daily “Sunshine Girl” on page 3. Both have traditionally supported Canada’s conservative governments.

Postmedia’s Class B shares fell 0.4 percent to C$2.49 at the close in Toronto after yesterday rising to its highest closing price since April 2012. The stock is down 86 percent from its all-time high of C$17.75 in 2011.

Quebecor dropped 0.8 percent to C$27.94. The stock is up 65 percent in the last three years.

“Newspaper revenues have been declining year by year,” said Pierre Dion, CEO of Quebecor and Quebecor Media, in a statement. “This transaction comes at a time when the Canadian newspaper business absolutely needs consolidation.”

Postmedia said it expects C$6 million to C$10 million in cost savings from running the companies together. The deal includes C$50 million to C$60 million worth of real estate, some of which could be sold to help pay down the additional debt being taken on to fund the transaction, Postmedia said. The company already had C$485 million in total debt as of the third quarter, compared with its current market value of C$99.6 million.

Google, Facebook

It’s worth the investment as the newspaper world has changed dramatically, Godfrey said.

“Newspapers aren’t competitors with other newspapers anywhere close to what they were,” he said. “Everything’s going digitally -- Google, Facebook, every other major website that takes up and swallows all the digital revenue away from us.”

Quebecor, which is selling the publications of its Sun Media Corp. unit, is instead wagering on the future of its wireless business after the newspapers dragged down revenue and profit growth in recent years.

The sale will free up money for Quebecor to fund a potential expansion of its wireless business outside Quebec, Phillip Huang, an analyst with Barclays Plc, said in a note to clients.

Montreal-based Quebecor had been cutting jobs and closing newspapers before the sale, with news media revenue falling 23 percent from 2011 to 2013, when the company reported sales of C$784 million. By comparison, Postmedia’s revenue fell 16 percent in two years to C$752 million in fiscal 2013.

GoldenTree Backing

Godfrey said he has the support for the deal from GoldenTree Asset Management LP, Postmedia’s largest shareholder which owns about 40 percent of the Class B shares, according to data compiled by Bloomberg. The investment firm, with $21 billion under management, has agreed to take up any unpurchased shares in Postmedia’s $186 million rights offering to help fund the acquisition.

“They made it quite clear: ‘We’re in this for two to five years minimum, but if that isn’t the right exit strategy for us, we’ll be in there for longer, we’ll be there for 10 years,’” Godfrey said. GoldenTree invested in Postmedia about four years ago.

Scott Sunshine, a spokesman for GoldenTree, declined to comment. GoldenTree has been expanding in Canada under Steve Shapiro, a former CIBC World Markets banker who runs the fund’s investments in distressed securities and media and communications and sits on Postmedia’s board.

‘Gutted’ Dailies

Postmedia has a lot of work ahead to revamp the Sun newspapers, said Christopher Waddell, associate professor at Carleton University’s School of Journalism in Ottawa.

“Some of the dailies, they’ve been basically gutted,” Waddell said in a phone interview. “Postmedia’s going to have to decide what it’s going to do with them. Will it make investments to rebuild them as entities? Or will it just look for opportunities to put Postmedia content inside the shell of these other publications?”

Canadian newspapers had a daily circulation of 5.7 million in 2013, down from 5.9 million the year before, according to the Canadian Newspaper Association.

Print advertising revenue fell 16 percent to $1.7 billion in Canada in 2013 from $2 billion in 2009, according to PricewaterhouseCoopers LLP. Digital advertising revenue has more than doubled in the same time, to $284 million from $91 million.

Advertising Footprint

“To the extent that you can merge and put a bigger digital footprint together, that might make it more relevant for advertisers,” Paul Sweeney, an analyst with Bloomberg Intelligence, said from New York.

To cope with shrinking readership, advertising and revenue, publications such as the nationally-distributed Globe and Mail and Postmedia’s National Post have reduced staff and costs over the past several years.

Godfrey said he has a track record of keeping newspapers open and vowed to continue that.

“There’s no doubt that the news will come in many forms in the future,” he said. “Younger people may not be interested in print copy, but they’re sure interested in news on the device they want to see it on. We have to supply that to them in that manner. That’s the future. If you don’t march towards that future, you’ll disappear.”

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