The 20th century could well be called The Newspaper Century. Through 100 years, beginning in the 1890s, news printed on paper dominated the political and media landscape, overcoming even the advent of television.
By today’s standards, most of the competitive newspaper anecdotes seem mildly dramatic and quaintly colourful. In Canada, certainly, newspaper owners were far less offensive and politically aggressive than their counterparts in the United States, where media legends such as William Randolph Hearst and Joseph Pulitzer engaged in racist “yellow journalism” and routinely printed steady steams of sensationalism and wild fabrications.
It was a Political war with a capital P between the relentlessly Liberal/left/socialist Star and the steadfastly Conservative, Royalist and right-wing Telegram. Owners called one another names, but it was all part of the sport. The proprietor of the Telegram in the early 1950s, a wealthy deal-maker named George McCullagh, told his employees his objective was to go after the Star and “knock that shitrag right off its pedestal.”
In his lively book on the mid-century Star/Telegram era, Hello Sweetheart… Get Me Rewrite: Remembering the Great Newspaper Wars, veteran newspaper writer Val Sears, who died in January at 88, reports on McCullagh’s roughhouse observation on the physical appearance of the Star’s then-president, H.C. Hindmarsh. In an interview with Time magazine, McCullagh said, “That fellow Hindmarsh is so ugly that if he ever bit himself he’d get hydrophobia.”
Absurd and crude, maybe, but mild compared with the latest ugly language in the current newspaper war between the Toronto Star and Postmedia Network, which owns a chain of newspapers across Canada, including the National Post. In what appears to be a concerted effort to malign and destroy the reputation of its competitor, the Toronto Star and John Honderich, chairman of its corporate owner, Torstar, recently launched a series of personal and corporate attacks on Postmedia’s executives and corporate behaviour.
There’s no love lost between Torstar and Postmedia, or between John Honderich and Paul GodfreyThere’s no love lost between Torstar and Postmedia, or between Honderich and Paul Godfrey, chief executive officer of Postmedia. They’ve been competitively sparring for many years, politically and in business. But the nature and tone of the recent series of Star attacks on Godfrey and Postmedia are beyond anything seen in 100 years of riotous newspaper competition.
The language has shocked observers. Bill Ardell, former head of Southam Newspapers — once in partnership with Torstar — said that “a bit of a gentleman’s code has been broken by this kind of a rant.” Nobody wants to see the end of newspapers, but “that clearly was sort of a diatribe that was unnecessary.”
The Star’s unprecedented public attacks on Postmedia began on Nov. 9, 2015, with a column by John Honderich, who inherited part of the voting control block of Torstar through his father, legendary Star editor and publisher Beland Honderich. In all, seven family groups representing dozens of individuals control Torstar through a voting trust. In his column, Honderich mostly took aim at Postmedia’s decision to order each newspaper in the chain to endorse the Conservatives in last year’s federal election.
It was an odd column. Where did that come from? There was clearly more going on here than mere journalistic pique over press freedom and the role of newspapers. In retrospect, the piece needs to be put into a larger corporate perspective. It is worth noting, for example, that Honderich’s Nov. 9 high-profile attack on Postmedia came four days after Torstar, the company he chairs and controls through the voting trust, cut the dividend on its stock by 50 per cent and endured a 25 per cent stock price decline to $3.10. The third-quarter earnings report noted a loss-to-date in 2015 of $166 million.
In the weeks that followed, Torstar shares would continue to slide as investors and analysts puzzled over the company’s strategy in the face of what was turning out to be another grim year for the industry, and especially the Star. As Torstar’s market fortunes worsened, Honderich ratcheted up his attack on Postmedia.
On Nov. 28, less than three weeks after the initial Honderich column, the Star published another blast, a 5,000-word take down — massive by newspaper standards — of Postmedia. The headline doubled-down on Honderich’s cheap shot: “The man who brought Canadian newspapers to their knees … is now a member of the Canadian News Hall of Fame.” A four-column picture of Paul Godfrey appeared under the headline.
As the New Year came, the Torstar shareholder bonfire continued, with the company’s stock price tumbling again to hit an all-time low $2.11 on Jan. 24. Three days later, Honderich wrote another column in which he said Godfrey was “trifling with the truth about the newspaper industry.” The issue, said Honderich, was a Godfrey statement about the role of the U.S. hedge fund GoldenTree in the operation of Postmedia. If GoldenTree had not invested in the CanWest newspapers and created the Postmedia chain, Godfrey said in a media interview, “this chain might not be in existence today.”
Honderich, among other things, said that was false. “Get your facts straight, Paul,” he said. “How about Torstar, of which I am chair … We submitted a bid of approximately $800 million.”
Added Honderich: “And we are Canadian.”
According to Godfrey, however, it is Honderich who seems to have forgotten. In a note to Postmedia employees responding to Honderich, Godfrey said Torstar’s lowball bid for CanWest was well below the “floor price” of $925 million that had been set by CanWest creditors, a group led by the Bank of Nova Scotia. Torstar, in other words, was never in the running.
This Honderich/Godfrey tiff was trivial compared to the next Torstar move. On Jan. 30, another Star blast at Postmedia landed, this time from business columnist David Olive. Atop the front page of the Saturday Star, a white-on-red promotion said: “There is a cancer on Canadian journalism. The malignancy is Postmedia, a foreign-controlled, debt-burdened contrivance flirting with insolvency that nonetheless is relied on buy about 21 million Canadian readers. It’s a shocking story.”
The front-page sell sent readers to the Olive column, which was splashed dramatically across the front of the Star’s business section. In his column, Olive added the following salvo: “The good news is that the Postmedia abomination, which has never turned a profit, is in such wretched condition that it’s not long for this world.”
The Olive piece appeared to be channelling Honderich’s brain waves. He regurgitated an assortment of his chairman’s opinions on the nature of a free press (“an essential public service”) and foreign ownership. He called Godfrey’s claims to have rescued the CanWest newspaper chain “a lie.” He claimed Postmedia was paying hundreds of millions to “quick-buck” U.S. hedge funds that were poised to raid it and make off with all the assets. Financially, wrote Olive, Postmedia “has erased about $530-million in shareholder value, a record in the 264-year history of Canadian newspapers.”
That, as Olive might say, is a lie. It is certainly not true. There was no mention in Olive’s story of the steady decline in Torstar’s revenues — or its collapsing shareholder value. Since 2004, Torstar’s shareholder value has dropped from a peak of $30.60 a share, or $1.9 billion, to $2 today, about $175 million. In other words, Torstar has erased $1.7 billion in shareholder value since 2004, making Torstar — and not Postmedia — guilty of the largest destruction of value in the 264-year history of Canadian newspapers. The Torstar value decline is three times greater than that of Postmedia.
The damage to the voting trust members is even greater. According to the last information circular, Honderich and the other members of the trust collectively also own 20 per cent of Torstar non-voting shares. In all, Torstar’s seven controlling families now hold $50 million in Torstar equity that was once worth $600 million, all of it wiped out under John Honderich’s watch.
The voting trust structure, which gives the families control of the company with a minority position, is a problem in itself, At least one bank analyst says this control is an issue with investors. “Torstar has always had a unique ownership structure. So in terms of investors stepping in and really wanting to create some new change within the organization and take new tacks or whatever … obviously that’s not really an option. So it’s kind of getting left behind right now.”
With the company he chairs skidding through a cash-flow squeeze and a corporate value decline that must be devastating personally, the public attacks on Postmedia have industry observers scratching their heads. What’s Honderich’s real motivation?
One logical theory is that Postmedia, deep in debt and suffering through the industry crisis, is vulnerable on several fronts and Honderich is doing everything he can to enhance that vulnerability for the long-term benefit of Torstar. Less obvious, perhaps, is the vulnerability of the venerable Torstar itself as owner of Canada’s largest circulation newspaper. Unlike Postmedia, Torstar may be debt-free, but it is also teetering on the brink of its own corporate meltdown. Its problem: No cash in its dowry, declining revenues and no obvious marriage prospects.
Torstar shares continue to hover around $2 a share, and have even slipped below that on occasion, as analysts and investors try to assess the future of a company that has operating losses, little cash and has hooked its future to a couple of high-risk Internet ventures.
What this war is about may be reduced to a simple question: Which of the major newspaper companies will hit the wall first, and which is most likely to survive? This could be the last battle for the Star, a company that, in one form or another, has never been able to lift itself out of its Toronto home.
For more than half a century, Torstar has been locked in direct competitive struggle with one or another of Postmedia’s predecessors. Postmedia may be a new business entity, but it incorporates newspaper properties that the Star has failed to overcome as competitors despite many attempts.
- Torstar failed to eliminate its direct competition as hoped when it bought the old Telegram’s circulation list in 1971.
- Torstar failed to stop the Toronto Sun, which rose out of the ashes of the Telegram on the day the Telegram stopped publishing and soared to become a major thorn in Torstar’s side.
- Torstar failed to consummate a takeover/merger with the Southam newspaper chain (of which it owned 20 per cent) in 1992 when Honderich and his team were squeezed out by Conrad Black.
- Torstar failed to conclude a hostile takeover of Sun Media in 1998. Instead, the Sun went to Quebecor in a deal that was at least partially orchestrated by Paul Godfrey, who was then CEO of Sun Media.
- In 2011 Torstar failed to buy the newspaper assets of CanWest, the Asper media conglomerate that had bought the Southam newspaper chain, plus the National Post, from Black in 2004.
As with all newspaper companies, Torstar is struggling with new market realities and has run out of options. Its current corporate strategies have analysts puzzled and investors bailing out.
At the end of 2013, Torstar had its feet firmly planted in two sliding industries, newspapers/media and book publishing. Revenues from the newspaper/media operations — the daily Toronto Star, the free Metro tabloids, and a chain of community papers — had dropped below $1 billion and would fall another $100 million in 2014. Analysts expect another 10 per cent slide when Torstar announces its 2015 results on March 2.
Torstar’s book publishing arm, Harlequin, faced the same fate as the newspaper business. Always an odd fit within Torstar except for its ability to generate fat profits, Harlequin was — as Honderich put it — “undergoing transformational change with digital books.” Perhaps wisely, Torstar sold Harlequin in May 2014 for $455 million. Unfortunately, it was a little late. A decade ago Harlequin, then rolling in profits, might have been worth maybe three times $455 million. Still, analysts welcomed the sale in part because it allowed Torstar to pay off all its debt and end up with a $290-million cash position.
VerticalScope’s business model is based on attracting advertisers to websites it manages. Torstar describes VerticalScope as a “vertically focused digital media company which services the North American market through its network of user forums and premium content sights.” The business is heavily focused on attracting buyers of cars and other high-profile products, such as snowmobiles.
Whatever VerticalScope’s business model, its financial details are not public. Sketchy data in Torstar’s last financial report imply an operating losses of $18 million. Torstar concedes that VerticalScope is a year or more from generating meaningful returns.
One analyst has doubts about the merit of owning only 56 per cent of a company. Bentley Cross of ScotiaCapital told Torstar executives, “It doesn’t make a heck of lot of sense to have a public company (Torstar) with a 56 per cent holding in something else.” In such cases, investors tend to apply a “holding company discount.”
With Harlequin gone, Torstar is grappling with a declining newspaper industry, a tablet that has debatable prospects and a digital product that is a long-term riskWhen Torstar issues its next financial report on March 2, analysts will be looking for real disclosure on what it bought with $200 million. Said one, “They go and spend a bunch of money and it would be nice to get a little more operating history to know that either a) it was a great purchase or b) a big waste of money. “
Analysts participating in an investor conference call last November with Torstar listened attentively as executives reviewed another looming exodus of cash. After sinking more than $13 million during 2015 into developing and marketing Star Touch, a tablet version of the newspaper, the company has said it will spend up to another $9 million in 2016 marketing the product. By the end of 2016, the objective is to have 180,000 “daily readers” for Star Touch.
Exactly what constitutes a daily reader and whether Torstar will be making any money off the product at that level remains unknown. A Torstar executive said it was too early to say when Star Touch might start producing cash since the company was at the “very early stages of dealing with advertisers.” For what it’s worth, Godfrey says Postmedia’s experience with tablet newspapers suggests advertisers are not interested in such products. The ad dollars are in phones, not tablets.
With Harlequin gone, Torstar is grappling with a declining newspaper industry, a tablet that has debatable prospects and a digital product that is a long-term risk. All require a lot of cash. At the same time, there’s the dividend to be paid. Torstar CEO David Holland, on the November conference call, was not encouraging. The dividend, which will fall to 26 cents a share on March 2, could be cut again at the end of 2016 if circumstances warrant.
The dividend cut is no picnic for Honderich and the voting trust families. Their collective dividend on their declining stock value will fall from $12 million to $6 million, spread among dozens of heirs.
While it might be in Torstar’s business interest to see Postmedia lurch into another corporate reorganization, the Star’s published attacks are all delivered as matters of high moral and political principle. No corporate power interests are mentioned. Everything Postmedia does is framed as a breach of journalist ethics and a threat to the public and the national interest.
In each of the above reports published in the Star, the main themes are almost entirely ideological and political. Postmedia is portrayed as a den of compromise and dastardly foreign-owned corporate behaviour that threaten their definition of the public interest.
As a matter of fact, little of their parade of allegations is true, including the now-entrenched idea that evil New York hedge funds led by a company called Golden Tree are profiting handsomely by bleeding Postmedia dry. But more on that later.
The origin of the Livesey piece is worth an aside. It was written for an online newspaper, The National Observer, a radical left/green operation founded by Linda Solomon Wood, CEO of Observer Media Group based in Vancouver. Solomon Wood is the sister of Joel Solomon, founding vice-chairman of Tides Canada, the Canadian charitable arm of a U.S. foundation, with tentacles throughout the green political movement. Tides Canada, an active funder of various environmental and activist groups, also funds journalism in the Observer — and in the Star. At the Observer, Tides is backing an environmental series on the Great Bear Rainforest movement in British Columbia. It also partnered with the Star last year to fund a series of reports on the Paris climate talks.
Livesey, a staffer at the Observer, begins his 5,000-word article with a four-year-old tale in which Dan Murphy, a cartoonist at the Postmedia-owned Province in Vancouver, published an animated cartoon that doctored a Northern Gateway pipeline commercial. Murphy altered the images in the feel-good television ad by drawing in splotches of black oil and fart sounds to depict a series of spills from the pipeline. The screen is splattered with black smudges. The editor of the Province, Wayne Moriarity, pulled the cartoon from the paper’s website.
Is this a breach of journalistic principles? Not by any stretch. Over the Newspaper Century, it is safe to say that hundreds of cartoons have been killed by editors and/or publishers who did not like the work of their cartoonists. Has the Star never killed a cartoon by one of its long list of artistic troublemakers over the last 100 years? No newspaper, moreover, would allow its cartoonist to doctor and ridicule an advertiser’s ads to score a cheap joke and independently publish it without first seeking permission. Whether Moriarity made the right decision — and he says it was his alone — is not material.
Livesey also veered into a brief review of two libel cases, one involving the writer of this article. There was nothing new in his summary, except that it allowed him to say such libel suits represented “reputational hits” to Postmedia. Would the Star agree that a libel suit — of which the Star has had many — is a reputation hit on the Star? What damage to its reputation does a media corporation suffer when it elects to defend its journalists (including one who no longer works at Postmedia) in court against libel allegations? On the contrary, it is an indicator of journalistic integrity for a newspaper to back its writers.
In the news and comment business, one journalist’s incisive review or comment is another journalist’s wrong-headed ideological blither. Livesey sees everything other than his own view as a journalistic failure.
As a convert to climate catastrophism, Livesey feels other views should not be heard. Postmedia, he says (inaccurately), employs a roster of columnists who for years have argued “that climate change is a myth and the oilsands must be developed.” The offending columnists are listed: “Terence Corcoran, Peter Foster, Rex Murphy and Lawrence Solomon at the National Post; columnists Barry Cooper and Licia Corbella (who is also editorial page editor) at the Calgary Herald and Province columnist Jon Ferry.”
For an authority on whether this is bad journalism and dumb corporate strategy, Livesey consults a fellow traveller, David Miller, a former greener-than-green mayor of Toronto and head of the apocalyptic World Wildlife Fund. Predictably, Miller declares my existence and that of other columnists at Postmedia to be “a poor strategic move” in a country where the “vast majority … are environmentalists.”
More could be said about Livesey’s judgment and journalism. But he trips up most egregiously in his portrayal of Postmedia as a hapless appendage of New York hedge funds.
The company, he writes, is “controlled primarily by two American hedge funds: Golden Tree Asset Management LP and Silver Point Capital LP.” Such funds, he said, have a “reputation for being destructive and remorseless sharks within the financial industry.”
According to Livesey, while Postmedia is losing money the U.S. hedge funds have been funnelling massive streams of cash out of the company. Since the creation of Postmedia in 2011, he said, they have collected $340 million in interest payments to cover interest costs of 8.25 and 12.5 per cent on Postmedia debt.
As a result of these payments, Livesey said, Postmedia has been “a profitable investment” for Golden Tree and the hedge funds. Olive agreed, saying U.S. hedge are “doing just fine.”
Olive went a step further, claiming that under hedge fund control Postmedia may be on a “deliberate path of self destruction.” By draining the company dry, the U.S. hedge funds can “get their hands on a bankrupt Postmedia’s real estate and other assets at fire-sale prices.”
First of all, Olive appears to have just made up his real estate sell-off story. Why would the hedge funds deliberately aim to sell assets at fire-sale prices? In any case, as Postmedia has reported in its financial statements, there are no significant real estate assets to sell. Over the years, real estate holdings — such as Postmedia’s former Toronto head office, newspaper production buildings in Vancouver, Edmonton, and Montreal and newspaper operations and real estate in Victoria and the lower mainland region of British Columbia — have all sold for a total of about $150 million in what appear to be prime market conditions, rather than at fire sales prices.
Livesey makes the same nonsensical claim that U.S. hedge funds are getting rich squeezing Postmedia dry, sucking out interest payments and “selling off assets for scrap to recoup their investment.” As with Olive, he does not explain how companies get rich selling assets for scrap.
The general conclusion in the Livesey/Olive review of Postmedia is that the U.S. “hedges will be at or near the front of the line of creditors in a bankruptcy proceeding.”
That’s not true either.
The Canadian newspaper industry is in dire straits. The last thing it needs is a mudslinging internecine public battleLet’s take a look at just a bit of the financial history of Postmedia since its creation in 2011. By my assessment using annual statements and other sources, the U.S. hedge funds, including Golden Tree Asset Management, have over time put three different tranches of cash into Postmedia. First, there’s an initial 2010 investment of C$250-million in original Postmedia equity. A second equity infusion of C$175-million occurred in 2015 to help pay for the acquisition of Sun Media. The third U.S. hedge fund cash injection was an original 2010 debt issue worth US$275-million.
The changing value of the Canadian dollar makes these numbers hard to reconcile. But a rough addition of the three injections at current exchange values comes to either US$600-million or C$700-million. Either way, it’s a lot of cash. But what have the hedge funds received in return? According to Livesey, “For the hedge funds that control it … Postmedia is a profitable investment.”
In fact, with Postmedia shares now worth close to zero on the market, the value of the U.S. hedge funds two equity investments (C$250 million/US$190 million) and C$175-million/US$135-million) is currently zero. As for the debt issue of US$275 million bought by the hedge funds, including Golden Tree, the last quoted price on bonds is about 65 cents on the dollar.
In summary, Golden Tree and the U.S. hedge funds have invested the equivalent of US$600 million in Postmedia that right now is valued at US$175 million.
Meantime, of course, the hedge funds have collected interest payments at a rate of 12.5 per cent a year, or a 5½-year total of about US$190 million, on the debt portion of the original investments. In short, the U.S. hedge funds have at the moment a collective equity/debt net cash deficit of as much as US$300 million.
The story of Golden Tree’s plunder of Postmedia is a myth, a fabrication of Olive and Livesey.
Another myth is their claim that Golden Tree and all the other U.S. hedge funds will end up as foreign owners of Canada’s key newspaper properties if Postmedia should be forced into a financial restructuring.
Olive and Livesey fail to note that Postmedia has Canadian investors that are first in line to take control of Postmedia. In the event of a restructuring, the ultimate controller of the Postmedia newspaper chain would not be American hedge funds, but a Canadian entity known as Canso Investment Council, a private investment fund manager based in the Toronto suburb of Richmond Hill.
Canso’s founder and CEO is John Carswell, a one-time air force navigator, graduate of the Royal Military College of Canada and holder of an MBA from Queen’s University whose company now manages $18 billion in assets through scores of funds and investment vehicles. He appears in brief biographical notes to be a patriotic Canadian who sits on the board of the Vimy Foundation. Canso, formed in 1997, is the name of an aircraft built by Canadian Vickers in Canada during the Second World War and reportedly flown by Carswell’s father.
What Carswell thinks of Postmedia strategy and policies is unknown. He did not return a phone call. But Canso is clearly in the driver’s seat.
In August of 2012, Postmedia issued $250-million in new C$ debt, with Canso one of the buyers. The cash was used to pay down part of the original debt needed to fund the $1-billion CanWest takeover. Postmedia disclosed in a press release announcing the Sun acquisition that a holder owned more than 50 per cent of this issue. This holder is subsequently disclosed as Canso.
In its latest financial report, Postmedia lists debt of C$672 million, half held by U.S. hedge funds (now valued at C$350 million) and half by Canadian/Canso investors. But here’s the thing: The Canadian/Canso debt is made up of first-lien notes which “are secured on a first priority basis by substantially all of the assets of Postmedia Network and the assets of the Company.”
Leaving currency issues aside, the Canadian connection means that about $80 million of the $340 million in interest payments Postmedia allegedly shipped to U.S. hedge funds has actually been paid to investors in the funds Canso manages and others.
The important nationalist conclusion, if one were to worry about such things, is that in the event of a reorganization on or before 2017, Canadians are first in line for the assets, not the U.S. hedge funds. The second-lien notes owned by the U.S. funds are, as one might expect, secured on a “second priority basis” in the event of trouble. If worst came to worst, they would theoretically out in the cold.
Contrary to the claims of Honderich, Livesey and Olive, U.S. hedge funds and foreign owners have not reaped fat profits from Postmedia, nor is Postmedia at risk of collapsing into the hands of exotic Wall Street outfits named Golden Tree.
The Canadian newspaper industry is in dire straits. The last thing it needs is a mudslinging internecine public battle that is filled with attacks that are inaccurate and politically motivated. As the graphic on this page shows, the industry began to walk off an advertising revenue cliff at the end of 2012. Over the next three years, revenue plunged from $3.5 billion to about $2.2 billion in 2015, a decline of 50 per cent over two years.
On March 2, Torstar executives will face analysts to review the company’s 2015 performance and answer questions about the company’s cash problems, sliding revenues, long-range strategy and $2 share price.
This is the Canadian newspaper industry in the 21st century. Maybe with that conference call Torstar will do more to resolve its own existential crisis and vow to stop inaccurately demeaning its competition. It, too, may not survive.
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