Canwest newspaper division sale: analysis

Several media columnists have weighed in on Canwest president and CEO Paul Godfrey’s $1.1 billion-bid for Canwest’s newspaper
division. 

In a press release Canwest said the new ownership plans
to “maintain all existing newspaper operations” across the chain, which
includes the National Post, The Gazette in Montreal, The Edmonton Journal, The Province in Vancouver and the Ottawa Citizen, along with several
community papers.

The newspapers will be operated under a new
company that is publicly traded, headed by Godfrey as president and CEO.

The
National Post reports:

“We’re
going to have to do business a little bit differently,” explained Mr.
Godfrey, currently president and CEO of the National Post. “Newspapers
are in a transition to the digital world … and the chain will be
digital-first newspapers.”

“The 71-year-old businessman and
former politician is among a group of 18 to 20 Canadian and U.S.
investors who have bet large — $1.1-billion — that traditional
newspapers with strong brands and loyal readership can compete in a
highly competitive media world.

“I never subscribed to the theory
that newspapers will disappear,” he said. Rather, they needed to adapt
to the “inevitable change” the Internet has thrust upon the industry. “I
can see the trendlines taking place. Times such as this inevitably mean
change.”
 
The Globe and Mail‘s Andrew Willis wrote in the Streetwise blog:

“J.P. Morgan and Morgan Stanley stepped up Monday with a new $700-million loan that will help unsecured creditors in CanWest buy the newspaper chain for $1.1-billion, according to court filings on Tuesday. J.P. Morgan is driving his deal, shouldering 70 per cent of the loans. There is also $250-million of new equity and what’s known as mezzanine debt – loans that are can be converted into equity – committed to this takeover.

“As the U.S. banks take the stage, Canadian lenders are heading for the exits.

“Senior lenders, led by Bank of Nova Scotia, having controlled CanWest since the company filed for creditor protection in January. These secured lenders, owed $925-million, are thrilled to be paid 100 cents on the dollar, and are not participating in the recapitalization of the chain.

“Somewhere, tycoon J.P. Morgan is smiling.”

In a column titled “Canwest
deal all about local papers“, columnist Jennifer Wells writes:

“There’s
going to be a lot of talk about the $1.1-billion deal to buy out the
CanWest papers, and how it was favoured because it’s cash and it’s
clean. In other words, there’s a lot of real money on the table ($950
million), which makes existing senior debt-holders happy as it gives
them the opportunity to say farewell to their investment.

“Undoubtedly,
there will be a great deal of small talk on the street today about how
the deal was done and prognostications of its chances of success — or
not.

“But this isn’t the street’s story. This is Canada’s story. I
know that sounds corny. And I don’t much care.

“It’s a story
that will play out through the newsrooms of the Calgary Herald and the
Montreal Gazette and the Edmonton Journal, newspapers that have now been
notified that should the deal go through — a closing date of July 15
has been targeted — there will be pensions and benefits and continued
employment: all newspaper operations will be maintained.

“That’s
the plan. It’s an audacious bet. Big and ballsy.

“And it will
fall to Godfrey, long ago Metro chairman, past chief executive officer
of the Toronto Blue Jays, current president of National Post Inc., to
make it work.”

She concludes: “The Internet has changed the
industry wholly. But local papers do matter in local markets and Paul
Godfrey is gambling on that.”
 
Globe
and Mail columnist Andrew Willis also wrote another Streetwise blog entry about the Canwest deal:

“Someone just made the wrong call on newspapers.

“CanWest
Global Communications’ stable of 46 dailies and weeklies sold Monday
for $1.1-billion. That’s somewhere in the neighbourhood of $175-million
more than the most optimistic of ink-stained analysts forecast these
assets would change hands for.”

He continues:

“These
financial players beat out a strategic buyer, Torstar, to win the prize.
It’s not supposed to work this way, not when private equity and hedge
fund types are still suffering through the hangover from a buyout boom
that went bust in 2007. Torstar should have been able to pay top dollar
in this auction, given the potential cost savings.

“So what’s
going on? Did Torstar offer too little, or did Golden Tree and the rest
of the creditors pay far too much?

“The answer to that question
reflects where various players got involved in this game, and when they
plan to exit.

“Torstar arrived late, and was offering something
in the $900-million range for CanWest’s papers. Had Torstar been
successful, it would have made a bet-the-company wager on these papers,
making a generation-long commitment in an industry facing serious
headwinds.

“On the other hand, Golden Tree and friends bought
into CanWest months ago, by purchasing bonds with a face value of
$450-million for something in the range of 30 cents on the dollar. As
for their intentions, well, cue up ‘70s rockers Trooper, and their
classic tune: “We’re here for a good time, not a long time.”

Willis
explains the new hedge fund structure, noting:

“The whole game
for the hedge funds is to get CanWest’s papers back on public markets as
quickly as they can, positioning the new company as a classic pure play
on print media and a rebound in the economy.

“The eminently
credible Paul Godfrey is at the helm. CanWest’s product shows up on
doorsteps across the nation each morning. Canadian investors know
exactly what they are getting: this is Southam, The Sequel.

“At
this point, it’s worth noting that some of the biggest players in
Canadian distressed debt took a pass on this CanWest recapitalization,
on fears that the price was too rich.”

He concludes:

“If
anything goes wrong with this sunny scenario in coming months – a slump
in equities or signs of a double-dip recession – then the value of
CanWest’s papers will slide, and the hedge fund crowd could take a
beating. In that case, Torstar gets another shot at buying these papers
for a bargain-basement price.”