Blog by John Miller

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Sold to vultures

Hundreds of thousands of readers woke up today to news that their local newspaper has been sold -- and the new owner is something called "the ad hoc committee of Canwest's unsecured bondholders."

If I were those readers, I would be very, very angry. In a $1.1 billion stroke, the leading newspapers in cities like Vancouver, Victoria, Edmonton, Calgary, Ottawa and Montreal have fallen into the hands of a faceless gang of financial bottom-feeders. We don't know who they are, but we know what they want. As corporate vultures, they want to wring the last round of profits from a declining industry before someone starts closing them down.

The proceeds from the sale will be used to pay off approximately $925 million in debt owed by Canwest Limited Partnership, which owned Canada's largest chain of big-city dailies and the National Post. The newspaper division filed for creditor protection in January after missing interest payments on about $1.5 billion in debt. At that time, the secured group, led by the country's biggest banks, sought a sale of the chain and its related new media properties to recoup the $925 million they are owed. They are the only winners in this deal, actually managing to earn all their money back from a disastrous decision to lend former CanWest boss Leonard Asper loads of money to run newspapers, a business he did not know and wasn't very good at.

The new owners are a coalition of about 20 U.S. and Canadian financial institutions consisting of private-equity and hedge-fund firms. The biggest is New York-based Golden Tree Asset Management, which owns about $150 million of the publishing division’s debt. Collectively, the group owned about $450 million, or just under a third, of Canwest's overall debt. The group is fronted by Paul Godfrey, who earlier in his career fattened up the Toronto Sun chain of newspapers before selling them at a healthy profit to Quebecor.

Instead of walking away with nothing for its investment, the group is betting another billion on two scenarios -- that Godfrey can turn things around, and that a public offering of shares can recoup the money the group had to lay out.

The bid means that the Canwest chain will remain intact, including the money-losing National Post, at least for now. But the pledge of no layoffs or selloffs will probably not last much beyond the summer. Financial institutions don't put out that kind of cash and wait very long for some return.

A major component of the strategy is front-man Godfrey, an executive whose acumen and experience in the newspaper industry extends back decades. Media quoted the 71-year-old executive steadfastly resolving that the chain — and newspapers in general — have much room to grow, but there are new realities to be embraced.

"We’re going to have to do business a little bit differently," Godfrey explained. "Newspapers are in a transition to the digital world . . . and the chain will be digital-first newspapers."

Digital ad sales represent under 10 per cent of the $1 billion or so the Canwest Limited Partnership took in revenues last year. Godfrey says he would like to see revenues from digital operations increase to about 25 per cent.

These are lofty goals, Godfrey concedes, but attainable with the right management team that he has yet to finalize. On the other hand, CanWest has long owned the  most popular news website in the country,, and hasn't managed to make money out of it.

In 1996, Godfrey led a $411-million management buyout of what was then Toronto Sun Publishing Corp. The deal proved wildly successful for its backers, but less so for readers.

A portion of the company was sold just over a year later in a deal that valued the chain at $534-million, then the whole works was taken over by Quebecor Inc. for $983-million in 1999. Along the way, Godfrey helped squeeze out the heart and soul of the Sun chain, the late publisher Doug Creighton, and slashed jobs in the newsroom. Readers began to drift away in droves.

CanWest publishes 12 daily newspapers, most of which dominate their local markets, along with the National Post, which gives the chain its presence in Toronto. If the economy continues to rebound, analysts project these papers will churn out $200-million of earnings before interest, taxes, depreciation and amortization (or EBITDA) next year. Publicly traded newspaper chains are currently changing hands at five times their forecast EBITDA, which put the entire stable of CanWest papers in the $1-billion range, which is what it sold for.

The losing bid, by Toronto-based Torstar, was substantially lower. Torstar president and chief executive David Holland said: "We took a long, hard look at this opportunity. In the end, the successful price as well beyond what we were prepared to pay. We wish the new owners well."

The sale, if approved, marks the loss of the Asper family’s last hold on the media empire founded by the late Izzy Asper with a single Winnipeg TV station in the mid-1970s. It is believed that Leonard Asper, the second-oldest son of Izzy, who assumed the role of CEO in 1999 but stepped down earlier this year, had prepared a competing bid but failed to reach the final stage of the sale.

That, my friends, is the only good news in this sad affair.