Home Capital Markets Old home week at the Canwest newspaper auction

Old home week at the Canwest newspaper auction

To think that the left-leaning Toronto Star may soon subsume the right-leaning National & Financial Posts. Quite the end to the newspaper war that’ll be, even if it won’t represent the actual end of fierce competition in North America’s most competitive print market.

What’s more fascinating is the players behind the various deal teams. According to reporting by the Globe and Mail, the final round bidders line up this way: Torstar & Fairfax, Birch Hill Equity Partners, and Westface Capital & Golden Tree Asset Management. Westface has the most at stake economically, as they are reportedly already long unsecured Canwest debt.

For Fairfax, the deal actually gives them a chance to make good on their original Torstar investment thesis (see prior post “And then the bottom fell out on Torstar shares part 2” July 14-08). They’re still underwater about 50% from their original share purchase, and nothing could do more to propel their stake higher than a hundred million of synergy dollars between Torstar’s 5 daily broadsheets, 100+ community newspapers, and the Canwest 11 daily papers and 35 community titles.

For Torstar and BirchHill, this is a bit of “old home week”, as many of the players involved have seen this movie before: Torstar’s 1998/99 hostile bid for Sun Media.

As an Associate at BMO Nesbitt Burns, I was the fifth man on the five man M&A deal team advising Torstar at the time. What fun it was. Around the table was David Galloway, then CEO of Torstar, John Honderich, then Publisher of the Toronto Star and a member of the Torstar Voting Trust, and Dave Samuel, then a Torstar Vice-President of Corporate Development. Torrance Wylie handled the communications, back when it was a novelty in the M&A world.

Nesbitt sent out the “A team” (except for me): Vice-Chairman David Ward, M&A head Dan Mida, and Media group head Sandy Rhind.

Although Torstar didn’t ultimately land the Sun Media tabloid chain prize, they were able to get Quebecor to sell them Sun Media’s four Ontario broadsheet titles: The Hamilton Spectator, The Guelph Mercury, The Cambridge Reporter and The Kitchener / Waterloo Record.

More than a decade has passed, and Torstar may well be happy they don’t have the burden of worrying about the economics of The Toronto Sun’s competitive battle with the free subway newspapers. But when it comes to what Canwest has on offer, the deal appears to make plenty of financial and strategic sense.

Torstar will be transformed to a national player from the current Ontario beachhead.

From a people standpoint, the landscape isn’t all that different 13 years later. That’s the delightful backstory to this auction.

John Honderich is now the Chairman of the Torstar Board, and remains the heart and soul of The Toronto Star all these years later. As a student of the M&A process back in the 1990s, he understood the human dynamic as well as anyone could. And with all of the twists and turns on the Sun Media hostile bid, it was the perfect tutorial on public acquisitions. In the spotlight.

From a strategy sense, turning the Financial Post into the business section of the Toronto Star may well open the Star up to a readership that has eluded them for decades. As to owning the rest of the nation’s newspaper titles, the thought must be utterly thrilling for the Star’s investigative journalists. Particularly now that the Supreme Court of Canada has dispensed with any modicum of a libel law for our nation. Which “power couples” in Vancouver or Calgary can be brought to their knees?

Unlike many Canadian board chairs, Mr. Honderich and his family have a huge financial stake in Torstar, which will serve as a meaningful governor should anyone on Torstar’s investment banking advisory team suggest they bet the farm on the Canwest deal. As much as Mr. Honderich may be motivated by a love of newspapers and is positive about their future as an avenue of communication, he’s also as analytical as most in the Torstar boardroom today.

Which will come in handy over the coming days, as Torstar’s strategic acquiror standing provides them the ability to pay more than anyone else around the table. Whether it’s good for their health or not. The fact that much of the new capital being invested comes from Fairfax gives them a massive say in the process.

Prem Watsa will soon be a newspaper baron. Someone who has done a pristine job of avoiding the media for many years, granting few, if any, interviews. In short order, he’ll be relying on the rest of us to screw up royally, so that our shortcomings can be reported on the front page in the hopes of selling more papers. Ironies abound.

To think that if the credit crunch had come two years earlier, and tilted the Asper wagon just a little sooner, former Torstar CEO Rob Prichard could be quarterbacking this deal instead of Mr. Honderich and Torstar’s new CEO David Holland.

Dave Samuel joined Birch Hill a few years ago and quickly distinguished himself as one of Canada’s best merchant bankers. There is nothing this guy isn’t good at. A hockey Dad with five (or is it six?) children, he’s certainly cut out for this battle.

His training as a former Morgan Stanley NYC investment banker will come in very handy, once again. At Rogers Communications (RCI.A:TSX) in the early 1990s, Mr. Samuel had the wisdom to get Rogers ahead of the internet curve, and was responsible for all things online, including the Rogers cable modem development project and the Rogers “Wave” initiative. Having a vision of the internet will come in handy; something that newspapers have yet to perfect, to put it mildly.

When combined with his stint at Torstar and the Birch Hill cheque book, Mr. Samuel and his colleagues are a natural participant for this deal. The only problem is, they aren’t yet bringing any synergies to the table, which makes it tough to bid as much as Torstar. Unless, of course, Mr. Samuel can rope Black Press into his deal (despite their alliance with Torstar). Then, he might have the winning combination.

And what role do Messers Galloway and Prichard have this time around? Both are on the board of the Bank of Montreal, which will play an important role in the lending syndicate of any eventual auction winner.

Unless Westface pulls a rabbit out of a hat, it’s safe to bet that Torstar, or its alumni, will come out on top.


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