Toronto Star article on the Nordstar LBO Bid for Torstar features Pycap CEO Stuart Browne for Insight & Commentary

Chair disputes claim that a higher bid was tabled for Torstar — and industry observers look at what’s next for the publisher
By Josh Rubin Business Reporter

At first glance, a pair of conservative-leaning entrepreneurs might seem like unlikely guardians of the progressive values of the Toronto Star.

But that’s just what Jordan Bitove and Paul Rivett say they are, after being anointed the preferred bidders for Torstar, the newspaper’s publisher, last weekend.

Barring an unforeseen twist, the company will be theirs, thanks to lock-in provisions in their latest 74-cent-a-share bid, submitted last Saturday through NordStar Capital, that prevent rival bids from being considered by the two main shareholders.

But questions are now arising about a second proposal to buy Torstar that became public late last week, from surprise bidder Canadian Modern Media Holdings (CMMH).

The second group of suitors say they were prepared to offer much more for Torstar, with investment banker Neil Selfe, a member of the bidding team, claiming they were ready to go as high as 80 cents per share — higher than NordStar’s 74 cents. He has publicly asked why Torstar’s owners would lock into a lower bid “if (they) were focused on maximizing shareholder value.”

Selfe’s claim has set off a public debate over who submitted what bid when: Both Torstar’s chair and NordStar say no firm bid was ever tabled for 80 cents.

Meanwhile, some industry observers say there might be another reason the NordStar bid was locked in 48 hours before this past Monday’s deadline: Sometimes, it’s not all about the money.

Torstar chairman John Honderich flatly disputes Selfe’s claim that CMMH made a firm superior offer. He says that Selfe’s group began with a proposal for 72 cents a share, plus contingent value rights (CVRs) that could be worth as much as 50 cents a share, and that they hadn’t improved the cash portion of the offer before the revamped NordStar bid came in, despite being given the opportunity.

“There was no 80-cent offer on the table when we made our decision. All we had was an offer for 72 cents and CVRs. We went back to Selfe twice on Saturday to urge him to increase the cash component of his bid. He didn’t. Only after the improved offer from NordStar became public did he then take a pen, scratch out 72 and put in 80, and then send it to us,” Honderich said.

By that point, the voting trust and Fairfax had already signed hard lock-ups guaranteeing their support for the improved NordStar bid, Honderich said.

Former Ontario premier David Peterson, who’s part of the NordStar bid, said in an emailed statement that the CMMH bid couldn’t have been better because it was never made official.

“There was no other binding offer on the table. A non-binding proposal is not a superior offer. A binding offer includes a legal commitment with financing. Unlike NordStar, CMMH group never made a binding offer and never publicly disclosed a source of financing,” said Peterson.

A source, who asked not to be identified because they were not authorized to speak publicly, said CMMH asked Torstar for an assessment of the value of the contingent value rights — which can mean extra money for shareholders if a specified milestone is met in the future — before considering a raised bid, but the group did not receive one. The source added that the only thing missing to make the CMMH bid legally binding was a “signature page” which was being held in escrow pending the value rights assessment.

Multiple sources have confirmed to the Star that CMMH’s bid was being financed by Canadian Western Bank, an Alberta-based business bank. Selfe declined to comment for this story, citing nondisclosure agreements.
Whether or not the owners of Torstar could have gotten a higher bid from CMMH — and whether that bid would actually be successfully financed — may never be known. But observers note that, as with any sale, money isn’t the only consideration.

Sources say the five families who have long controlled Torstar’s A-class shares were concerned that the new owners maintain the Star’s progressive values, in particular the Atkinson Principles which have guided the Star’s journalism for decades.

Torstar is more than a corporate entity, it is also one of the largest publishers in the country. If the decision to sell considered both principles and cold, hard cash, that’s fine with journalism industry watchers like Tim Currie, head of the journalism program at the University of King’s College in Halifax.

“It’s pretty clear that the legacy of the Atkinson Principles are very important to the families, and it certainly seems from the outside as though that’s a reason why they may have left some money on the table,” said Currie.
Not that the bottom line isn’t a factor, acknowledged James Compton, an associate professor at Western University’s Faculty of Information and Media Studies.

“Has Torstar been concerned with making money? Of course. But they’ve invested money in journalism, and like any good news organization, had a core set of values. … In their case, that’s the Atkinson Principles,” said Compton, a former journalist who specializes in studying the Canadian media industry.

Keeping up those progressive values and journalism also make solid business sense, argues Allan Thompson, director of Carleton University’s journalism program.

“I think the Star has enormous value as a brand … and that brand is as a progressive voice which invests in journalism,” said Thompson, a former Star reporter. “It’s not just the political perspective, it’s the fact they’ve been willing to invest in good journalism.”

That has meant, Compton said, that the Star has partly avoided the fate of many American media organizations which have cut staff to the bone after getting taken over by hedge funds and private equity firms. That trend is something Compton said has also loomed as a danger in Canada, where the majority of Postmedia shares are controlled by U.S.-based hedge fund Chatham Asset Management. (Last week, Chatham also won a bankruptcy court auction for the McClatchy newspaper chain in the U.S.).

The prospect of the Star falling into similar hands is something Compton worries about. In many cases, the debt loads assumed by new owners after takeovers have been crippling to newsrooms.

“This is a problem across North America. Value is being extracted and not put back into the newsrooms. Value is being extracted to make the debt payments. The business model is stripping assets, cutting costs and making debt payments,” said Compton.

The fact that NordStar’s bid financing comes from Canso Investment Counsel — also Postmedia’s largest debt holder — has stoked fears that NordStar plans to eventually sell the Star to Postmedia. That fear has been articulated by, among others, former Ontario finance minister Greg Sorbara, who’s part of the CMMH bid team.
NordStar has previously said through a spokesperson that it intends to pay back a “significant” amount of its Canso loan when the deal closes, and that the financing doesn’t mean there’s a merger coming.

“Let us be absolutely clear: The financing arrangements for the NordStar bid are not, in anyway whatsoever, connected directly or indirectly with any other media company,” a NordStar spokesperson said in late May, after Canso’s involvement became public.

Private equity executive Stuart Browne doesn’t think NordStar bought Torstar to merge the Star with Postmedia.
“I don’t see any evidence that there’s a consolidation play here. As long as they keep making their debt payments, there’s nothing that Canso could do,” said Browne, CEO of Pycap Venture Partners and a lecturer at York University’s Schulich School of Business.

Instead, said Browne, NordStar likely intends to boost the Star’s efforts to attract more digital subscribers, while selling some non-core assets, such as its stake in digital community discussion board VerticalScope.
It’s also not a coincidence, Browne argued, that the deal is happening during a global pandemic.

“The industry has been in distress anyway, and then COVID hit, so I think they saw value at these prices,” said Browne, adding that there could be some cost-cutting to reduce the company’s losses.

The NordStar team did not comment on their long-term plans for Torstar when approached for this story, but after news of their then-63-cent bid became public in late May, Bitove and Rivett said they planned to boost the Star’s digital offerings and said they weren’t planning big cuts.

“Our focus is on the Star’s journalism and digital transformation. And you need capital to support that,” said Bitove at the time. A report published in the Globe and Mail said Bitove and Rivett were seeking up to $100 million from the sale of non-core assets, but Bitove said there’s no exact number.

“You can’t grow revenue on the back of cuts. We don’t subscribe to cutting. But that said, we support management and we support (Torstar CEO) John Boynton and the team. So there’s no current focus on that. Our current focus is that we’re excited to bring new potential revenue sources and partners to the business and find ways to grow, not cut,” added Rivett.

While the Star doesn’t have the digital subscription base of U.S. outlets such as The New York Times or The Washington Post, there’s still hope for subscription growth, which could stem the losses Torstar has suffered over the last few years, University of King’s College’s Currie argued. Just because people have been used to getting news online for free doesn’t mean they won’t ever pay for it.
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“As an industry, we made a huge mistake three decades ago in not monetizing online readership. But people used to get their music online for free. Now, they’re paying. Not as much as they should be, if you ask a lot of artists, but they’re paying,” said Currie.