Media: Canwest's long goodbye

Asset sales continue, but the prospect of a total restructuring looms larger still.

The unbuilding of the Canwest Global media empire accelerated in late September. The company sold its stake in the Australian TV network, Ten, for about $640 million. And rumours surfaced in early October that its Canadian newspapers could soon be auctioned. Previously, it disposed of a slew of minor assets, including struggling Canadian television channels, Turkish radio stations and The New Republic, an American political magazine. Canwest becomes less global by the day — all the while moving toward a much-anticipated denouement.

Canwest’s management team, led by president and CEO Leonard Asper, has little choice. As of its last reported quarter, ended May 31, the various units of Canwest Global Communications owed a combined $3.7 billion through bank lines of credit and corporate bonds. High leverage is particularly hazardous for a company that derives more than 80% of its revenue from advertising, which is notoriously cyclical. As advertisers started slashing budgets earlier this year, two Canwest subsidiaries stopped making scheduled debt payments. That placed the family business at the mercy of creditors, who could demand repayment and topple it into bankruptcy proceedings.

Instead of that fate, Canwest has subsisted on a string of biweekly clemencies, during which negotiations continued toward recapitalizing the company. These clandestine talks have persisted longer than many observers expected. “We’ve been surprised,” says Chris Diceman, an analyst and senior vice-president at DBRS, a bond-rating agency. “Typically, lenders won’t give a company this much latitude. What’s different here is the fact that the company can offer some voting control in a recapitalization.” The descendants of founder Israel Asper (who died in 2003) command Canwest through multiple-voting shares — a formidable bargaining chip.

Ten’s sale likely simplifies these negotiations; bondholders of Canwest Media have a better idea how much cash they’ll receive, because the proceeds are earmarked mostly to pay them back. The transaction also eliminates all debt associated with Ten ($582.5 million as of May 31). Purchased in the early 1990s, the Australian network was among the earliest (and most successful) symbols of Canwest’s ambitions for world media domination. The company reportedly attempted to sell Ten several years ago, but failed. “I don’t think they would have been into this situation if they had monetized Ten in the last few years,” says Diceman.

So what’s left? Canwest’s newspaper chain is Canada’s largest, with 13 dailies (including the National Post, Ottawa Citizen and Vancouver Sun) and 26 community newspapers in British Columbia. There are also related online assets, such as the Internet portal. It’s all held (except the Post) by a subsidiary called Canwest Limited Partnership, a crippled unit that defaulted on both its line of credit and its senior secured debt earlier this year. All told, as of May 31, it owed $1.4 billion.

According to The Globe and Mail, Canwest has lined up private equity firms to back a management takeover of these publications. Company spokesman John Douglas declined comment, except to say: “We’re not marketing those papers ? we haven’t declared them to be non-core.” If the newspapers are auctioned, other potential bidders might include any of Canada’s major media companies, such as Corus Entertainment, Astral Media, Torstar, Rogers Media and CTVglobemedia. Canadian tax rules discourage foreigners from bidding; they allow businesses to deduct advertising expenses, but only if the newspapers are Canadian-owned.

What are the papers worth? In July, TD Newcrest analysts Scott Cuthbertson and Michael Elkins guessed that the publishing assets might be worth somewhere between $750 million and $1 billion, far short of the debt outstanding. DBRS guesses perhaps $800 million. That’s sobering, given that Canwest paid press baron Conrad Black $3.2 billion for those newspapers at the beginning of the decade.

But then, it’s hardly a seller’s market. Newspapers must endure more than simply a recessionary drop in advertising. Circulation is falling by about 2% each year, and advertisers are abandoning papers in increasing numbers for online and other media.

Canada’s largest media conglomerates might conceivably be interested in Canwest’s conventional television assets. While Canwest jettisoned its E! stations this year, its Global-branded assets across Canada remain. But conventional stations depend on advertising revenue, too. Several of the E! stations were sold for “nominal” amounts — a harbinger of how difficult selling other stations might be.

Canwest’s specialty cable channels are the last remaining jewels. These include National Geographic, Slice, History Television, Food Network and Showcase. Unlike the conventional stations, these generatesubscription revenues. And they’ve performed reasonably well. Corus has already expressed interest in several of them. Astral, Rogers and others might also be interested. But Canwest co-owns most of these properties through a Byzantine arrangement with Goldman Sachs, the investment bank, which might complicate any divestiture.

The atmosphere of secrecy, coupled with Canwest’s complicated capital structure, makes predictions difficult. A successful recapitalization seems within reach for Canwest Media; failing that, a “pre-packaged bankruptcy,” in which management and creditors agree on a plan before applying for court protection under the Companies’ Creditors Arrangement Act, so as to emerge with a reorganized company quickly and cheaply. (The outlook for Canwest LP is cloudier still.) But it’s widely expected that when the smoke clears, the Aspers will have lost control — a terrible, yet common, aftermath of excessive borrowing.