Torstar in turmoil

Is CEO Rob Prichard the next to go?

“Ask why” is the new advertising tag line for Canada's biggest daily newspaper, The Toronto Star. OK, we'll bite. Why did the paper's owner, Torstar Corp. (TSX: TS.B), push out publisher Michael Goldbloom and editor-in-chief Giles Gherson?

In mid-October, Torstar announced Jagoda Pike, 46, most recently the Star's general manager, as the new publisher; Fred Kuntz, 49, former publisher of The Record, in Kitchener-Waterloo, succeeds Gherson as editor. Industry watchers suggest Goldbloom and Gherson became scapegoats for the paper's current woes.

The paper, which claims 2.7 million readers each week, has been struggling. As newsprint costs rise and advertisers move toward the Internet, revenues and profits have declined. The amount of advertising space bought in the second quarter fell 8.3% from a year earlier, with classified ads declining 11.9%. Torstar's second-quarter profit fell 29% as sales dropped 3.2% to $390 million.

Goldbloom became publisher in May 2004, after a stint as publisher at the Montreal Gazette. At the Star he enjoyed a “relatively solid first half of his tenure,” says Montreal-based National Bank Financial analyst Adam Shine in a research note. But given declining profits in the past five quarters, “it was likely time for a change.” Under CEO Rob Prichard, Torstar has embarked on a series of what some consider unwise investments–for example, its purchase of a 20% stake of Bell Globemedia, which includes the Star's rival, The Globe and Mail. Torstar stock is now trading in the $18-$20 range, its lowest since 2001.

So will Pike be able to turn around the good ship Star–or is this akin to moving deck chairs around on the Titanic? Shine, who is keeping his Underperform rating, points out: “So far, the moves in Torstar's Newspaper Group in 2006 reflect a lot of shuffling–bodies, titles and segments. We're not about to change our forecast or rating in the absence of any changes in industry or company fundamentals.”

Unless things change, it's enough to make a Torstar investor “ask why.” Is Prichard next?