U.S. hedge fund GoldenTree seeks buyer for stake in Postmedia

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The largest shareholder in Postmedia Network Canada Corp. is soliciting offers to sell its stake in the media company, signalling a potential shift in the ownership of Canada's biggest chain of newspapers.

GoldenTree Asset Management LP, a New York-based fund manager that owns 52 per cent of Postmedia's variable voting shares, has hired investment bank Canaccord Genuity Group Inc. to drum up interest in its holdings, and has approached roughly half a dozen potential buyers, according to a source familiar with the talks.

Yet it remains unclear where GoldenTree might find a buyer. Postmedia is struggling with some $670-million in debt, while its print advertising revenues – which remain a key source of funds – have declined by double-digit percentages, year over year, amid a rapidly changing industry.

The company's $316-million deal to buy 175 newspapers and digital publications from Sun Media, which closed less than a year ago, was designed to give Postmedia greater heft to compete against digital competitors and more runway to get its financial house in order. But since then, the company has suffered a series of blows, and its outlook has soured in the eyes of many on Bay Street.

Two credit rating agencies, Standard & Poor's and Moody's, each downgraded Postmedia's ratings in December and January, respectively, with S&P warning that Postmedia's capital structure looks "unsustainable." In January, an analyst at RBC Dominion Securities Inc., Haran Posner, lowered the bank's price target for Postmedia to zero, arguing that "a material recovery in equity value seems unlikely."

One party approached by GoldenTree immediately brushed aside the opportunity, calling Postmedia a "very, very difficult business to get your mind around purchasing."

Postmedia president and CEO Paul Godfrey and a company spokesperson both declined to comment on Monday. Mary Beth Grover, a spokeswoman for GoldenTree from ASC Advisors, also declined comment, while Ted S. Lodge, a partner at GoldenTree who was recently voted onto Postmedia's board of directors, could not be reached for comment, nor could representatives of Canaccord.

In the meantime, Postmedia's newspapers are getting leaner. After recording a $4.2-million loss in its most recent quarter, the company announced it had increased an already ambitious cost-cutting target from $50-million to $80-million by the middle of next year. The company had previously slashed $136-million in annual costs over three years.

Days later, on Jan. 19, executives at the company announced perhaps the most drastic cost-cutting measure yet – axing 90 jobs, merging competing newsrooms in Calgary, Edmonton, Ottawa and Vancouver and offering further staff buyouts at some papers.

GoldenTree owns nearly 147 million of roughly 281 million Postmedia variable voting shares, worth about $14.7-million at Monday's closing price of 10 cents a share. However, the company has a dual-class share structure that limits GoldenTree's voting power in order to comply with foreign-ownership restrictions. Voting control is concentrated in Canadian hands through a separate class of shares.

The American fund, which now manages more than $23-billion (U.S.) in assets and specializes in high-risk stocks and debt, also owns an unspecified amount of Postmedia's debt, which is split in two tranches with 8.25-per-cent and 12.5-per-cent interest rates, and which the company is looking to refinance before it comes due in 2017 and 2018. In 2015 alone, Postmedia paid $69-million in interest, according to company filings.

"I think the problem is going to be: I don't know who's going to buy it," said Christopher Waddell, an associate professor at Carleton University in Ottawa who teaches business journalism. "Sure, people will lend you money, but at what rate? They'll also want to know what your ability is to repay it, and that's why I think the Postmedia situation is going to be problematic."

GoldenTree is believed to be the newspaper company's second-largest debt holder, after Richmond Hill, Ont.-based Canso Investment Counsel Ltd. Canso also declined to comment, though speculation has already begun about whether it might have an interest in GoldenTree's stake.

"That, to me, I'm sure is the first door that's being knocked on," said Dwayne Winseck, director of the Canadian Media Concentration Research Project. "Whether they're going to step up and deepen their involvement in the plot, I'm not so sure."

The history of GoldenTree's interest in Postmedia's assets dates back to 2007, when it began buying debt issues from CanWest Global Communications Corp., the prior owner of many of Postmedia's newspapers. GoldenTree continued buying bonds in subsequent years in anticipation of a restructuring, and after CanWest was pushed into bankruptcy in 2009, it emerged as the de facto owner of the newspaper assets with a $1.1-billion cash bid.

In a past interview, Mr. Godfrey called GoldenTree "terrific partners," but also said the fund is "in it for the business side of it."

With reports from Richard Blackwell and Jacqueline Nelson