The launch of a new national daily starts an industry upheaval
It is an unwritten rule of journalism that big stories often appear when—and where—they are least expected. These days, that adage also applies to the business itself, where newspapers seem to make news as much as report it. Consider last week, which began with the launch of Southam Inc.’s new daily, the National Post. Its appearance marked the start of a head-on battle with Canada’s other Toronto-based, self-declared national newspaper, The Globe and Mail, owned by Thomson Inc. But two days after the Post’s debut, both newspapers found themselves giving front-page coverage to a new conflict of rivals. The story: a hostile $748-million takeover bid by Torstar Corp.—owner of The Toronto Ster—-for Sun Media Corp., which operates The Toronto Sun and 14 other newspapers across the country. Said Roger Parkinson, publisher of the Globe: “Man, I’m not easily surprised, but this just knocked me flat over.”
He is not alone. In less than a week, the newspaper industry—which has already been radically transformed since Conrad Black took over majority control of Southam in 1996—has entered another period of upheaval. In the short term, the launch of the Post is the most obvious sign of the change: Canada now has two nationally distributed newspapers competing for the same upmarket, largely urban readers. The new paper was generally well received by analysts and media critics, although its layout and format, which resemble those of the Globe, caused some surprise. “It has good points, but it bears nothing in common with the
prototype that Southam was showing around during the summer,” said Ann Boden, president of the McKim Media Group division of BBDO in Toronto. “The prototype had a lot more color, a much more radical design, and frankly, looked a lot more exciting.” Still, the new newspaper attracted plenty of interest—and readers. In Toronto, the Post’s most important market, many prospective buyers complained that it sold out so quickly in the downtown area on the first day that they could not find a copy—although that was at least partly due to distribution problems. Nationally, first-day sales topped 300,000. “The demand is tremendous,” said publisher Don Babick. “One of the most gratifying things is that is true in the West as well as Central Canada.” One measure of that success: at week’s end the number of unsold copies returned from newsstands—normally about 40 per cent of copies printed—was about half that. Another measure of Southam officials’ confidence in their new product was their refusal to offer introductory rate cuts to advertisers. In fact, Southam has followed a policy of pricing Post advertisements at 15 per cent less than an equivalent in the Globe—so that a full-page ad for a regular client in the new paper will cost about $30,500. Complained Boden: “They are not being very advertiser-friendly.” But, said Babick: “So far, demand is justifying our prices.”
At the same time, Southam and the Post are confronted with the prospect of another newspaper company with a powerful national reach—and what would constitute an overwhelming presence in the country’s richest market, the Metropolitan Toronto area. A success-
ful Torstar bid would give it 26 per cent of total average daily circulation, with properties including the two biggest newspapers in Toronto, and others in cities ranging from Edmonton and Calgary in the West to Ottawa, London and Hamilton in Ontario. ‘We see this as a one-time opportunity to grow as a newspaper company,” Torstar CEO David Galloway told Maclean’s.
Investors seemed to approve. In the wake of the announcement of the bid, Torstar stock jumped from $16.00 to $18.35 by week’s end, while Sun Media stock improved even more, jumping from $9.90 to $16.90 in a similar period. Said one Bay Street analyst, who asked not to be identified: “This would be a great move for both companies— even if Sun Media hates it.” And that seems precisely the case, as the Torstar bid was rejected in emphatic terms by Sun Media CEO Paul God-
frey after an emergency board meeting. But the company is now in play—and Torstar remains at the head of the list of suitors. In an effort to fend off that bid, or at least drive Torstar up from its present offer of $16 a share, Sun Media said at week’s end that it has named CIBC Wood Gundy Inc. as an adviser. Said Godfrey: “A lot of people have called and are interested.”
That may be the case, but in the aftermath of the Torstar move, most of the obvious potential buyers appeared either uninterested for strategic reasons or scared off by the price. They include Quebecor Inc.— which expressed interest in Sun Media in the past but backed off when the price was even lower than it is now—Thomson, and Brunswick News of the Maritimes (owned by the wealthy Irving family). Quebecor officials refused comment, while Thomson and Brunswick officials said flatly that they will not make a bid. Still, a source with good contacts among Sun board members said that many of them believe they can attract a bid of at least $20 a share. Other potential measures include a Sun management-led attempt to retain control by borrowing money to buy up shares themselves. That move would likely be accompanied by the strategic sale of some assets—such as newspapers outside the Metropolitan Toronto area—in order to raise money. Some of the properties that Torstar is consid/-, ered to covet most include the broadsheet Hamilton Spectator,
the Brockville Recorder and Times, Kitchener-Waterloo’s The Ov Record, and The Umdon Free Press. The Sun group could sell V IJir /\ those properties without touching the core
of its chain—the string of Sun tabloid newspapers in four cities. As well, Southam officials indicated that while they are unlikely to bid on the entire company, they too are interested in some properties. But Torstar officials say at least part of the attraction for them would be 'Ætjp. the cost savings that would result from acquiring properties in and around the Toronto area, including The Toronto
F THE CHAIN GANG Irving The avera8e weekly circulation of o Ao/ Canadian newspapers, showing 2.4/0 the percentage controlled by ownership groups Quebecor 8.5% Hollinger/Southam Thomson 41.8% MACLEAN'S/NOVEMBER 9,
Sun and some smaller community newspapers.
Although CEO Galloway insisted that the Sun would be run editorially as a separate operation, he emphasized that money could be saved through sharing services such as administration, circulation and distribution, and perhaps printing. And, suggested Galloway, the newspapers might eventually share other services: “At least some of the newspapers might set up a newsgathering co-operative service nationally.”
Any or all of those suggestions are enough to drive employees into a frenzy at Sun Media, where antipathy towards the Star has been an article of faith since The Toronto Sun was founded in 1971. “This thing just makes me choke,” said Doug Fisher, the veteran columnist who is one of the Sun’s most respected figures. In fact, the two newspapers are quite similar in some ways—including their insistence that they speak for average citizens, and the tightly knit sense of family that both try to instil among their employees.
But in other ways, they are dramatically different, both in their corporate structures and the manner in which they perceive themselves. Torstar, which has its roots in the founding of the Star in 1892, is well heeled, well established, and courts its mid-to-uppermiddle-class readership with an editorial policy that is relentlessly liberal, frequently advocating government intervention on social issues. Sun Media revels in its blue-collar, libertarian image, enhanced by such traditions as its scantily clad Page 3 Sunshine Girl, and a vast array of columnists who vie with each other to see who can express themselves in the bluntest terms. Heather Bird, a popular Sun columnist who previously worked as a Star reporter, says the two newspapers could not be more different as employers. “The Star is entirely management-driven: any one mid-level copy editor, no matter how anonymous, can make or break writers,” she said. “The Sun is a bottom-up place: you argue and fight with each other, but in the end you feel you’re all in this together.” On the other hand, the Star1 s Rosie DiManno, in a recent column, described her version of the differences: “The Star has a political columnist who underwent a heart
transplant. The Sun has several political columnists who are in need of brain transplants.”
Those differences extend to the way the companies are structured. Torstar, at least until this week, has recently been diversifying by expanding into fields outside publishing. In 1994, for example, newspapers and book publishing accounted for 88 per cent of all revenue. By last year, that figure had dropped to 78 per cent as Torstar began investing in children’s supplementary education products. Torstar’s takeover plan would be financed by $600 million in bank borrowing. But Torstar says it would pay down some of that debt by selling off its supplementary education product division. That move would be consistent with the trend in business for companies to concentrate on one specific area, rather than diversifying. But it is potentially risky, as the economy falters and newspapers start to experience drops in advertising revenue and circulation. “We know that focusing on newspapers will make us more cyclical and susceptible to ups and downs,” says Galloway. “But our forecasts in-
elude the possibility of a recession and we would be prepared.”
Another advantage for Torstar would be the chance to enhance its place in the country’s expanding Internet market. Right now, Torstar is doing well in the Toronto market with Web sites that offer such services as an on-line version of the newspaper, a guide to theatrical events and restaurants, and classified advertising. But its growth efforts are hampered by its lack of national content. Sun Media owns controlling interest in Canoe LP, one of the country’s largest Web sites with more than 30 million page views a month. Although advertising on Canadian Web sites will total only about $20 million this year, most media analysts expect that figure to increase by multiples over the next five years.
Still, said Galloway, it was a move involving traditional media products—and, ironically, Southam—that led to Torstar’s decision to bid for Sun Media. Last July, Sun Media swapped The Financial Post and $150 million to Southam in return for The Hamilton Spectator, Kitchener-Waterloo’s The Record, The Cambridge Reporter and The Guelph Mercury. That gave Southam the core of its new national newspaper—and prompted Torstar officials, who were worried about their slipping hold on the lucrative Southern Ontario market, to focus on Sun Media, with its new acquisitions. “That,” said Galloway, “was when we really took notice, sat down and started talking.”
Still, the question of who talked with whom—and about what—is now a sore point between the two companies. Publisher John Honderich has said that Torstar was approached by Godfrey, who was seeking a deal, but that’s an assertion Godfrey angrily denies. Still, Sun Media, which has already changed hands three times in its relatively brief history, is once again ripe for takeover, whether or not employees approve. After its 1971 founding, the company was bought by Maclean Hunter Ltd. in 1982, which in turn was acquired by Rogers Communications Inc. in late 1994 (along with Maclean’s and other properties). Rogers sold the company to an employee-led group put together by Godfrey in August, 1996, for $411 million—or $337 million less than it is now being offered by Torstar.
To a large extent, Sun Media’s fate now rests with its three largest shareholders: with a combined total of 39 per cent, they are all controlled by money managers. The Ontario Teachers Pension Plan Fund holds 16 per cent, Toronto-based Trimark Financial Corp. has 12 per cent, and TAL Investment Counsel Ltd. of Montreal has 11 per cent. Together, the three can block the deal because Torstar’s offer is conditional upon its being able to buy at least two-thirds of shares. At the same time, Godfrey and other senior Sun Media executives stand to reap enormous personal windfalls in the event of any sale. Godfrey, who at the end of last year had about 1.4 million stock options, would make about $22 million on
those options if the stock sold at $16. As well, in the event of a takeover, Godfrey would be entitled to about $3.5 million in deferred salary and bonus. Several other senior executives, including Toronto Sun publisher Doug Knight, would make about $2.4 million. But Godfrey insisted that personal concerns are not a factor in his thinking: “My main responsibility is to maximize value for all shareholders, and we do not think this proposal does that.”
When—or if—an agreement is reached between the two sides, it will still require approval by the competition bureau. Torstar notified the agency of its intentions about 10 days before the bid. Federal officials said that the deal, which is valid in its present form for a 45-day period, would likely receive a ruling by Christmas. But one irony of the deal was that when Southam and Sun Media swapped newspapers last July, one of the people calling for the government to look closely into the purchase for fear of excessive media concentration was Toronto Star publisher John Honderich. Said Babick: ‘The most polite thing I can say is no one should have the nerve to change their hat, let alone their mind, that quickly.”
Torstar’s proposal would not only give Honderich’s company control of the two biggest papers in Toronto, but also a near stranglehold on the daily and weekly newspaper market elsewhere in southern Ontario. Because of that, some analysts initially suggested that Torstar might have trouble gaining approval from the federal bureau. But the takeover bid was warmly received by some senior federal Liberals, including Heritage Minister Sheila Copps. In arguing the case, Torstar officials would almost certainly cite as precedent the case of Vancouver, where Southam controls both daily newspapers, The Vancouver Sun and The Province. And Honderich insisted that Torstar’s proposed deal would aid competition by building a viable national alternative to Southam, which, along with its parent company Hollinger Inc., now has nearly 42 per cent of circulation across the country.
In all, the debate over the future of Torstar and Sun Media, coupled with the launch of Southam’s Post, has been enough to throw both financial markets and hardened newspaper executives into something of a tizzy. “I love the thrill of the game,” says the Globe's Parkinson. “But all sides may wish for time out at some point to catch their breath.” That is not likely to happen soon, as the pace quickens and stakes grow higher. One measure of the sense of urgency in the business is an internal study that Honderich recently commissioned by outside analysts on the functions and future of the Star. Although the contents of the report remain secret, its title speaks to the company’s concern about the future. It is called Sink or Swim—and with its actions last week, Torstar has signalled how hard it will fight to stay comfortably afloat. □