Gerry Schwartz’s bid for two newspapers casts Onex in a new light
PRIVATE MONEY, PUBLIC FIGHTS
Gerry Schwartz’s bid for two newspapers casts Onex in a new light
Philadelphia, the City of Brotherly Love, has little affection to spare these days for Gerry Schwartz and his holding company Onex Corp. Earlier this month, Onex was one of six companies looking to buy Philadelphia’s two largest newspapers, the Inquirer and Daily News. Representatives from the Toronto-based company had made several trips to feel out the properties, and things seemed to be going well. That is, until two weeks ago, when a confidential letter from an Onex manager ended up in the hands of a reporter at a Philadelphia newspaper, allegedly revealing the company’s ruthless plans to make deep cuts inside the papers’ newsrooms. Then the bad blood started to flow.
According to the Teamsters union representing drivers and printing press workers at the papers, Onex had come looking for assurances from the union that it wouldn’t oppose plans to cut newsroom jobs. The Teamsters said no, siding instead with the Newspaper Guild. Then Onex sent the fateful letter to the Teamsters, saying the company couldn’t fully appreciate the union’s concern “for colleagues at other collective bargaining units.” When that missive, as well as Onex’s plans, all went public, reporters noted the author, Onex manager Seth Mersky, even misspelled “Inquirer,” calling the paper the “Enquirer.” “I guess that name doesn’t mean anything to him,” the president of the local Teamsters said. “But it’s on our paycheques.”
Onex soon found itself portrayed as the stereotypically ruthless private equity company, set to destroy journalism in Philadelphia for a quick buck. In the end, the papers were sold to a local group—“Our kind of people,” declared the Daily News.
Onex’s bid, however ungraceful, confirmed the company’s long-rumoured interest in the newspaper business, while also providing a lesson in the kind of scrutiny a company attracts when venturing into that realm. And it comes at a time when Onex, long known as media shy, seems intent on staying out of the headlines. (Despite much recent activity, no one at the company was willing to be interviewed.) Onex, which seemed down-and-out three years ago, has been making a minor
comeback with a series of fruitful investments, but it has also quietly been making big changes in the way it does business. While Onex was testing the waters in Philadelphia, back in Toronto, Schwartz was telling investors the company had too much idle cash lying around— about $1.5 billion. The solution? Schwartz promptly announced that the company was launching a massive private equity fund worth $4 billion (up to 40 per cent of which will come from Onex). The size of the fund came as a surprise, but its creation did not. Over the past few years, Onex has sprouted a number
of these privately funded tentacles. It now controls funds called Onex Partners LP, Onex Partners II, ONCAP LP, ONCAP II LP and Onex Real Estate Partners. All operate much the same way Onex does and are controlled by Onex, but differ in an important way—they use private money, and operate at arm’s-length from the public company and its investors. While they’ve proved successful, the funds have raised questions about who really benefits in the new, more private Onex—managers or shareholders—and just what type of company Onex is becoming.
Onex has long been something of a curiosity. Founded by Schwartz in 1984 with $2 million of his own money, it is now the only private equity firm in North America that’s
publicly traded. At its simplest, it is described as a “buy-build-and-hold” company—it buys underperforming companies, rebuilds and restructures them, and holds on to them for long periods. The prime example is its investment in Celestica, a high-tech manufacturing company Onex bought in 1996 from IBM. After cutting costs and rejigging, it proved a massive money-maker through the ’90s, until the tech bubble burst.
Lately though, the arm’s-length private equity funds have taken the lead. Over the past two years, most of Onex’s large investments have used the $2.1-billion private equity fund, Onex Partners LP, set up in 2004. By the end of2005, it had invested over $1 billion, largely in the U.S. health care industry and in a former Boeing airplane parts maker called Spirit AeroSystems. Now, with the addition of the latest fund, Onex Partners II, the perception
is that Onex is gradually morphing into a money management company, where investments are made in part through the private funds, while Onex handles the management fees and returns rather than investing shareholders’ money directly. “The truth is that in setting up these funds, they are beginning to manage outside money as opposed to just the money that the shareholders own,” says Horst Hueniken, an analyst at Westwind Partners in Toronto. “They do look today more like a money management firm than before they had all these funds.”
When Onex established Onex Partners, the structure raised some concern among shareholders. What caught their attention were the fees paid to Onex managers, which
appeared “excessive,” as one BMO Nesbitt Burns report noted this year. The fund includes money from Onex (24 per cent), Onex managers (four per cent), and large investors like banks and insurance companies in Canada, Europe, and the U.S. (72 per cent). But the returns the fund pays to Onex are unevenly distributed: of the fees and gains that go to Onex, management receives 60 per cent, while Onex itself receives 40 per cent. According to the company’s financial statements, Onex received $11 million in carried interest from the funds in 2005. Management, on the other hand, collected $17 million.
Onex insists its managers put their own money into the company and that they “share in the risk and rewards of ownership.” And the company is known to be very generous with its rewards. Last year, Schwartz’s annual com-
pensation appeared to fall about 15 per cent, from $12.5 million in 2004 to $10.6 million in 2005. But that doesn’t include any money he may have collected from Onex Partners. However, any initial concern about management largesse has been somewhat muted by the company’s recent success. As analysts note, so long as things are going well, Onex shareholders are still better off with the current structure than they were without it.
And lately, Onex has been hot. Having suffered through a few tough years after the tech bubble burst, the company has lined up some big paydays, like the investment in Spirit just before the aerospace industry took off. The company is rumoured to be considering taking Spirit public this year, a sign of its suc-
cess. While the private equity funds are becoming an important part of Onex’s business, they are not yet the bread and butter for Onex shareholders. “The successful purchasing and selling of companies, that’s the main driver for you if you own a share of Onex. It’s not yet the fees,” said one analyst.
While there are still lingering questions as to why Onex chooses to raise money privately, rather than through the public markets as it has in the past, there are good reasons why the company needs the large pool of money the funds provide. Onex was dealt a blow four years ago when it failed to purchase Yellow Pages, and more recently when its deal to buy Aeroplan from Air Canada fell apart. “This triggered their interest to build those kinds of funds where they have other partners making commitments ahead of time,” said one analyst. “This way they have the liquidity to pursue large acquisitions.” Big purchases are becoming essential in the in-
creasingly competitive world of private equity.
Newspapers, an embattled industry suffering in a weak advertising market, might be ripe for the picking for Onex. They may be losing readers but they are still making money and can, theoretically, be milked for decades to come. Add to that the opportunity to cut costs, which Onex clearly sees, and the returns can get even better. Despite the Philly fiasco, Onex is still on the prowl. That may be good news for shareholders, but not for the workers of companies it has in its sights. Last week, the head of the group that now owns the Philadelphia papers couldn’t resist a parting shot. Putting on a mock Canadian accent, he told relieved reporters from both papers: “Think of what would have been, eh?” M
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