Thursday, April 16, 2015

Another bleak update for Postmedia, with a shark waiting to be leaped

It looks like Postmedia has moved into asset-strip mode, based on its latest quarterly report.
The results were dismal, as they have been every quarter since the corporation bought the newspapers of near-bankrupt Canwest in 2010. Revenues are down 11.3 per cent for the first six months of the fiscal year, about $42 million. Expenses were down 10.8 per cent, or $32 million.
Postmedia management appears to have no solutions. They are cutting expenses, but not fast enough to match falling revenues. At the same time, the cuts are reducing value for readers and advertisers, which leads to more revenue losses. It’s a relentless downward spiral.
Paul Godfrey
Earnings before interest, depreciation and taxation were $190 million in 2011. This year, they will be about half that amount. The company is about two years away from being unable to meet the interest payments to the hedge funds that put up the cash to buy the Canwest properties. 
CEO Paul Godfrey initially talked about strategies to increase revenues at the 10 dailies across Canada. He was enthusiastic about  “Digital First,” an early initiative that has been a bust. Digital revenues - subscriptions and advertising - will be about $88 million this year, unchanged in four years. If the future is digital, Postmedia is in trouble.
The latest quarterly update includes a telling note on costs. 
Postmedia has outsourced production at three newspapers over the last 18 months.
Corporations usually contract out because its cheaper. But Postmedia reports production expenses jumped 25 per cent for the first half of this fiscal year, “primarily as a result of outsourced newspaper production of the Calgary Herald in November 2013, the Montreal Gazette in August 2014 and both The Vancouver Sun and The Province in February 2015.” The increased costs are about $9 million a year.
The contracting-out program does free up some real estate for sale, which will let Postmedia reduce its debt load.
But a corporation can look at that process in two ways.
If the debt repayment results in interest-rate savings greater than the increased production costs, the company is protecting its long-term sustainability.
If, however, the increase in production costs is greater than the interest savings, then the company is more focused on loan repayment than its future.
Postmedia looks to be taking the latter approach.
In Vancouver, Postmedia sold the press building for $17.5 million and handed the full amount over to Unifor, the union representing employees. The union agreement had strong language preventing contracting out; the payment was compensation for accepting the change. The deal saw $11.5 million in severance for affected employees, and $6 million paid to Unifor that it can spend “as it sees fit for the benefit” of affected employees.
In Montreal, the press centre was sold for $12.4 million. The Calgary Herald building - constructed in 1980, when newspapers managers thought the future was bright - is assessed at $41 million. Even if it brings $50 million, the interest savings will be barely half the increased production costs.
Which makes Postmedia look like a corporation in the process of wringing value from its assets before selling the remains, or writing them off.
Postmedia’s purchase of Quebecor’s 175 English-language newspapers, including the Toronto Sun and 32 other paid-circulation dailies, doesn’t change that. 
Quebecor sold cheaply at $316 million, or about $1.8 million per newspaper. (Quebecor had spent something over $1.5 billion assembling the group of newspapers since 1998.) The business has been trending steadily downward, but the properties still produce about $85 million in earnings before interest, taxes, depreciation and interest. And Postmedia hopes to make $60 million by selling the newspaper’s offices, and leasing space. (Again, not necessarily a sound long-term decision.)
But the deal does not change the fundamental problems facing Postmedia.
There is a point where business owners decide that the best strategy is to extract the most value in the limited time remaining. Based on the quarterly report, Postmedia looks to have reached that point.