Could Canwest go bankrupt?

Next year will mark the 10th anniversary of Leonard Asper’s ascent to the top job at Canwest Global Communications, taking over the reins from his late father Izzy. But there might not be much of a celebration. It hasn’t been an easy ride. When the youngest Asper became president and CEO in 1999, Canwest was trading at close to $20 a share. As of early this week, it was treading water around 60 cents. What was once arguably Canada’s leading media company was kicked off the country’s main market index in September, and is now a struggling penny stock.

Asper himself seems more perplexed than anyone by his company’s rapid decline. After all, as he’s fond of pointing out, Canwest is not only making money, it’s making more money every year. Revenues have increased from $2.7 billion in fiscal 2006, to $2.9 billion in 2007, to $3.1 billion in 2008. Similarly, Canwest’s EBITDA (earnings before interest, taxes, depreciation and amortization)—a popular indicator of a company’s profitability—looks healthy. As of August, the end of Canwest’s latest fiscal year, its EBITDA hit a three-year high of $578 million—$91 million higher than the year before. Canwest’s various holdings, which include Global Television, Network Ten in Australia, various websites and 10 major daily newspapers (including the National Post), are as a whole still making money. And analysts say that from a strategic standpoint, the company’s decision to acquire Alliance Atlantis and its portfolio of top specialty TV channels last year made perfect sense.

And yet, the market is rebelling. One after another, major brokerages have slashed their projections for the company, and few are recommending clients buy the stock. At least one major institutional investor recently opted to cut his losses and bailed out completely. According to financial analysts and investors Maclean’s spoke to, Canwest’s stock price is now so low, it indicates that investors feel it could go bankrupt. The next three years may be the most crucial in the company’s history. If Canwest pulls through, it could once again surge back to health and recapture its former glory. If it doesn’t, Asper could find himself presiding over the collapse of his father’s empire.

Asper declined to be interviewed for this story, but he hasn’t gone completely silent. For the past several months he has been on a campaign to counter the perception that Canwest is a sinking ship. Back in July, before the worst of the market collapse hit, Canwest had already been reduced to a mere $2.50 a share from more than $7 at the start of the year. On a conference call with analysts that month, he practically begged them to look past the plunging stock and appreciate the true value of his company. “Let me start by saying that given our diversity and strength of our properties, I believe that Canwest stock is significantly undervalued,” he said. Later in the call he protested his company’s low valuation again, saying that his own reported earnings-per-share figures didn’t do Canwest justice. “I challenge the analysts and the media listening to not get caught in what are today’s accounting principles,” he said, “and to take the time and look at the underlying operating strength of our corporation line by line.”

The analysts participating in the call were evidently not impressed. As the summer and fall wore on, and the economy worsened, Canwest’s stock continued to swoon. According to Bloomberg, of the 11 analysts following the shares, five now rate it a “hold” and six rate it a “sell.” Moody’s has put Canwest’s credit rating under review, and just last week, Dominion Bond Rating Service reduced the issuer rating for Canwest Media from BB to B (high). That’s a serious tumble and it puts the company firmly in junk bond territory, meaning that Dominion now considers lending money to Canwest to be a “highly speculative” investment. According to Dominion’s rating scale, when a company receives a B-level grade, “there is a reasonably high level of uncertainty as to the ability of the entity to pay interest and principal on a continuing basis in the future, especially in periods of economic recession or industry adversity.” Which, of course, is exactly the sort of period Canada is entering now.

Despite Asper’s protests, analysts say Canwest is actually in dicey financial shape. One respected mutual fund manager with a large holding in the company’s stock (who spoke on the condition of anonymity) lists off the reasons why: “One, almost all media properties are selling at a depressed price,” he wrote in an email. “Two, media properties in general are facing huge challenges from Internet, cable, and new technology. Three, management have made several questionable acquisitions at high prices (looking with hindsight). Four, they compounded the problem with high leverage.” And finally: “Five, the Street does not think highly of current management.”

The first two reasons for Canwest’s plunge are no fault of its own. Readers and viewers are abandoning newspapers and conventional television for cable and Internet all over the world. In a conference call with analysts in mid-November, Asper himself went as far as saying, “The conventional television revenue model continues to be challenging, and I would dare say, broken.” Compound that with the current economic collapse, and you find that all media companies are getting hit hard. Corus Entertainment, for instance, which owns more than 50 radio stations and a slew of specialty channels, has seen its stock price slump from $25 a year ago to less than $13 today. Torstar Corp., which owns the Toronto Star, the Metroland community newspapers, Harlequin books, and a stake in CTVglobemedia, has seen its stock fall from $19 to $8 over the same period. Both represent declines of between 50 and 60 per cent. But over the same period, Canwest’s stock has dropped by a staggering 92 per cent. So the plunging market, it seems, is only part of the story.

The bigger problem falls under the heading of “questionable acquisitions at high prices,” and the piles of borrowed money required to close those deals. Since taking over, Asper has bought up a grab bag of properties. He has launched three radio stations in the U.K., acquired four radio stations in Turkey, and bought the New Republic magazine in the U.S. Then, just a few months ago, he turned around and sold the U.K. stations for an undisclosed price, less than three years after launching them. Such flip-flops have helped contribute to a perception that management doesn’t have a long-term plan. “What can I say?” says Robert Floyd, president of R.A. Floyd Capital Management in Mississauga, Ont. “They’re not the brightest bunch of boys when it comes to buying assets.”