But it’s Asper’s largest acquisition that’s causing him the biggest headache. It took place in January of last year, when Canwest gobbled up a big chunk of Alliance Atlantis to get its hands on popular specialty TV channels such as Food Network, HGTV and Showcase. Floyd says acquiring the channels was a smart move strategically, but they cost a whopping $2.3 billion, and Canwest had nowhere near that kind of cash. To pull it off, the company had to make a deal with the now-troubled U.S. investment bank Goldman Sachs. The agreement they struck is complex, but Chris Diceman, senior vice-president at Dominion Bond Rating Service, says the upshot is this: 2½ years from now, Canwest will have to merge all of its TV assets with the Alliance Atlantis business, which is now called CW Media. Both Canwest and Goldman will have a stake in this new entity, and how much Canwest ends up owning will depend on its earnings and debt levels. If earnings decline, Goldman will own more, and Canwest will own less. If earnings go low enough, and debt levels rise, Goldman could even force CW Media to buy out its stake at a minimum price. In the worst case scenario, that price could be more than Canwest could afford.
When the deal was first struck, Asper said he liked it because it put his fate in his own hands. But ironically, one of the main reasons for structuring the deal in such a complex fashion was because Asper felt his TV holdings were undervalued by the market at the time. Now they’re worth even less. “The problem is,” says Floyd, “that deal was struck in better times. Now we’re in a much worse economic environment, so deals like that can go sour.” Indeed, when you read the Dominion Bond Rating Service report it becomes clear that Canwest’s debt, which now sits at about $3.7 billion, is the real albatross around Asper’s neck. Dominion’s report predicts that the “ongoing deterioration of the advertising market” will be so severe that, as a group, Canwest’s main media holdings could stop making money for their parent, “which could put Canwest Media into a negative free cash flow position by the end of fiscal 2009.” It would be a disaster that could seriously compromise Canwest’s ability to pay its debt. Last year, Canwest was expected to raise close to $1.5 billion by selling off Network Ten in Australia. That would have gone a long way toward relieving the debt burden, but Asper never got an offer he considered to be adequate.
Canwest may soon need cash desperately, and as the economy worsens, it’s running out of options to get it. The company is trimming costs—it has cut down the physical size of its newspapers, reduced the National Post’s distribution in the West, and announced the elimination of 560 jobs just last month—but Dominion says that likely won’t be enough to keep cash flows from declining if revenues keep going down. Asper could start selling off assets, but if he were to sell off holdings such as Network Ten now, he’d have to do so at fire sale prices. He’s even rumoured to have considered another option, to buy up all of Canwest’s outstanding shares and take his company private, but again, that would require hard-to-get financing.
There is always the option of raising cash by borrowing more money (assuming Canwest could find a willing lender), but previous lenders have set strict limits on how much the company can borrow. Canwest Media recently managed to raise that limit by negotiating with creditors to step up its allowable total debt-to-EBITDA ratio from 5 to 6.75 by next August. However, Dominion worries that if the economy keeps getting worse, “the company’s covenant cushion could erode faster than its headroom increases throughout fiscal 2009.” Dominion has good reason to worry: right now, of all the major publishing and media companies in Canada and the U.S. that it compares Canwest to in its report, only Liberty Media, Clear Channel Communications and Tribune Company have higher levels of debt, as measured by the gross debt-to-EBITDA ratio, while Canadian rivals such as Torstar have levels around the industry average of three. Ominously, on the very day Dominion’s report came out, Tribune, which had the highest debt ratio at 10, declared bankruptcy.
Indeed, if Canwest can’t borrow more money, that could leave only the option of last resort: defaulting on the company’s debt—which would almost certainly lead to bankruptcy. Could it really happen? Edward Altman, professor of finance at the Stern School of Business at New York University and one of the world’s most respected corporate bankruptcy experts, says yes. Back in 1967, Altman invented an indicator that can predict corporate bankruptcy with a high degree of accuracy, called the Altman Z-Score. When applied to Canwest, he told Maclean’s that this strictly by-the-numbers analysis indicates that Canwest has about a 37 per cent probability of defaulting on its debt within five years.
That means Canwest has a better than 60 per cent chance of weathering the storm, but those odds aren’t high enough for some. In late November, shortly after the company announced a massive $1-billion writedown on goodwill and broadcast licenses, respected deep value investment manager Irwin Michael finally threw in the towel. His investment company, ABC Funds, specializes in buying up the stock of undervalued companies and waiting for them to bounce back, so he’s not scared off easily. But after first buying into Canwest at about $15 some years ago and then watching almost all of his investment evaporate, Michael has stopped waiting for the bounce. In a note to clients he explains that with 85 per cent of its revenue coming from advertising, Canwest is particularly vulnerable to the looming recession. He adds that he originally believed that “in the event of a serious downturn, Canwest could have sold Network Ten,” but now the Australian network has hit its own slump, and he doubts it could be sold. In the end, he writes, “We made the difficult decision and sold our position in Canwest. We will look to redeploy the capital into less economically sensitive positions with cleaner balance sheets, better cash flow and greater dividend income.”
Not everyone is giving up, however. Prem Watsa, president of Fairfax Financial Holdings and one of the most astute financial minds in Canada, seems to be sticking by Canwest. In fact, Watsa keeps scooping up more and more of the company’s stock at every opportunity. His company now owns 22 per cent of Canwest’s subordinate voting shares—and he may know something that other investors don’t. After all, Watsa not only accurately predicted today’s general financial ruin, he made more than a billion dollars off it through canny investments in credit default swaps. If he’s right about Canwest, and it pulls through to see sunnier days, he could be richly rewarded. If that happens, Asper will be proven right, and the naysayers will be kicking themselves in disgust. But it’s a pretty big “if.” For now, “they would be hard to recommend as a buy,” says one Toronto analyst. “There’s a lot of value in their properties, but there has to be some hope of a recovery.”
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As someone who works in media, I can’t help but find many of the responses to this somewhat delusional.
Yes, the quality of newspapers and their level of impartiality have quietly, over the last 20 years, gone into the crapper. It’s NOWHERE near the level of hyberbole you see here on blogs.
But this is about leveraging too much debt against not enough revenue, then being hit with even less revenue. It has NOTHING to do with readership levels.
Circulation is not the same thing as readership. Circulation is the number of paid copies you sell; readership is just an aggragate for how many people actually read the thing. But the difference has become vitally important in the wake of every paper, including those in CanWest, choosing to give their product away for free online.
Why? Because if you total their online readership with their paid readership, you see the number of people consuming the product has risen, but the fact that they’re getting it for free a tenth of the time has hurt advertising revenue.
In point of fact, if their leveraged debt for expansion (and for write downs on other properties) is removed from the equation, newspapers actually still make lots of money. But their owners believe the end is nigh, due to the prevalence of the internet, so they’re accelerating the process via layoffs, cutbacks and by switching to the cheapest news package they can….accelerating the death of newspapers from a process that should take decades (and dovetail nicely with internet portability improvements) into one that takes just years.
“Why? Because if you total their online readership with their paid readership, you see the number of people consuming the product has risen, but the fact that they’re getting it for free a tenth of the time has hurt advertising revenue.”
That doesn’t make any sense as advertisers do not care where there ads are being shows, as long as they get viewed advertisers are willing to pay.
What’s really at issue here (and you don’t have to work for the media to see it) is three-fold:
1. Newspapers in North America have continuously moved from a mixed revenue stream (advertisers+subscriber) to advertisers only revenue; yes, to opposite from diversification.
2. This move has often led to crappy, right-wing journalism (to please the generally more conservative advertisers)
3. Bad journalism has lead to a drop in subscribers’ revenue; less people want to subscribe to a crappy paper and definitely don’t want to pay much for it (many papers still only cost a dollar)
The credit crunch is speeding up the demise of the right-wing media, but who really cares? I don’t.
I’ve observed Canwest’s Nanaimo’s Daily News for years ( mostly as a freelancer). This industry is so top heavy with management it’s unbelievable. There is no private sector enterprise with so many levels of management per employee. There is a guy called the Publisher, who has no apparent fuction and strangely, has time to operate an advertising business that some would say competes with Canwest. Then there is a managing editor, then there is a city editor, and we still haven’t hit the workers. This outfit makes the armed forces look like japanese style mananagment (the worker manages himself). It makes GM look lean and mean. Sure GM has managers, but not three levels to manage fifty workers.
Hasn’t Asper read business 101? The place to cut is management.
[...] being on the verge of bankruptcy. It follows several similar stories in recent months, including a good one in Maclean’s by Duncan Hood that helpfully explains the different reasons for the company’s decline. One [...]
Good riddance to Crapwest Globull. Then we won’t have to put up with the hijackings of American networks.
It’s always sad to see large companies go bankrupt, but I will shed no tears for Canwest. They manipulated journalism for their own agendas. Their newspapers became unreliable news deliverers, their editorials doubtful and their writers, unfortunately unbelievable in their views. It was the disappearance of journalism as we knew it. Most readers and viewers were aware but could do little to undo it. I found myself second guessing everything I read to the point of stopping my subscription. The newspapers went to the recycle bin unopened. I looked for information from other sources, like everybody else. We need a guarantor for press integrity, and our government has not provided it. Would market forces do it? I hope so.
You are right!! I will shed no tears but CanWest will!! What goes around, comes around!! Karma!!
Are they off the air yet? Today is March 11, their last day. Hopefully they are gone and no more annoying interruptions from them when watching CBS, NBC, ABC, and FOX.
CanWest – ReachCanada – all one in the same – spells trouble because of poor management – the way they treat the employees and allow their employees to be treated is disgusting!!! Do they deserve a bailout or extensions? NO!! And why is there a Human Rights Museum when CanWest – Aspers have no idea how to treat or expect their employees to be treated humanely. That is so third world!! Andwhy are/did our military fighting for humanity, fredom and equal rights? Tell me.
With them in protection now, does that mean no more simsubbing?