Postmedia pays $316 million for Sun Media assets as it fights social media

Postmedia newspapers, including the National Post and Ottawa Citizen, are shown with Quebecor Media's Ottawa Sun on Monday, Oct. 6, 2014. Postmedia Network announced it would purchase 175 of Quebecor's English language newspapers, including the Toronto Sun and Ottawa Sun.
Image Credit: THE CANADIAN PRESS/Justin Tang

TORONTO - Postmedia is bulking up its ammunition against Facebook and Twitter by spending more than $316 million to purchase most of Sun Media, an effort it hopes will help stop the steady erosion of its advertising business.

The move will make the owner of the National Post, and a slate of other digital news properties, a significantly larger national media player and allow it to tap further into the struggling newspaper industry as it builds its online network of websites.

"We need this scale, and of course time, to be able to compete with the giant foreign-owned, digital-only companies like Google, Facebook, Yahoo, Twitter, etc.," Postmedia CEO Paul Godfrey said in a news conference on Monday.

Buying Quebecor's English-language operations puts a lot of options at Postmedia's disposal, including 175 traditional newspapers and publications, like the Sun chain of dailies, the London Free Press and the 24 Hours dailies in Toronto and Vancouver.

Postmedia also pockets valuable real estate that could soon be on the sales block, as it focuses on assets like the national news website, which is part of the acquired properties.

"Digital audiences are unbelievably valuable to this strategic acquisition," Godfrey said. "Over time, our hope is that Canoe and all of the other related websites may very well become the jewel of the deal."

The sale is subject to approval by the Competition Bureau.

However, even with the purchase, Postmedia will still be dwarfed by the reach of its Silicon Valley competitors in the social media world.

Google's advertising division, for example, allows an advertiser to purchase banner ads that run on thousands of popular websites, as well as video spots featured on YouTube. Facebook and Twitter both sell ads that are seamlessly integrated into each user's news feeds.

Some of the country's biggest media outlets have complained that advertisers, who were once devoted to buying space on their newspapers and websites, are now taking their money to social media operators because of their more favourable rates and massive reach.

Postmedia (TSX:PNC.B) is one of the most aggressive Canadian media companies in the digital space.

The company launched a redesigned version of the Ottawa Citizen earlier this year, which included a new look for the newspaper and website as well as new apps for smartphones and tablets. It also expects to redesign most of its other newspapers, except the National Post and Vancouver Province, by next summer.

All of these ventures have been expensive and merging its content with the new Sun Media assets will almost certainly cost Postmedia more.

The company, however, said it expects to find annual savings of $6 million to $10 million from the Sun Media deal within two years, but did not say where it hopes to economize.

Godfrey said the company has been aggressively cutting some business areas to save money, such as centralizing the editorial production of newspaper pages at a facility in Hamilton, Ont., and closing printing plants across the country.

Postmedia has also ended the publication of many Sunday newspapers and sold its original headquarters in Toronto.

There are no immediate plans for layoffs, though Godfrey didn't rule them out either.

Despite its efforts, Postmedia is still deep in debt, owing nearly half a billion dollars and posting a loss of $20.6 million in the last quarter.

"The newspaper business is pretty much a mug's game right now, and you have to have awfully deep pockets to make a newspaper work," said Jeffrey Dvorkin, director of journalism at the University of Toronto Scarborough. "My worry is that stripping out assets from Sun Media might be one way of doing that."

Selling off parts of Sun Media could help Postmedia's generate cash for its debts.

Sun Media owns 34 real estate properties in Ontario, Alberta and Manitoba, which include a Toronto printing plant and a pagination centre in Barrie, Ont., which handles all of its Ontario newspapers.

Both are prime candidates to be merged with Postmedia's existing operations.

Sun Media has undergone its own changes in recent years, including the sale of the Toronto Sun's building in downtown Toronto to a developer, which has turned it into mixed retail and office space.

Quebecor president and chief executive Pierre Dion said the deal comes at a time when the Canadian newspaper business needs consolidation to remain viable and to compete with digital media.

"The transaction will also keep Sun Media Corp.'s properties in the hands of a well-established Canadian group," Dion said in a statement.

Earlier this year Quebecor (TSX:QBR.B) sold 74 weekly newspapers in Quebec to Transcontinental for $75 million.

Quebecor Media still has Le Journal de Montreal, Le Journal de Quebec and the 24 Heures free daily as well as Internet, television, telecommunications and retail operations.

Quebecor will retain ownership of Sun News Network, the conservative-angled news channel that has struggled in the ratings, and been the centre of various political controversies.

Sun News will licence the rights for its existing logo for a year before Postmedia requires them to distance it from the Sun newspaper, Godfrey said.

Postmedia said the Sun Media acquisition will be financed by issuing an additional $140 million in senior secured notes by Postmedia and a rights offering of subscriptions receipts for shares in the company.

The purchase price is subject to a $10-million adjustment related primarily to properties to be sold by Sun Media prior to closing, and other customary adjustments.

Postmedia's largest shareholder, New York-based GoldenTree Asset Management LP, has agreed to a standby agreement to buy any subscription receipts not otherwise subscribed for under the rights offering.

GoldenTree has also signed a voting restriction agreement with Postmedia that will limit the number of votes that it will be entitled to cast at any meeting of Postmedia’s shareholders to one-third, less one share, of the total number of outstanding voting rights.

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