TORSTAR IS A FAILED COMPANYThe excerpts of Globe and Mail's Terence Corcoran Feb. 24, 2016 article below leaves no doubt that Torstar will end up in a poor go private/takeover. ___________ From Honderichs perspective, Torstars lost value is even more dramatic and personal, considering that his familys voting control over the company is exercised through a voting trust that holds 9.8 million shares, or about 12.5 per cent of outstanding Torstar shares. At $30 a share, the descendant families of the voting trust clans held Torstar shares worth $240 million. Today, those same shares are worth $20 million. The damage to the voting trust members is even greater. According to the last information circular, Honderich and the other members of the trust collectively also own 20 per cent of Torstar non-voting shares. In all, Torstars seven controlling families now hold $50 million in Torstar equity that was once worth $600 million, all of it wiped out under John Honderichs watch. The voting trust structure, which gives the families control of the company with a minority position, is a problem in itself, At least one bank analyst says this control is an issue with investors. Torstar has always had a unique ownership structure. So in terms of investors stepping in and really wanting to create some new change within the organization and take new tacks or whatever obviously thats not really an option. So its kind of getting left behind right now. With the company he chairs skidding through a cash-flow squeeze and a corporate value decline that must be devastating personally, the public attacks on Postmedia have industry observers scratching their heads. Whats Honderichs real motivation? One logical theory is that Postmedia, deep in debt and suffering through the industry crisis, is vulnerable on several fronts and Honderich is doing everything he can to enhance that vulnerability for the long-term benefit of Torstar. Less obvious, perhaps, is the vulnerability of the venerable Torstar itself as owner of Canadas largest circulation newspaper. Unlike Postmedia, Torstar may be debt-free, but it is also teetering on the brink of its own corporate meltdown. Its problem: No cash in its dowry, declining revenues and no obvious marriage prospects. One veteran newspaper executive not affiliated with either company said in an interview that if Honderichs plan is to pick up Postmedia assets, I think theyd have a hard time doing that. I think theyd have a hard time finding the money to do it. Torstar shares continue to hover around $2 a share, and have even slipped below that on occasion, as analysts and investors try to assess the future of a company that has operating losses, little cash and has hooked its future to a couple of high-risk Internet ventures. What this war is about may be reduced to a simple question: Which of the major newspaper companies will hit the wall first, and which is most likely to survive? This could be the last battle for the Star, a company that, in one form or another, has never been able to lift itself out of its Toronto home. For more than half a century, Torstar has been locked in direct competitive struggle with one or another of Postmedias predecessors. Postmedia may be a new business entity, but it incorporates newspaper properties that the Star has failed to overcome as competitors despite many attempts. Torstar failed to eliminate its direct competition as hoped when it bought the old Telegrams circulation list in 1971. Torstar failed to stop the Toronto Sun, which rose out of the ashes of the Telegram on the day the Telegram stopped publishing and soared to become a major thorn in Torstars side. Torstar failed to consummate a takeover/merger with the Southam newspaper chain (of which it owned 20 per cent) in 1992 when Honderich and his team were squeezed out by Conrad Black. Torstar failed to conclude a hostile takeover of Sun Media in 1998. Instead, the Sun went to Quebecor in a deal that was at least partially orchestrated by Paul Godfrey, who was then CEO of Sun Media. In 2011 Torstar failed to buy the newspaper assets of CanWest, the Asper media conglomerate that had bought the Southam newspaper chain, plus the National Post, from Black in 2004. So many battles and so little to show for them. Honderich and Torstar have been on a consolidation hunt for decades. The publisher of Canadas largest circulation newspaper claims to be philosophically opposed to corporate media chains and concentration of ownership unless Torstar is the concentrated owner. It just never succeeded and now has nowhere to go. *** As with all newspaper companies, Torstar is struggling with new market realities and has run out of options. Its current corporate strategies have analysts puzzled and investors bailing out. At the end of 2013, Torstar had its feet firmly planted in two sliding industries, newspapers/media and book publishing. Revenues from the newspaper/media operations the daily Toronto Star, the free Metro tabloids, and a chain of community papers had dropped below $1 billion and would fall another $100 million in 2014. Analysts expect another 10 per cent slide when Torstar announces its 2015 results on March 2. Torstars book publishing arm, Harlequin, faced the same fate as the newspaper business. Always an odd fit within Torstar except for its ability to generate fat profits, Harlequin was as Honderich put it undergoing transformational change with digital books. Perhaps wisely, Torstar sold Harlequin in May 2014 for $455 million. Unfortunately, it was a little late. A decade ago Harlequin, then rolling in profits, might have been worth maybe three times $455 million. Still, analysts welcomed the sale in part because it allowed Torstar to pay off all its debt and end up with a $290-million cash position. The sale of Harlequin boosted Torstars already flagging share value by 20 per cent within a week to $8.15. But thats the last time Torstar saw $8. Soon, as investors began to absorb the companys plans for the $290 million in cash, Torstar began a major tumble. The decline accelerated when Torstar paid out most of the cash $200 million for a 56 per cent share of a digital media company called VerticalScope. VerticalScopes business model is based on attracting advertisers to websites it manages. Torstar describes VerticalScope as a vertically focused digital media company which services the North American market through its network of user forums and premium content sights. The business is heavily focused on attracting buyers of cars and other high-profile products, such as snowmobiles. Whatever VerticalScopes business model, its financial details are not public. Sketchy data in Torstars last financial report imply an operating losses of $18 million. Torstar concedes that VerticalScope is a year or more from generating meaningful returns. One analyst has doubts about the merit of owning only 56 per cent of a company. Bentley Cross of TD Securities told Torstar executives, It doesnt make a heck of lot of sense to have a public company (Torstar) with a 56 per cent holding in something else. In such cases, investors tend to apply a holding company discount. With Harlequin gone, Torstar is grappling with a declining newspaper industry, a tablet that has debatable prospects and a digital product that is a long-term risk. When Torstar issues its next financial report on March 2, analysts will be looking for real disclosure on what it bought with $200 million. Said one, They go and spend a bunch of money and it would be nice to get a little more operating history to know that either a) it was a great purchase or b) a big waste of money. Analysts participating in an investor conference call last November with Torstar listened attentively as executives reviewed another looming exodus of cash. After sinking more than $13 million during 2015 into developing and marketing Star Touch, a tablet version of the newspaper, the company has said it will spend up to another $9 million in 2016 marketing the product. With Harlequin gone, the dividend cut is no picnic for Honderich and the voting trust families. Their collective dividend on their declining stock value will fall from $12 million to $6 million, spread among dozens of heirs. ***