2018 Letter to Voting TrustHi All,
I sent this to the Voting Trust members this week. I didn't send it to Honderich because it would have been immediately fed into the shredder. I wont apologize for the length because it is an indictment of the Voting Trust for their complicity in mismanaging Torstar.
Joseph Atkinson wanted to enshire the Atkinson Principles and guarantee continuity of control over the Toronto Star. I don't think he ever imagined the Keystone Kops guided by Inspector Clouseau would be the legacy that will remembered even after Fairfax prevails.
April 17, 2018
An Open Letter to the Voting – How You Must Act to Save Torstar for the Future
Dear Voting Trust Members:
Last August I wrote you a letter expressing what I believe is the collective dismay of all B shareholders and reminded you of the value destruction detailed in the story written by Terrence Corcoran of the National Post. The erasure of $1.8 billion of shareholder value is by any standards is a truly ignominious achievement, with no apparent real consequences to anyone but B shareholders. The chair remains in place and the Voting Trust members show no tangible signs of being at all concerned about the massive financial ruin perpetrated on all shareholders over the past decade. I write this letter in the hope you will collectively take action to remedy this situation before it is too late.
To refresh your memories, I have assembled the following facts and observations.
Let’s start with a recap of the basic financial metrics of Torstar since John Honderich became chair of the Company (Finance schedule attached). Revenues have declined at a CAGR of negative 8.9% since 2007 and EBITDA has declined by negative 10.5% each year over that period. Net income and cash flow results speak for themselves. Dividends have declined from $.74/share to the current $.10 and Shareholder Equity has shrunk to $246 million from $918 million.
You may try to find solace from the constant reminder whispered into your ears that it could be worse. Yes, the newspaper industry has been under siege for years and no newspaper organization has been immune to the dislocation caused by the Internet. However, repeating the mantra that you need a longer runway to transition to some sort of magical digital future or unashamedly begging for a substantial government handout doesn’t give you absolution from the terrible business decisions that have been the hallmark of Torstar’s management for far too long. I will provide an illustrative list of the financial calamities that have unfolded over the past decade and perhaps you will understand why shareholders are more than just dismayed:
1.
EYE Weekly, which eventually became
The Grid, is a prime example of a flawed business idea that lost money every year it was published until it ceased publication in May 2011. Too much time and money was wasted over the 20 years competing with Now Magazine. Millions of dollars were wasted out of the stubborn and contrarian belief held by John Honderich that the Toronto Star had to dominate every print advertising vehicle in Toronto. Estimated total lifetime losses
$5 million.
2.
Transit Television Network – In 2002 Torstar made its first investment in TTN and then proceeded to lose at least
$20 million on this failed business model before it was placed into bankruptcy in 2009. This was a poorly researched investment concept and symptomatic of the ill-advised forays into businesses Torstar had no expertise in running and compounding the challenges by making one bad decision after another.
3. In 2002 Torstar acquires 19.35% of
Black Press for $20 million. This investment has been dead in the water for 16 years and the strategy for this investment (whatever it was purported to be) was flawed from the outset. Estimated cost at least
$15 million as Torstar will never recoup its total investment.
4.
Weekly Scoop was launched in October 2005 and ceased publication in June 2006. The notion that Canada needed a Canadian-centric celebrity magazine ranks as one of the worst ideas ever. In fairness, it was shutdown in less than a year because it was such a bad idea. Estimated total losses
$4 million.
5.
CTVglobemedia – Torstar invested $377 million in 2006 for 20% of this enterprise and incurred considerable carrying costs for four years before selling out to Bell in 2010 for $345 million. Total losses on this investment including carrying costs are estimated at
$95 million. Who thought a significant investment in conventional television in 2006 was a good investment idea? Losses were only mitigated because BCE has a slightly worse long-term investment track record (excepting Workopolis) and more cash than Torstar when it comes to making poorly conceived and executed diversification initiatives.
6. In October of 2006
Workopolis was valued at $300 million and Torstar acquired an additional 10% for $28.75 million in cash when Bell Globemedia sold its 40% interest for $115 million. Workopolis was apparently sold in Q1 2018 by Torstar and Gesca for an undisclosed amount. This writer speculates it commanded a selling price that was a very small fraction of $300 million. This opportunity was squandered because of poor management decisions. Look at the track record of Indeed, the company that acquired Workopolis for a primer on how to invest in this field. Estimated loss from not exiting before the bottom fell out -
$120 million. Accumulated operating losses estimated at
$5 million.
7. In the
2009 Annual Report, John Honderich declared it was a year of transition,
transformation and consolidation for Torstar. Anything sound familiar ten years later? This transformation fraud has been perpetuated for far too long. It is time to finally acknowledge the board and management have no idea how to transform Torstar for the 21
st century.
8. In 2010, Torstar bid approximately $800 million in an attempt to acquire the CanWest newspaper group with the financial support of FFH. In retrospect, what confidence do you have that if that bid had been successful you wouldn’t be bankrupt today or part of FFH? Yes, you might have paid less than Postmedia ultimately did, but the organization has demonstrated limited capability to deal with the challenging industry circumstances, as evidenced by the continued financial carnage in the attached Financials schedule.
9. In 2012 Torstar invests in
Shop.ca – a failed and flawed venture intended to compete with Amazon and other established online shopping sites. Nothing about this investment and subsequent additional investments in this venture ever made any business sense. Total estimated loss
$10 million.
10. In 2014, without a cohesive strategy in place, Torstar opportunistically sold
Harlequin for $455 million. There were no plans to replace the earnings generated by Harlequin – it was a reactionary move and Harlequin was sold for a fraction of what it was worth a few years earlier. There was a time when Harlequin was worth almost $1 billion. Sure, debt was paid off and a frantic effort was made to demonstrate a strategy was in place for the balance of the cash, but who runs a major corporation like this? Harlequin was the last wise investment made by Torstar and unfortunately that dates back to 1975 – more than forty years ago! Estimated unrealized value lost
$300 million.
11. In the same year that Harlequin was sold, the investment in
Star Touch was announced. At the same time the paywall at The Star is taken down for reasons that will make even less sense when the paywall is re-established in 2018. Star Touch was an unmitigated disaster and clearly illustriated the organization was completely bankrupt of credible business ideas. Torstar was sold a bill of goods by La Presse and the level of scrutiny on their questionable claims appears to be non-existent. No other credible media company in the world could find a reason to go down this road. The fact that Torstar chose to rely on the dubious results at La Presse is impossible to understand. Out of pure obstinacy it continued to bleed cash until July 2017. Total estimated loss
$24 million.
12. In
November 2016 David Skok was hired as Associate Editor, Digital and Head of Digital Strategy with considerable fanfare. He was the managing editor and vice-president of digital for the Boston Globe, where he led the digital transformation efforts of the organization across the editorial, product, and business units. Under his leadership at the Globe, BostonGlobe.com’s digital subscriptions grew by 40 percent, and its page views and digital revenue both tripled. Three months later, on
February 3, 2017 the chair of Torstar announced Skok’s departure from The Star – neither Michael Cooke nor the publisher was capable of making this announcement? Did Skok have the temerity to suggest that Star Touch was a mistake and should be shutdown with a knock on effect on the chair’s son? The message coming from the chair could only be interpreted as intending to send a chill to anyone thinking about speaking truth to power. What did that episode cost The Star and who in their right mind would want to come work at The Star in this environment? Estimated financial cost of relocation and severance
$500,000. The impact on The Star’s reputation and ability to attract future talent is
priceless.
13. In 2015, in an apparently desperate search for a home for approximately $178 million from the proceeds from selling Harlequin, Torstar doubles down on an advertising dependent business vulnerable to digital disruption with the purchase of 56% of
VerticalScope. What kind of a diversification strategy is tethered to the same revenue stream in which you are currently experiencing significant declines? This is another cash black hole and time will ultimately prove this to be another disastrous investment. An investment should have been made in a cash generating business with high barriers to disruption. Highlight this point for future reference when the $178 million investment is cited as another unfortunate chapter in the demise of Torstar. Estimated lost opportunity cost to date
$10 million.
14. In 2017,
wagjag was sold for proceeds of $500,000. This was another copycat initiative intended to compete with Groupon much like Shop.ca competing with Amazon. Who thought this was a good idea? Estimated loss
$5 million.
15. In 2000, the building at One Yonge was sold, ironically to Woodbridge for $40 million. That doesn’t seem like a good deal in retrospect when the LCBO property next door recently sold for $260 million. The Vaughan printing plant property was sold in 2016 and the list of remaining tangible assets is quickly coming to an end. What is the plan after the corporation runs out of assets to sell to generate cash?
16. In addition to all of the above, request an analysis of the ROI on Toronto.com, Metro, Sing Tao, Olive Media, various other acquisitions by Metroland and ask the hard questions about the quality, value and return of these investments today. Expect to be shocked.
17. On the issue of the mystical
“transformation”, does anyone inside or outside the organization after a year know what Boynton is talking about? His message in the Annual Report is impenetrable and lots of the usual bafflegab around all things digital. Hiring another CEO with no CEO experience when you are in a death spiral makes no sense whatsoever. The appointment of David Holland, the Honderich puppet without a strategic bone in his body and no operating experience also contributed significantly to the deterioration of the company. Estimated cost impossible to estimate, but has contributed in large part to the demise of Torstar.
18. The deal announced with Postmedia in November 2017 was a rare good business idea with absolutely amateur execution. The arrogance and gross incompetence has been well documented in The Globe and Mail and other publications. The Competition Bureau will no doubt slap Torstar’s and Postmedia’s wrists and admonish both organizations for their heavy-handed behaviour. This recent episode speaks to the inability of Torstar management to accomplish a relatively straightforward transaction. This was a self-inflicted mess that casts serious doubts on the capabilities of both the board and management. Cost of lawyers and disruption estimated at
$1 million.
19. The “major” national expansion with
Metro in western Canada announced this month will rank with Star Touch as one of the most ill-conceived strategies in the long history of bad strategies. Does anyone at Torstar understand what purpose Metro serves – it’s a 20 minute time waster for commuters. Furthermore, the Toronto Star brand carries no value in western Canada. I would encourage you to take a cursory review of the competitive landscape in Vancouver, Calgary and Edmonton and ask yourself where the opening is for a Star branded commuter publication? Where was Linda Hughes, the lead director and Edmonton native on this discussion? Estimated loss before capitulation in 18 months – at least
$3 million.
20. Finally, the
reorganization implemented in 2017 has done nothing but create even more chaos and uncertainty within an organization with an already highly toxic culture. The Oliver brothers are hapless pawns saddled with considerable responsibility, no authority and possessing no strategic skills. Decision-rights are muddled and the new crew of executives recruited by Boynton are arrogant and dismissive of the legacy employees. Boynton is rude, arrogant and controlling with no idea about how to transform a media company. He has no genuine passion for the role of news media and he is unsuited to be the publisher of the Toronto Star, let alone CEO of Torstar. This continues the tradition of having unsuitable and unqualified Toronto Star publishers for more than 20 years.
I would implore you to invest a modest amount of time and money in an employee survey where the results come directly to you, unfiltered or scrubbed by management or the chair. If you aren’t shocked and dismayed by the environment in which employees are operating I will be more than surprised. The toxicity and sense of despair is impossible to put into words. Good people are quitting daily and the remaining hostages are constantly filled with dread as the once proud company sinks deeper into the morass of destructive leadership and financial ruin.
To recap, the total value of ill-advised or unwise investments by my estimates total
$617.5 million. This represents approximately $7.70/share of value destruction. This list is not complete and neither the board nor the Voting Trust has ever seen this kind of analysis because it is a stunning indictment of the leadership of this company. No doubt his list and the estimated costs will be challenged, but an independent review would tell you it is directionally correct and perhaps understated. The newspaper industry is under siege and a portion of the decline in the value of the company is understandable. This list of failures has no corresponding list of successes and isn’t directly related to the structural changes in the newspaper industry. This also isn’t simply a case of a string of bad luck – it is the result of unacceptably atrocious management and oversight by John Honderich, who has been at the meddling helm for much of this catastrophe.
Before the Voting Trust does its version of “Thelma and Louise” and takes the entire cast and crew of A and B shareholders over the cliff with them, I would offer the following solutions for your consideration. You have the power to reverse this record of failure now, by acting in the best interests of your families, the families of all B shareholders and most importantly perhaps, the families of the good people still toiling away at Torstar:
- · Negotiate with Fairfax a fair price to privatize Torstar with all of the necessary conditions to enshrine and protect the Atkinson Principles in perpetuity. Fairfax has the long-term financial resources to ensure the Toronto Star remains a well resourced and strong voice for all Canadians. It is not my place to determine what constitutes a fair price, but watching the company bleed to death is not something I believe you want to leave as your legacy. Prem Watsa by all accounts, is an outstanding Canadian with a demonstrated interest in doing what is best for Canada and the Toronto Star. If he walks away from Torstar your options are extremely limited and the final outcome will be disastrous.
- · Appoint a new chair of the board and of the Voting Trust. John Honderich has been a major contributor to the failure of the company and the toxicity levels within the entire organization. He will deny this, but you have to know this to be true. The AGM would be the appropriate transition date and find someone with the business acumen to privatize the company or get it back on the right track. It isn’t too late to salvage something from this unbroken string of failures.
Yours truly,
A Concerned B Shareholder
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