WHEN DAVID RADLER TOLD ME that to buy American community newspapers would now cost twelve times the operating income, I told him that we should sell, that there was no possible justification for paying such multiples for small, minimum-growth operations in towns whose name even the head of the American Geographical Society would not recognize. Radler did a very capable job of disposing of these units, frequently achieving multiples to operating income exceeding twelve – after jacking up the income by his relentless pressure on costs and with novel but well-tried ideas of how to generate revenues in unconventional ways. He and I had been at this, he continuously, since the Eastern Townships more than thirty years before; we did not have much left to learn about how to raise the profit margins in small-town newspapers.
I had been loudly proclaiming for years, in my single-combat defence of the newspaper, that we had the content and the franchise and the ability to attract the proverbial eyeballs. But I was getting well into middle age and I wanted to do something else as an occupation than be a tout for a declining industry and sit up night after night soothing banks, reassuring note-holders, and generally being like the little Dutch boy who put his finger in the dyke. Rather, it was time for Hans Brinker’s Silver Skates. If this environment continued, I worried, newspapers could very rapidly become a vanity occupation, even though we were still making excellent profits.
I also wanted to bury my ancient nightmare of Almayer’s Folly once and for all. Joseph Conrad’s novella about a Dutch merchant in Indonesia who gradually lost all the proceeds of forty years of work had haunted me since I read it. The fear that all my efforts in the newspaper business, from the Knowlton Eastern Townships Advertiser in 1966 on, could come to nothing financially if the lenders were spooked or the industry imploded oppressed me.
Unlike the United Kingdom or the United States, Canada has antediluvian media ownership rules that restrict foreign ownership of the nation’s newspapers to 25 per cent. I could circumvent this, if necessary, by putting some of my stock in trust for my children, or my wife (who was an uncontested dual U.K.–Canadian citizen). This was the time to sell out in Canada.
With a market restricted by nationality, the pool of buyers for our Canadian assets was just about empty. Power Corporation had sold its Southam interest to us. Ted Rogers had exited, selling the Sun newspapers to a leveraged buyout group led by former Metropolitan Toronto chairman Paul Godfrey, who then sold to Quebecor. The financially strapped Quebecor was scrambling and not a buyer. Thomson had all but vacated the business except for a minority interest in the Globe and Mail, the Winnipeg Free Press, and a few smaller assets that they were trying to sell. In fact, the final catalyst to announce our sale was a conversation with the president of Woodbridge, the Thomson holding company, the distinguished and affable John Tory (one of Tory & Tory). He telephoned me at home on a Sunday evening and asked if I was interested in buying their remaining papers, apart from the G&M minority interest. I put down the phone, poured myself a glass of wine, and reassured myself that I could move faster than the slightly ponderous, though very well managed, Thomson Corporation.
With no visible buyers for our main properties, Canada was closing in like a financial vise. I wished to reduce our company’s financial dependence on the newspaper industry, and on debt generally.
The big sale began in the spring of 2000. In April, our stock price languished, despite huge increases in profit. We announced that we would be prepared to seek “strategic alliances” for most of our assets and would possibly sell some of our non-metropolitan Canadian newspapers. We also made clear that the Telegraph was not for sale.
David’s sale of American community newspapers yielded capital gains to the company of US$562 million on an initial acquisition price totalling US$466 million. Since most of the acquisitions had been financed entirely on borrowing and repaid from operating profits, the real gain on these sales was almost all of the $1.03 billion sale proceeds. These sales rolled in from 1998 through 2000. We sold the papers and on request promised the buyers not to compete in their markets in return for non-compete payments. This was standard in the industry, and we had paid out non-compete fees ourselves, sometimes to companies, sometimes to individuals, depending on the situation. We were known as fierce competitors and any buyer wanted to be sure there was no way for us to get back in. As both Hollinger Inc. (the Canadian parent company) and Hollinger International (the U.S. company) had been owners and operators of newspapers, buyers of our newspapers usually wanted both those companies in the agreements. And since David and I were employed by Ravelston, which contracted our management services to International, there were also payments to us individually. In the event we ever separated from the public company, most vendors wanted to be sure we would be durably prevented from re-entering the market as competitors.
Acquisitions of community newspapers could often be self-financed. Indeed, that’s how we initially built our company with very little cash of our own. We would borrow half the cost of new properties, dealing with the other half of the sale price as a promissory note to the vendors. In the days of reasonable interest rates and buoyant newspaper advertising markets, these deals could be paid off from operating profits within four or five years. That was how we had founded Sterling Newspapers in the early 1970s. Then we ran the operations efficiently enough to ensure that we paid down both balances and gradually assumed the equity in the business. As our track record became better, we could borrow more. But obviously, when others were acquiring newspapers from us, the same sort of self-financed deal was vulnerable to competitive pressures, and the buyers and their lenders had to be assured of non-competition from those who knew the market best – the vendors.
There were no outside lawyers arranging the formalities on these dispositions in the United States. Company secretary Mark Kipnis, an affable, Chicago-based lawyer and normally rather thorough practitioner, under the general supervision of Peter Atkinson, one of Canada’s outstanding barristers before he joined us as legal vice-president in the Toronto office, was relied upon to make sure all was handled to the best standards of documentation and independent approval where appropriate.
Years went by, and the auditors, KPMG, and the Audit Committee repeatedly assured us that all documentation and disclosures of non-competition payments and all other matters were completely satisfactory. The U.S. community newspaper division, with head offices in Chicago, at the Chicago Sun-Times, was run autonomously by David Radler. I had no reason to imagine anything had been done improperly. Where there were leftover individual community newspapers without buyers, David Radler grouped them together and sold them to non-arm’s-length groups assembled and headed by himself, at formula prices based on audited figures. This was the beginning of what are called in this narrative the private newspaper companies, which included Horizon Operations (Canada), Horizon Publications, and Bradford Publishing (both in the U.S.). I invested in those three as a silent partner, as well as some arm’s-length acquisitions, passed on others, and had no hand in the management whatever.
These transactions were approved by the independent directors, but would lead to substantial controversy eventually. The allegation would be made that Radler had arranged a low-ball price in most cases. And in the particular case of Horizon Operations (Canadian community newspapers), Radler represented his understudy, Todd Vogt, as a 25 per cent shareholder, as were David and I. It would come to light that Vogt had no equity in the business, and was fronting for Radler, with no knowledge of the deception Radler had conducted opposite the directors, especially me. When I learned this, several years after the transaction, it was the first warning that Radler’s conduct was ethically deficient, and that we were no longer compatible as associates. This will be referred to hereafter as the Vogt affair.
A couple of weeks after our announcement of possible sales, the founder and chief builder of CanWest, Canada’s second private-sector television network, Israel Asper, telephoned me and asked if we would be prepared to sell so
me of our larger Canadian newspapers. This was the call I had been waiting for. We had no other strong and plausible expressions of interest. I had known Izzy Asper for many years and had always liked him. I had sold him the Crown Trust Company in 1979. In 1975, I had negotiated with the owners of the eastern portion of the Global television network, of which Izzy then controlled the western part, to sell them our Sterling newspaper interests. That deal did not go through, but Izzy and I had kept in touch.
Negotiating with the Aspers over the sale of the Canadian newspapers was not like falling off a log. Bargaining continued non-stop through the spring and summer of 2000. Our discussions knew no day or night, frequently entailing long, hand-written letters faxed by Izzy at 4 a.m. revoking what had been agreed at 3 a.m. only to be reinstated with small modifications at 5 a.m. His style was very different to mine, but his constant sense of humour made the difficult possible. As we approached an agreement, they were prepared to buy all our Canadian newspapers except some of the smaller ones in British Columbia. The National Post was a special negotiation, since its survival depended on printing and delivery by the Southam chain, which we were selling to CanWest. I didn’t want to part with the National Post, but for Izzy too it was the big trophy, so we divided ownership evenly, with me continuing as its publisher. I was happy to share the loss and Izzy was content for the time being to share the prize. The last stages of this complicated sale were carried out on my cellphone from Bayreuth, Germany, home of Richard Wagner, where Barbara and I were attending a series of operas at Wagner’s Festspielhaus. In the intermissions I would try to sort out the final details with Izzy and his son Leonard. Wagner’s operas are of sufficient length and the Germans so dedicated to eating that the intermissions were just long enough to make an agreement that could then be reinterpreted and renegotiated when we arrived back at our hotel.
This semi-madness was fitting, as we were staying at Pflaums Posthotel in Pegnitz, a wonderfully eccentric hotel run by a family dedicated to Wagner. I would talk to Izzy in its corridors in the shadow of six monitors all playing Wagner and fit my negotiations to the background music: a night’s ride with the Valkyries followed by Valhalla crumbling. On the penultimate night of the negotiations, the bathtub in our room, which was curiously placed at the foot of our bed where one might normally find a bench or sofa, self-started as we were sleeping. Neither Barbara nor I could decide what precise meaning this had, but in the normal way of things, I saw it as a hopeful sign, verging on a self-revealing spring, as at Lourdes, while Barbara muttered about the deluge, as in the last hours of Louis XV.
When the deal was announced in July, the Canadian media responded with joyous stupefaction. I was actually getting out of their faces. They were generally convinced of my desire to retain a majority of Canada’s newspapers and to conduct a long-term campaign against the soft Canadian left. The tenor of media comment was that Asper had “wrested control of Black’s newspapers,” as reported in Maclean’s. The Globe and Mail portrayed me as a stuffed turkey, with Asper setting out to carve me up. It was assumed that because Asper was a Manitoba Liberal, though a rather conservative one, he would be more ideologically amenable to official Liberal views than I had been. In fact, there wasn’t much difference between us in ideological or policy terms.
As the negotiations to conclude our deal continued through the summer and autumn, elements of the media saw what a remarkable deal this was for Hollinger and did a 180-degree turn, trying to sandbag the sale. Having celebrated my departure, they now tried to warn Izzy off by claiming that I had taken him over the barrel. Consideration in the transaction was ten times operating income, plus Can$100 million for half of the National Post, plus Can$30 million for the money-losing website www.canada.com. On its face, this was the definitive deliverance of Hollinger from the jaws of debt, allowing us to retain the Telegraph titles and the strong group of assets we had in the Chicago area, half the National Post, our Quebec properties, and a scattering of smaller newspapers. The total consideration was Can$3.6 billion, a gain in a little over four years of about Can$1.4 billion, and set up in a tax-favoured deal structure. One-fifth of the consideration was in shares and one-fifth in high-yield notes.
By October, the Canadian Imperial Bank of Commerce (CIBC), which was financing Asper, had a partial case of cold feet. They indicated that they wanted the scope of the deal reduced slightly, and we managed to accommodate that. By Christmas 2000 the deal had been closed. Finally, I had largely extricated myself from debt, from Canada, and from the newspaper business, of all of which I had become wary. Largely extricated, yet not quite sufficiently to assure a peaceful transition to the new life I had started to plan.
FOR ALMOST A YEAR following the closing of the sale of most of the Canadian assets to CanWest and others, corporate life was less worrisome than it had been. It quickly became clear that we had moved at the most advantageous time. A couple of months after the completion of the main transaction, the economy started to falter. Advertising revenues, especially in the newspaper business, went into a steep decline, and income at the main continuing units, the Daily Telegraph and the Sun-Times, eroded very seriously. I looked upon this with a slightly cavalier indifference at first, as the elimination of bank debt left us much less vulnerable to such fluctuations and I was confident revenues could rebound.
However, there remained an excess of debt in the Canadian holding company, Hollinger Inc. Getting money from Hollinger International to Hollinger Inc. could be done but had to be navigated with care. The remaining debt terms from bond-holders and lending banks were a patchwork of complicated cross-warranties and ratios governing asset values and cash generation. The CanWest deal and those that followed on smaller asset packages dramatically reduced debt and removed concerns about any business downturn or unforeseen developments. They did not, however, make matters objectively simple.
The initial relief in the Canadian media that these newspapers would now be in the hands of Liberals swiftly gave way to howls of rage at alleged ownership interference, the perceived bumptiousness of the new owners, and very faint groans of nostalgia for our era. My longstanding critics on the left of the Canadian media now turned on the Aspers, ridiculing them unjustly as ignorant meddlers and inept businessmen who had swallowed the then fashionable “convergence” dream and couldn’t digest the newspapers they had bought so dearly. The price of CanWest’s shares declined by 90 per cent, from $25 to $2.50, because of the unkind perceptions that Izzy Asper had overpaid and was an unsuitable owner of such franchises. We bailed out of the stock about halfway down, but our capital gain on the entire transaction was reduced by about Can$100 million.
CanWest needed a refinancing to cope with the acquisition of these properties and had the assets for one. Their predicament was not the failure of “convergence” but rather the failure of their banker, CIBC, to grasp the basic structure and psychology of the U.S. financial market. The big New York merchant banks in those pre-crisis days operated a tight cartel. CIBC thought they could raise money in the United States without using one of its members as co-lead in the issue. This did not go over well with Morgan Stanley, Lehman Brothers, Salomon Smith Barney, Merrill Lynch, Credit Suisse First Boston, Goldman Sachs, and one or two of the others. All that was necessary to sabotage the entire underwriting was for representatives from these firms to advise their main institutional investors that if they just sat on their wallets, the deal would come back to them on more advantageous terms and the favour in swatting down this Canadian interloper would be remembered. CIBC looked like innocents in Babylon.
I groaned resignedly at the stupidity of the CIBC as they smugly shot themselves in the foot, knowing that the next shot would come at us and to a far more vulnerable spot. It did. The Canadian banking system then determined that, since CanWest was having difficulty refinancing itself out of its bank debt, the CanWest paper that we held was not acceptable collateral for our loans. This was a significant inconvenience of a kind that we had hoped we had outgrown
.
We continued to sell secondary assets. A group of Canadian community newspapers, mainly in Ontario, were sold to a management buyout group led by Michael Sifton, scion of a celebrated Canadian newspapering family, from whom we had purchased the main newspapers in Saskatchewan in 1996. We gained a further profit for Hollinger International of Can$120 million. But we certainly followed financier and presidential adviser Bernard Baruch’s advice to “leave something on the table for the next guy” and were pleased when, three years later, Sifton floated the newspaper company at a profit. His family and mine have been friendly for generations, and still are.
Dan Colson and I sold Hollinger International’s French-Canadian newspaper company to Paul Desmarais’s Power Corporation. One of our great strengths was knowing when to sell. I had bought this company, Unimédia, from Jacques Francoeur in 1986 for Can$50 million. We had taken more than $50 million out of it and sold it from Hollinger Inc. to Hollinger International in 1995 for about Can$75 million. This had been another related-party transaction in which the shareholders of both related companies made a very large score. We sold it to Power Corporation for $145 million.
(Jacques Francoeur was a colourful Québécois of the old Duplessis school. He maintained his office where it had always been, in the unfashionable east end of Montreal, with a police radio transmitting behind his desk. He would tear out of his office like a cub reporter if something interesting came over the radio, including twice when I was visiting him. I accompanied him, once to a fire and once to a bank that had been robbed. This was not as distracting as the habit of his and Paul Desmarais’ great rival Pierre Péladeau, the controlling shareholder of Quebecor and Le Journal, of interrupting himself in mid-sentence to utter a prayer or receive a purported revelation. I went through this a couple of times too and at first thought that Péladeau was having an attack of epilepsy.)
Conrad Black Page 11