Canwest's dance with debt

Canwest Global Communications president and CEO Leonard Asper sent out an internal memo to his staff earlier this year, hoping to downplay persistent reports that the company was in trouble.  

"In all the media coverage, what is often overlooked is that Canwest's businesses are highly profitable and generate well over $500 million a year in operating profits," Asper wrote.

"We are in the midst of a very structured process that has a number of checkpoints. Getting a financial agreement with our lenders is one of those checkpoints, as is potentially selling some assets ... reducing our cost structures and finding new sources of revenue."

One important checkpoint came mid-March when Canwest was due to make a $30.4-million US interest payment on some of its outstanding debt.

Its creditors have given the company several reprieves since then, and the payment is now due May 5.

Canwest believes it will have sufficient liquidity to operate normally until that time. It also negotiated an extension of a waiver of certain borrowing conditions until that same date.

In the meantime, it plans to continue talks with its senior lenders aimed at a recapitalization of the company.

Overall, the Winnipeg-based company owes about $3.9 billion. It has been trying to raise some of the money it owes by selling off some of its non-core assets, including the U.S. political magazine The New Republic and a 26 per cent stake in sports broadcaster the Score.

"The problem is when you have tens of millions in debt payments, hundreds of millions in lines of credit and billions in debt, selling $1- or $2- or $3- or $4-million chunks of small subsidiaries, it’s like drowning in the ocean and having somebody on the shore bailing it out with a teaspoon," said Duncan Stewart of DSAM Consulting.

"It doesn’t really change the overall level of the water."

Terms of the New Republic sale, which occurred March 10, were not disclosed. The magazine, which Canwest had just bought in 2007, was sold to the current editor-in-chief and a group of private investors.

Most of Canwest's debt comes from past acquisitions of the former Southam newspaper chain from the Hollinger group in 2000 and, most recently, the specialty TV stations once owned by Alliance Atlantis.

"The billions in debt are there as a result of acquisitions, not as a result of operating losses," said Stewart. "They went out and they bought too much. A whole bunch of people spent money on media properties in the last five years, and Canwest is hardly alone."

Canwest Media's rating was downgraded to CCC from B-high while Canwest LP (the newspaper division) was moved to CCC-high from BB-low — both considered below investment grade.

Canwest owns the Global television network in Canada, a chain of big-city Canadian daily newspapers and broadcast operations in several countries (see sidebar).

Like many media firms, including the CBC, Canwest faces a downturn in advertising revenues as the economy sputters. It recently cut 560 jobs, or about five per cent of its workforce.

RBC Dominion Securities, Canwest's adviser, has been scouring the market searching for last-minute financing. In February, Rogers Communications Inc. indicated it might be interested in some of Canwest's cable assets, like the History Channel, Slice and HGTV.

"The properties themselves, viewed separately from the financial debacle of the parent company, are actually fairly robust businesses that seem to be weathering the downturn as well as can be expected," said Carmi Levy, a media analyst at AR Communications Inc.

Canwest has tried to find buyers for some of its other business, too, like the five television stations under the E! network brand (CJNT-TV in Montreal, CHCH-TV in Hamilton, CHCA-TV in Red Deer, Alta., CHBC-TV in Kelowna, B.C., and CHEK-TV in Victoria).

But so far, no buyers.

It has also had to scrap plans to sell more shares in its Australian TV broadcasting unit.

Ten Network announced earlier this month it would offer up to 13 per cent of the Australian company's outstanding stock.

'The properties themselves, viewed separately from the financial debacle of the parent company, are actually fairly robust businesses that seem to be weathering the downturn as well as can be expected.' — Carmi Levy, AR Communications

Canwest owns 56.6 per cent of Ten Network but cancelled plans to sell more shares because of what it called "difficult financial market conditions."

And then, there's the newspapers.

Canwest says its newspaper chain reaches 4.9 million readers on a weekly basis. 

It also includes the National Post, a newspaper that reported its first profit in 10 years in the last quarter. Circulation of the paper is believed to be falling. The Canadian Newspaper Association puts it at about 200,000 readers on the average day, not a lot more than one of Canwest's other properties, the Vancouver Sun.

"I’m a columnist for the National Post, and I like writing for them, and I hope they keep doing really well," said Duncan Stewart. "But the share price is down around 30 cents. Canwest debt is trading in the market at pennies on the dollar. Right now, experienced market watchers are more or less handicapping a less than one in 10 chance that Canwest will survive as we know it today."

Leonard Asper said the Post cut costs in its 2009 first quarter by "pulling out of markets where it was not profitable to print smaller numbers of newspapers."

That means people in Manitoba and Saskatchewan no longer get the print edition of the Post but can see it online. The newspaper's focus is now on city markets like Toronto and Vancouver.

A Fairfax buyout?

Aside from Rogers, other possible suitors for Canwest properties include Fairfax Financial Holdings and private equity firm Onex.

Fairfax is already Canwest's largest shareholder after the Asper family, and in December, it increased its stake in Canwest to 22.41 per cent, sparking speculation that it could be looking to buy out the company's minority shareholders.

Fairfax chairman and chief executive Prem Watsa says the firm is "seeing some excellent buying opportunities in common stocks for the first time in a long time, and we are taking advantage of them."

But he declined to say whether Fairfax was interested in taking Canwest  private.

The other major candidate that could make a move is Onex, which has been known to buy viable companies struggling with debt.

In 2002, Onex acquired movie theatre chain Loews Cineplex and sold off everything but the Canadian assets to private investors.

However, any company that's even considering buying the Canwest assets would have to be planning every step it takes carefully, according to Levy.

"This is not the time to be buying into media, unless you have very deep pockets and are willing to wait it out until things turn around," he said.