www.globeandmail.com

The Globe and Mail
leaftheglobeandmail

  Is success in the stars for media giant?

BENJ GALLANDER and BEN STADELMANN

Friday, February 19, 2010

The media generally focuses on the news that generates the most interest. Now two of their own are creating excitement, which even managed to encroach on the coverage of the Olympic Games.

Shaw Communications has bid to acquire a minimum 20 percent equity stake and an 80 percent voting position in a restructured Canwest Global Communications. The analysts who cover the sector were hardly thrilled, citing a long track record of poor returns on investment in media. They might be less excited now that the bids are being ramped up with Catalyst Capital Group and Goldman Sachs offering a competing proposal.

At Contra the Heard, we've never been ones to shy away from sectors that analysts don't like. The idea is to try and buck the current negative trend by finding a company in a patch of trouble, but not so serious that it won't survive to see better days ahead. In December, Torstar fit the profile just enough to join the Contra portfolio.

Torstar's value can be found in its broadly based ownership of newspapers, digital properties and book publishing. The Star Media Group includes The Toronto Star and Internet properties such as thestar.com, toronto.com, Workopolis, Olive Media and eyeReturn. The Metroland Media Group publishes many small community newspapers in Ontario. Perhaps not as well known is Torstar's ownership of Harlequin Enterprises, the leading global publisher of books targeted at female readers, although there are no rules against men turning the pages.

Any company that has a major focus on newspapers is very contrarian, to be sure. But we aren't buying into the hype that newspaper readership will swiftly be obliterated. At 118 years of age, The Toronto Star is Canada's largest daily newspaper and perhaps an undervalued asset. Though scary to many investors, it has initiated a huge restructuring effort to lower costs. Stacks of buyouts and moves to outsource are helping to adapt to a new landscape.

One wild card in this world is The National Post. It is not hard to imagine that the paper edition, a regular loser of bags of money, could go the way of the dodo. The resolution of Canwest's fate will certainly have repercussions in this direction. If it dies, that takes a major competitor out of the marketplace.

Harlequin is actually a growth and diversification component in Torstar's story. With the strategy of making it a global brand, revenues have been rising and foreign-exchange benefits are enhancing the bottom line. There has been a successful push into South Korea and Thailand. As women's incomes continue to grow in these countries, so could demand for an enjoyable discretionary product like a romance novel. Its doubtful that an airbrushed cover shot of male model Fabio will ever get lost in translation.

Results for Torstar's third quarter were mixed. Revenues from the newspapers and digital divisions continue to drop, while the restructuring efforts and growth at Harlequin still fall short of making up for it. However, the company has been profitable for a long period of time and currently remains in the black.

In November, the company confirmed a new CEO/president, David Holland, who had been the CFO since 2005 and was in senior leadership positions within the company since joining Torstar in 1986. He might make some quick, tough decisions, like writing down the investment in CTVglobemedia. Additional goodwill markdowns are also probable. Over the past few years, debt has risen, but the CEO has already made progress on his ongoing commitment to reducing net borrowings.

We're hoping that Mr. Holland also maintains the dividend at a healthy quarterly figure of 9.25 cents per share, yielding about 6 percent annually. Back in early 2009, the payout was cut from an understandably unmanageable 18.5 cents per share. Having dividend payers in the portfolio tends to grease returns.

As with many of our holdings, the target sell price is set in the hope that the company will regain a large portion of its former glory. Torstar's stock price will have to almost quadruple to reach the $23.49 that has been set. Much will depend on how the enterprise evolves in its rapidly changing marketplaces. If it fails to keep abreast of the transitions, with strong margins built in, thenit may never trade above $15. In the meantime, the dividend will be collected while one envisions media headlines of a turnaround at Torstar.


back