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Could Canwest go bankrupt?

The stock has fallen by more than 90 per cent and major investors are bailing out, as fear mounts over a debt crunch


 

Could Canwest go bankrupt?

Next year will mark the 10th anniversary of Leonard Asper’s ascent to the top job at Canwest Global Communications, taking over the reins from his late father Izzy. But there might not be much of a celebration. It hasn’t been an easy ride. When the youngest Asper became president and CEO in 1999, Canwest was trading at close to $20 a share. As of early this week, it was treading water around 60 cents. What was once arguably Canada’s leading media company was kicked off the country’s main market index in September, and is now a struggling penny stock.

Asper himself seems more perplexed than anyone by his company’s rapid decline. After all, as he’s fond of pointing out, Canwest is not only making money, it’s making more money every year. Revenues have increased from $2.7 billion in fiscal 2006, to $2.9 billion in 2007, to $3.1 billion in 2008. Similarly, Canwest’s EBITDA (earnings before interest, taxes, depreciation and amortization)—a popular indicator of a company’s profitability—looks healthy. As of August, the end of Canwest’s latest fiscal year, its EBITDA hit a three-year high of $578 million—$91 million higher than the year before. Canwest’s various holdings, which include Global Television, Network Ten in Australia, various websites and 10 major daily newspapers (including the National Post), are as a whole still making money. And analysts say that from a strategic standpoint, the company’s decision to acquire Alliance Atlantis and its portfolio of top specialty TV channels last year made perfect sense.

And yet, the market is rebelling. One after another, major brokerages have slashed their projections for the company, and few are recommending clients buy the stock. At least one major institutional investor recently opted to cut his losses and bailed out completely. According to financial analysts and investors Maclean’s spoke to, Canwest’s stock price is now so low, it indicates that investors feel it could go bankrupt. The next three years may be the most crucial in the company’s history. If Canwest pulls through, it could once again surge back to health and recapture its former glory. If it doesn’t, Asper could find himself presiding over the collapse of his father’s empire.

Asper declined to be interviewed for this story, but he hasn’t gone completely silent. For the past several months he has been on a campaign to counter the perception that Canwest is a sinking ship. Back in July, before the worst of the market collapse hit, Canwest had already been reduced to a mere $2.50 a share from more than $7 at the start of the year. On a conference call with analysts that month, he practically begged them to look past the plunging stock and appreciate the true value of his company. “Let me start by saying that given our diversity and strength of our properties, I believe that Canwest stock is significantly undervalued,” he said. Later in the call he protested his company’s low valuation again, saying that his own reported earnings-per-share figures didn’t do Canwest justice. “I challenge the analysts and the media listening to not get caught in what are today’s accounting principles,” he said, “and to take the time and look at the underlying operating strength of our corporation line by line.”

The analysts participating in the call were evidently not impressed. As the summer and fall wore on, and the economy worsened, Canwest’s stock continued to swoon. According to Bloomberg, of the 11 analysts following the shares, five now rate it a “hold” and six rate it a “sell.” Moody’s has put Canwest’s credit rating under review, and just last week, Dominion Bond Rating Service reduced the issuer rating for Canwest Media from BB to B (high). That’s a serious tumble and it puts the company firmly in junk bond territory, meaning that Dominion now considers lending money to Canwest to be a “highly speculative” investment. According to Dominion’s rating scale, when a company receives a B-level grade, “there is a reasonably high level of uncertainty as to the ability of the entity to pay interest and principal on a continuing basis in the future, especially in periods of economic recession or industry adversity.” Which, of course, is exactly the sort of period Canada is entering now.

Despite Asper’s protests, analysts say Canwest is actually in dicey financial shape. One respected mutual fund manager with a large holding in the company’s stock (who spoke on the condition of anonymity) lists off the reasons why: “One, almost all media properties are selling at a depressed price,” he wrote in an email. “Two, media properties in general are facing huge challenges from Internet, cable, and new technology. Three, management have made several questionable acquisitions at high prices (looking with hindsight). Four, they compounded the problem with high leverage.” And finally: “Five, the Street does not think highly of current management.”

The first two reasons for Canwest’s plunge are no fault of its own. Readers and viewers are abandoning newspapers and conventional television for cable and Internet all over the world. In a conference call with analysts in mid-November, Asper himself went as far as saying, “The conventional television revenue model continues to be challenging, and I would dare say, broken.” Compound that with the current economic collapse, and you find that all media companies are getting hit hard. Corus Entertainment, for instance, which owns more than 50 radio stations and a slew of specialty channels, has seen its stock price slump from $25 a year ago to less than $13 today. Torstar Corp., which owns the Toronto Star, the Metroland community newspapers, Harlequin books, and a stake in CTVglobemedia, has seen its stock fall from $19 to $8 over the same period. Both represent declines of between 50 and 60 per cent. But over the same period, Canwest’s stock has dropped by a staggering 92 per cent. So the plunging market, it seems, is only part of the story.

The bigger problem falls under the heading of “questionable acquisitions at high prices,” and the piles of borrowed money required to close those deals. Since taking over, Asper has bought up a grab bag of properties. He has launched three radio stations in the U.K., acquired four radio stations in Turkey, and bought the New Republic magazine in the U.S. Then, just a few months ago, he turned around and sold the U.K. stations for an undisclosed price, less than three years after launching them. Such flip-flops have helped contribute to a perception that management doesn’t have a long-term plan. “What can I say?” says Robert Floyd, president of R.A. Floyd Capital Management in Mississauga, Ont. “They’re not the brightest bunch of boys when it comes to buying assets.”

But it’s Asper’s largest acquisition that’s causing him the biggest headache. It took place in January of last year, when Canwest gobbled up a big chunk of Alliance Atlantis to get its hands on popular specialty TV channels such as Food Network, HGTV and Showcase. Floyd says acquiring the channels was a smart move strategically, but they cost a whopping $2.3 billion, and Canwest had nowhere near that kind of cash. To pull it off, the company had to make a deal with the now-troubled U.S. investment bank Goldman Sachs. The agreement they struck is complex, but Chris Diceman, senior vice-president at Dominion Bond Rating Service, says the upshot is this: 2½ years from now, Canwest will have to merge all of its TV assets with the Alliance Atlantis business, which is now called CW Media. Both Canwest and Goldman will have a stake in this new entity, and how much Canwest ends up owning will depend on its earnings and debt levels. If earnings decline, Goldman will own more, and Canwest will own less. If earnings go low enough, and debt levels rise, Goldman could even force CW Media to buy out its stake at a minimum price. In the worst case scenario, that price could be more than Canwest could afford.

When the deal was first struck, Asper said he liked it because it put his fate in his own hands. But ironically, one of the main reasons for structuring the deal in such a complex fashion was because Asper felt his TV holdings were undervalued by the market at the time. Now they’re worth even less. “The problem is,” says Floyd, “that deal was struck in better times. Now we’re in a much worse economic environment, so deals like that can go sour.” Indeed, when you read the Dominion Bond Rating Service report it becomes clear that Canwest’s debt, which now sits at about $3.7 billion, is the real albatross around Asper’s neck. Dominion’s report predicts that the “ongoing deterioration of the advertising market” will be so severe that, as a group, Canwest’s main media holdings could stop making money for their parent, “which could put Canwest Media into a negative free cash flow position by the end of fiscal 2009.” It would be a disaster that could seriously compromise Canwest’s ability to pay its debt. Last year, Canwest was expected to raise close to $1.5 billion by selling off Network Ten in Australia. That would have gone a long way toward relieving the debt burden, but Asper never got an offer he considered to be adequate.

Canwest may soon need cash desperately, and as the economy worsens, it’s running out of options to get it. The company is trimming costs—it has cut down the physical size of its newspapers, reduced the National Post’s distribution in the West, and announced the elimination of 560 jobs just last month—but Dominion says that likely won’t be enough to keep cash flows from declining if revenues keep going down. Asper could start selling off assets, but if he were to sell off holdings such as Network Ten now, he’d have to do so at fire sale prices. He’s even rumoured to have considered another option, to buy up all of Canwest’s outstanding shares and take his company private, but again, that would require hard-to-get financing.

There is always the option of raising cash by borrowing more money (assuming Canwest could find a willing lender), but previous lenders have set strict limits on how much the company can borrow. Canwest Media recently managed to raise that limit by negotiating with creditors to step up its allowable total debt-to-EBITDA ratio from 5 to 6.75 by next August. However, Dominion worries that if the economy keeps getting worse, “the company’s covenant cushion could erode faster than its headroom increases throughout fiscal 2009.” Dominion has good reason to worry: right now, of all the major publishing and media companies in Canada and the U.S. that it compares Canwest to in its report, only Liberty Media, Clear Channel Communications and Tribune Company have higher levels of debt, as measured by the gross debt-to-EBITDA ratio, while Canadian rivals such as Torstar have levels around the industry average of three. Ominously, on the very day Dominion’s report came out, Tribune, which had the highest debt ratio at 10, declared bankruptcy.

Indeed, if Canwest can’t borrow more money, that could leave only the option of last resort: defaulting on the company’s debt—which would almost certainly lead to bankruptcy. Could it really happen? Edward Altman, professor of finance at the Stern School of Business at New York University and one of the world’s most respected corporate bankruptcy experts, says yes. Back in 1967, Altman invented an indicator that can predict corporate bankruptcy with a high degree of accuracy, called the Altman Z-Score. When applied to Canwest, he told Maclean’s that this strictly by-the-numbers analysis indicates that Canwest has about a 37 per cent probability of defaulting on its debt within five years.

That means Canwest has a better than 60 per cent chance of weathering the storm, but those odds aren’t high enough for some. In late November, shortly after the company announced a massive $1-billion writedown on goodwill and broadcast licenses, respected deep value investment manager Irwin Michael finally threw in the towel. His investment company, ABC Funds, specializes in buying up the stock of undervalued companies and waiting for them to bounce back, so he’s not scared off easily. But after first buying into Canwest at about $15 some years ago and then watching almost all of his investment evaporate, Michael has stopped waiting for the bounce. In a note to clients he explains that with 85 per cent of its revenue coming from advertising, Canwest is particularly vulnerable to the looming recession. He adds that he originally believed that “in the event of a serious downturn, Canwest could have sold Network Ten,” but now the Australian network has hit its own slump, and he doubts it could be sold. In the end, he writes, “We made the difficult decision and sold our position in Canwest. We will look to redeploy the capital into less economically sensitive positions with cleaner balance sheets, better cash flow and greater dividend income.”

Not everyone is giving up, however. Prem Watsa, president of Fairfax Financial Holdings and one of the most astute financial minds in Canada, seems to be sticking by Canwest. In fact, Watsa keeps scooping up more and more of the company’s stock at every opportunity. His company now owns 22 per cent of Canwest’s subordinate voting shares—and he may know something that other investors don’t. After all, Watsa not only accurately predicted today’s general financial ruin, he made more than a billion dollars off it through canny investments in credit default swaps. If he’s right about Canwest, and it pulls through to see sunnier days, he could be richly rewarded. If that happens, Asper will be proven right, and the naysayers will be kicking themselves in disgust. But it’s a pretty big “if.” For now, “they would be hard to recommend as a buy,” says one Toronto analyst. “There’s a lot of value in their properties, but there has to be some hope of a recovery.”


 

Could Canwest go bankrupt?

  1. There’s also the matter of quality. Word in the progressive blogosphere is of lefties turning away from Canwest news sources in droves. They don’t watch, read, or link to articles or programs produced by Canwest media. Many have done so for years.

  2. Western Standard, National Post, CanWest.

    It’s kind of funny, eventually the consistent cries of the Mainstream Media is biased to the left will be true, but it’ll be because market forces drove out the right side stuff.

  3. It’s ironic then that the very forces the right supports so much, could very well lead to the demise of their media. Nah, I don’t see that happening. Though there is a problem when any paper is able to be clearly labelled as left or right. Once you fall into one of those categories, you will lose a segment of your audience.

  4. of course you can get a couple bs anonymous quotes from bay st guys. they dont own cw, and cant control it, therefor they hate it and conspire to avoid lending to it. this forces them to pay exorbitant rates from american banks and then rogers (macleans) throws editorial page parties over their demise. you really are despicable people

  5. Couldn’t happen to a nicer guy.

  6. I stopped my subscription to a Canwest paper years ago when I just couldn’t stomach the endless parroting of right wing tropes any longer. Not to mention 80% of the paper, by weight, was about cars, vapid articles by the likes of Leah McLaren, and breathless profiles of CEOs. Not worth it in the end. I stopped reading their online content when they put it behind a pay wall (i.e. when they went online – who pays for that anyway?).

    I cancelled my Maclean’s subscription when whatsisname, Whyte, took over and the magazine gave up all pretense of journalism in favour of, well, the kind of economic and social policies that lead to vast economic depressions.

    I guess I wasn’t the only one who gave up on them.

    • I subscribed to Maclean’s when Blog Central became must reading and I figured the magazine must have imporved, too.

    • Leah McLaren writes for the Globe & Mail, you idjit

  7. In any herd, the weak and lame die first.

    • Or, Mike, the weak and lame suck off billions from the healthy in order to die later. See GM & Chrysler.

  8. Watsa may be looking to takeover Canwest once it goes into bankruptcy by buying the Goldman debt at distressed levels. This may just be an arbitrage play for him, trying to corner the market in sub shares.

    I’d go along with the “incompetent manager” analysis. For anybody who has listened in on one of their conference calls, it becomes clear rather quickly that the guy at the top is not cut from the same cloth as his father. He is impossible to understand, and seems to be off on several different tangents about what to do about the company.

    I think a Chapter 11 filing early in the second quarter for this (and several other firms) is very likely. Their assets aren’t worth the debt they are carrying and the cash flow isn’t sufficient to sustain operations and interest payments.

  9. This article doesn’t really get into problem #5, which is the quality of senior management!

    • I agree… the majority of the senior management at Canwest have absolutely no idea where the media industry is heading and don’t seem to care either. it’s all about the $, sadly

  10. This article doesn’t really get into problem #5, which is the quality of senior management! Does anyone seriously imagine that Lenny would have got the job if his dad didn’t control the company?

  11. Canwest might go bankrupt but the Aspers never will

    • Umm, so what?

  12. Speaking as the spouse of a Canwest Global employee who will be laid off as of January 2nd, I don’t have much sympathy for Asper’s situation. When they bought our local television station a few years back along with a number of others, and then turned around a couple of months later and bought up a whole whack of newspapers, I started wondering what they were thinking. Getting into so much debt so quickly is never a good idea. Along with that, they seemed to create a new “VP of something-or-other” every month, and as a result became very top heavy.

    So it turned out that my nervousness was well-founded.

    The ship is sinking. They need a new captain and fewer first mates.

    • Right-wing bias has meant only a Fox News fair-and-balanced style that readers won’t buy, since 60 per cent of Canadians don’t want Harper or his ilk. Quality has been compromised (withdrawal from CP and AP, replaced with such great wire services as PA Sports Ticker) and production and editing farmed out to vastly under-experienced and/or under-paid non-union folk in Hamilton and Ottawa. Over-emphasis on bells and whistles on web sites instead of quality journalism. Hopeless managers who are mere toadies to the Aspers abound: read this: http://www.thedailybeast.com/blogs-and-stories/2008-12-08/kill-the-media-zombies/ In other words: Quality? Don’t need no stinking quality. No wonder no one is buying or watching the Canwest products.

    • I feel that way too I mean I don't mind watch Global and them buying TV stations for it but the newspapers that was stupid they didn't need all those newspapers it would be nice if those papers would be ran by local people

  13. Too true blah! Some time ago the NP and Global News became Canadian imitations of Fox News. I hope more people in this country start demanding some journalism in our news coverage. This doesn’t mean I’m not aware of the blatant “left” bias of some CBC reporters or papers like the Star. Myself, I’m not particularily fond of ideaologies, they tend to get in the way of democracy

  14. Out of curiousity, does every comment thread on this site turn into a war between Harper bashing and Harper loving, or just the ones not about jazz?

  15. I’m not sure how pointing out that 60% plus of Canadian voters, who bothered to showup and vote, did not choose to vote for the Conservatives. This despite the fact that the Liberals ran their worst campaign ever, with the most hapless leader (Dion is a decent man of course, just not a leader). Forget ideaology, lets just speak the facts and look for truth. I know, I know, it’s hard to find

  16. With the rapid growth of the Internet, the media can no longer compete simply by covering the news. The reader can easily go to the Internet to get the latest news, faster than any media can publish or broadcast it. However, the Internet is not a trusted source since it has too many opinions.

    Hence, we need the media to help us understand what is going on – to explain the news to us with impartial explanations from a source that we can trust. If the media succeeds in re-gaining this trust, it can win back its readership and its advertising revenues.

    I dont understand why a newspaper or media outlet should endorse a political party or a candidate; the foundations of journalism are impartiality , non-partisanship and a respect for the facts, not just opinions. Any media outlet that gets back to these basics will always do well.

  17. Niraj Chandra
    I agree totally with your last statement. Just present all of the facts and opinions, without biased headlines or lead ins. This may incourage the average citizen to research a particular topic and come up with an informed opinion of their own. I don’t hold out much hope for those with idealogical goggles, they don”t want the truth, just whatever supports their viewpoint.

  18. …and Conrad is in jail!

  19. Canwest is in a downward spiral – mounting effects of debt, dying conventional model, economic slump and advertiser/shareholder’s lack of confidence in the company and executive leadership. Leonard continuously displays “knee-jerk”, short-term desperate decisions without a solid and analysis-supported plan. Fixing one problem just creates a whole new basket of issues, and so on. The right leadership should have been put in place long ago, instead of the company’s demise playing into Leonard’s overinflated ego. It sure is entertaining to watch the circus…

  20. The problem is that, as far as the National Post is concerned, it has become a “newsletter” for a tiny fringe group within Canada’s conservatism. The paper caters to a US Republican-style flavour, the kind that simply doesn’t fly in Canada. How many times can readers put themselves through copies of the NP that almost exclusively dedicated to topics such as abortion or other issues so dear to US Christian fundamentalists? When a newspaper wastes so much space on single-issue or single-theme copies, people will lose interest.

    The majority of Canadian small-c conservatives have no truck with these things. They predominantly supported Obama over McCain, for example (as did conservatives in Britain).

    It would be perfectly alright to have a conservative newspaper, but we don’t need a US Republican/Christian fundamentalist newspaper. This is why the NP is losing readers and causing problems for the entire Canwest group.

    • I was a can west columnist for 10 years and could not have said it better. I’m a dual cit (brit) and yes Bush style neo cons have given conservatism a bad name. Maggie Thatcher never had preachers waltzing in and out of 10 Downing. If a politico sucked up to born agains in Britain, ( or France, or fucking anywhere, He ‘d be laughed out. Good piece.
      Nick

  21. website redesign – for all their media the website isn’t as fun or informative as it should be. they just redesigned it but it’s not that much fun to visit. unsophisticated comments, but I don’t waste as much time on there as I do on other websites.

  22. website redesign – for all their media the website isn’t as fun or informative as it should be. they just redesigned it but it’s not that much fun to visit. unsophisticated comments, but I don’t waste as much time on there as I do on other websites.

    with tv and newspaper and video, I should be on there longer than the huffington post, right?

  23. Take it easy guys…any company can go bust and bankrupt.
    That’s the nature of doing business.

  24. What has not been mentioned here is that with the internet we can all hunt around for the truth when it comes to news items . Once we have done that , we realize the bias that the media has manipulated us with all these years.

    From that point on we depend on them less and less and they shrink and die. They have lost credibility with us and now they are surprised we will not pay them for the “false news”.

    The CBC would have been gone long ago without your billion a year subsidy. For that reason alone I hope the best for Canwest , they fly on their own dime , have succeded so far , and if they mingle the internet with newspapers , radio , and TV along with a good dose of truthful reporting , they may survive.

  25. Please…Just watch Global for a few minutes. It will become obvious why you can’t…even if it it is just for a few minutes.

  26. As someone who works in media, I can’t help but find many of the responses to this somewhat delusional.

    Yes, the quality of newspapers and their level of impartiality have quietly, over the last 20 years, gone into the crapper. It’s NOWHERE near the level of hyberbole you see here on blogs.

    But this is about leveraging too much debt against not enough revenue, then being hit with even less revenue. It has NOTHING to do with readership levels.

    Circulation is not the same thing as readership. Circulation is the number of paid copies you sell; readership is just an aggragate for how many people actually read the thing. But the difference has become vitally important in the wake of every paper, including those in CanWest, choosing to give their product away for free online.

    Why? Because if you total their online readership with their paid readership, you see the number of people consuming the product has risen, but the fact that they’re getting it for free a tenth of the time has hurt advertising revenue.

    In point of fact, if their leveraged debt for expansion (and for write downs on other properties) is removed from the equation, newspapers actually still make lots of money. But their owners believe the end is nigh, due to the prevalence of the internet, so they’re accelerating the process via layoffs, cutbacks and by switching to the cheapest news package they can….accelerating the death of newspapers from a process that should take decades (and dovetail nicely with internet portability improvements) into one that takes just years.

    • “Why? Because if you total their online readership with their paid readership, you see the number of people consuming the product has risen, but the fact that they’re getting it for free a tenth of the time has hurt advertising revenue.”

      That doesn’t make any sense as advertisers do not care where there ads are being shows, as long as they get viewed advertisers are willing to pay.

      What’s really at issue here (and you don’t have to work for the media to see it) is three-fold:
      1. Newspapers in North America have continuously moved from a mixed revenue stream (advertisers+subscriber) to advertisers only revenue; yes, to opposite from diversification.
      2. This move has often led to crappy, right-wing journalism (to please the generally more conservative advertisers)
      3. Bad journalism has lead to a drop in subscribers’ revenue; less people want to subscribe to a crappy paper and definitely don’t want to pay much for it (many papers still only cost a dollar)

      The credit crunch is speeding up the demise of the right-wing media, but who really cares? I don’t.

  27. I’ve observed Canwest’s Nanaimo’s Daily News for years ( mostly as a freelancer). This industry is so top heavy with management it’s unbelievable. There is no private sector enterprise with so many levels of management per employee. There is a guy called the Publisher, who has no apparent fuction and strangely, has time to operate an advertising business that some would say competes with Canwest. Then there is a managing editor, then there is a city editor, and we still haven’t hit the workers. This outfit makes the armed forces look like japanese style mananagment (the worker manages himself). It makes GM look lean and mean. Sure GM has managers, but not three levels to manage fifty workers.
    Hasn’t Asper read business 101? The place to cut is management.

  28. Good riddance to Crapwest Globull. Then we won’t have to put up with the hijackings of American networks.

  29. It’s always sad to see large companies go bankrupt, but I will shed no tears for Canwest. They manipulated journalism for their own agendas. Their newspapers became unreliable news deliverers, their editorials doubtful and their writers, unfortunately unbelievable in their views. It was the disappearance of journalism as we knew it. Most readers and viewers were aware but could do little to undo it. I found myself second guessing everything I read to the point of stopping my subscription. The newspapers went to the recycle bin unopened. I looked for information from other sources, like everybody else. We need a guarantor for press integrity, and our government has not provided it. Would market forces do it? I hope so.

    • You are right!! I will shed no tears but CanWest will!! What goes around, comes around!! Karma!!

  30. Are they off the air yet? Today is March 11, their last day. Hopefully they are gone and no more annoying interruptions from them when watching CBS, NBC, ABC, and FOX.

  31. CanWest – ReachCanada – all one in the same – spells trouble because of poor management – the way they treat the employees and allow their employees to be treated is disgusting!!! Do they deserve a bailout or extensions? NO!! And why is there a Human Rights Museum when CanWest – Aspers have no idea how to treat or expect their employees to be treated humanely. That is so third world!! Andwhy are/did our military fighting for humanity, fredom and equal rights? Tell me.

  32. With them in protection now, does that mean no more simsubbing?

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