Nationalize Postmedia

…and then sell it. But we shouldn't let Americans own it anymore.

Written and posted prior to Corey Hogan running for - and being elected as - Member of Parliament for Calgary Confederation.

As Canadians grapple with our new relationship with the United States, we find ourselves caring about things we haven’t for years. East-west infrastructure, where to buy a Canadian flag, and media sovereignty.

Interest in the latter peaks whenever an American-owned outlet publishes a column that seems unusually supportive of the United States.

People are entitled to their opinions. I’m glad I live in a country where people can take the minority view in a 90-10 issue. But it’s hard not to interpret, at least a little, those opinions through the lens of Postmedia’s U.S. ownership. And it’s hard not to have nagging concern that ownership has influenced these opinions.

Postmedia owns over a hundred Canadian newspapers and most of our major dailies – from the National Post to the Edmonton Journal to the Pembroke Observer and News. Their channels are the primary source of news for millions of Canadians.

That Postmedia is majority owned by a foreign corporation was probably never a good idea. As a country, there was always a strategic interest in Canadians controlling Canadian news. But now, as we face an erratic and bellicose U.S. president it becomes more urgent to ask:

If Postmedia needed to choose between what’s good for its American owners and what’s good for Canada, what would they choose? And – even if they were invested in always doing what’s good for Canada – how would we know and how would we have confidence in that fact?

Postmedia’s dedicated journalists, columnists and staff have done nothing wrong. David Staples is welcome to have doubts about Confederation. But it’s reasonable as Canadians to insist such an important Canadian media property should be in the hands of Canadians.

Making this happen is going to take someone’s money. While it doesn’t necessarily need to be the Government of Canada’s, our government has already declared supporting private media a public interest – and is best positioned to get a deal done promptly. In fact, the purchase could be financed for what the government is currently spending on subsidizing Postmedia, if the will were there.

So here then, is a three-step plan for the Government of Canada to return Postmedia to Canada – and leave it on stronger footing for years to come.

1. Buy Postmedia

2. Fix Postmedia

3. Sell Postmedia to the Canadians who work there – and let them pay with an IOU.

Those who came for a quick “repatriate Postmedia” hit – feel free to like, comment, share and leave now. But for those of you who would like to come join me in the weeds, let’s expand on how we might accomplish each of these points.

---

---

1) Government of Canada buys Postmedia

Postmedia Network Canada Corp is majority owned by New Jersey hedge fund Chatham Asset Management LLC.

There is a voting “A” share class, and a non-voting “B” share class. For reasons¹, things are structured so Chatham doesn’t have a majority of voting shares, but we don’t really need to get into it: between their overall majority ownership position and holding over 90% of Postmedia’s debt, Chatham has the ability to exert significant influence.

The purchase of Postmedia can be done through negotiation with the current owners or an Act of Parliament to expropriate the company, which you must admit is a pretty good BATNA.

Because Postmedia is publicly traded, a fair price shouldn’t be very difficult to calculate. Postmedia isn’t worth very much these days - the total enterprise value (equity + debt²) is less than half a billion dollars. If that sounds like a lot, consider what it owns, and consider this is less than what the government committed to spending on Canadian journalism when it launched its current suite of supports in 2018. Most of the cost of purchasing Postmedia – about three quarters of it – would be paying off Postmedia’s substantial debts.

2) Government of Canada fixes Postmedia

You see, Postmedia is swimming in debt and that has affected their operations.

Don’t blame that entirely on newspapers being a dying, unsustainable industry. Blame it on the company’s leaders not clocking a shifting dynamic twenty years ago, and going on a debt-fueled buying spree at the same time revenue from subscriptions and classified sections collapsed³.

After Postmedia couldn’t pay, the U.S. companies who financed the buying spree took what was owed to them and negotiated some of that debt’s conversion into a majority ownership of the company. This didn’t, to be clear, solve the debt problem. Postmedia was still swimming in debt – and that debt has grown.

As of their last quarter’s financials, Postmedia’s long-term debt stands at $363 million. $337 million of that debt is paying 10.25-10.5% annual interest to Chatham who – as we know – has a majority stake in Postmedia.

Hey, welcome to finance.

It’s not as crazy as it might sound, but the situation has meant Postmedia hasn’t really had a chance to do more than push further consolidation of the Canadian news landscape, manage the decline of its portfolio and shovel money to New Jersey.

It also means there’s no way to separate the purchase of Postmedia from the settling or restructuring of its debts – also, to be clear, not unusual. But that’s fine – clearing the debts is something the government should do anyhow.

Often, a purchase like this would see the buyer simply refinance the debt. But that just leaves a different type of albatross around Postmedia’s neck. It’s time for a bailout. This one move – even if you were to couple it with an elimination of the Canadian Journalism Tax Credit – would be a significant step in the right direction in turning Postmedia from a money-losing venture into a sustainable one.

3) Government of Canada privatizes Postmedia – selling it to the people who work there in exchange for IOUs

The Government of Canada should not own Postmedia. We already have a public broadcaster in CBC. The Canadian Journalism Tax Credit and Online News Act already entwine the Government (in my opinion far too deeply) with private news media.

Once purchased and its debt problem fixed, Postmedia should be promptly sold so it can return to its role as one of the crown jewels of Canada’s private news ecosystem.

Certainly, the Government could find a Canadian corporation to buy – and while Canada would probably take a significant loss on the transaction, such a sale would serve the sovereignty function and represent a clean exit.

But many of the same financialization and internationalization pressures that led Postmedia to its current state would reappear. If the Government has an interest in local news and a durable private news media, they should consider a different path:

Each of its 2000 employees are offered the opportunity to purchase equal share of Postmedia. If we assume that it cost the Government of Canada $500,000,000 each share would be valued at $250,000.

Concurrently, the Government of Canada offers them an interest free loan of the value of the share. The terms are that the principle is due upon sale or transfer of the share – or forgiven at $10,000 (4%) per year for 25 years⁴.

Borrowing the half billion dollars to do all this would cost the Government of Canada about $16 million annually at today’s bond rates. This is comparable to what Postmedia currently receives annually in government support. Forgiving the interest-free loans would cost the Government of Canada an additional $20 million annually⁵ - a new project, but one that’s much smaller in scale than our current media bailouts and one that could probably replace some of our existing media bailouts.

Well that sounds pretty good, but I’m skeptical.

Good! But while “spend less, get more” should always trigger doubting response, it’s not magic. It’s not “one neat trick” your aunt sends you on Facebook. At its core, it’s taking a big debt that was financed at 10.5% interest – payable to a New Jersey hedge fund – and turning it into something financed at 3.25% interest – payable to Government of Canada bondholders. The difference is then used to improve the overall situation for Canada’s private news ecosystem.

But it’s not wins all around. The debt is also effectively moved from Postmedia’s books to Canada’s – with an explicit understanding that we’ll cover it if the company’s value doesn’t climb (if the value increases rapidly, people will sell, rather than take their debt forgiveness). There are opportunity costs. There are moral hazards. There are fairness concerns.

But there are also opportunities. It would mean the current $37 million a year debt servicing expense at Postmedia disappears. That in turn would mean – even if you were to eliminate Postmedia’s eligibility for the Canadian Journalism Tax Credit – the company has millions more for operations, and a much more stable company owned by a motivated Canadian workforce.

Most importantly, it’s one path to return one of Canada’s largest news properties to Canadian ownership.

We can all hope the moment with America passes. But hopefully, the lessons won’t. We live in an attention economy. It’s dangerous for a country’s news to be controlled by entities outside of the country. Prudence dictates we address it. So – let’s repatriate Postmedia.

And then, maybe we can talk about what we do about Twitter.

1. Tax laws.

2. Technically: equity plus debt minus cash … but Postmedia doesn’t really have any.

3. You would not believe how much newspapers used to get from classified sections - Facebook didn’t kill the local newspaper, Craigslist did.

4. Why bother with this? Why would you otherwise accept ownership of a $250,000 share (and corresponding debt) if you didn’t think it’s worth that much on the open market?

5. You could assume the government is paying off 4% of what is borrowed each year, which reduces interest costs associated with the program in out years - but let’s not. This is already pretty complicated.