Deal will help improve firm’s capital structure
There will be an immediate change to Postmedia Network Canada Corp. when it swallows the English-language newspapers of Sun Media Corp.: an improved capital structure.
Part of the attraction of the $316-million deal was that it would help de-leverage the Toronto-based company.
At a conference in February, Postmedia executives said the ratio of debt to earnings before interest, taxes, depreciation and amortization (EBITDA) is expected to be reduced to around 3.5 times from 4.9 times.
Even at the new level, the debt ratio remains higher than at some Canadian publishing companies such as Torstar Corp. (which is in a net cash position following its sale of romance-book publisher Harlequin last year) and Glacier Ventures, and U.S. firms E.W. Scripps and Gannett Co.
Prior to the deal, Postmedia’s leverage had gradually increased since 2011 as debt reduction did not keep pace with a decline in earnings ( before interest, taxes, depreciation and amortization), according to a report published by Moody’s Investors Service in October when the Sun Media deal was announced.
The ratings agency noted that Postmedia faced a refinancing deadline in 2017.
The Sun Media transaction will be partly financed with $140 million of fresh debt taken up by an existing Postmedia bondholder, but the structure of the deal will also inject substantial new equity into the company. A $173.5 million rights offering was completed March 17, and the funds are being held in escrow pending completion of the transaction.
There will be potential to further de-leverage by selling properties from Sun Media’s real estate portfolio. In addition, Sun Media’s newspapers already produce significant free cash flow that will help fund debt repayments and improve the company’s credit profile.
“It’s a very positive move. The finances are going in the right direction,” Postmedia chief executive officer Paul Godfrey said at a media briefing Wednesday after the Competition Bureau announced that it would not block the takeover deal.
When the purchase of 175 Sun Media newspapers was announced in October, Moody’s changed its outlook on Postmedia to stable from negative.
Moody’s analyst Peter Adu wrote that free cash flow would more than double to around $65 million, and said this would “enhance Postmedia’s ability to continue to reduce debt and maintain stable leverage” even if industry trends cause revenue and EBITDA to decline further.
Adu said office and production facilities Postmedia is picking up could be sold to further reduce debt.