Nothing is inevitable until it happens, or at least so said historian A.J.P. Taylor. If he had been alive to witness the carnage of the daily newspaper he may have revised his statement. Competition from cheaper, digital products has destroyed the business models of newspapers in every part of the world with a high internet penetration. A handful have stemmed the bleeding through successful digital offerings, such as the New York Times and The Wall Street Journal. Others have not been so fortunate. Canada’s Toronto Star is one of the unfortunate. Since 2000, its circulation has shrunk by 38% and the one-time lucrative national advertising market in Canada has dried up as well.
The Star traces its origins to 1892 when it was founded by strikers from the now defunct Toronto News. Partly as a result, the paper has always had a liberal editorial stance. Joseph Atkinson, the Editor from 1899 until his death in 1948, did more to chart its future than any other individual. Staunchly liberal, Atkinson intended the newspaper to be run from a charitable trust upon his death, but Canadian laws forbade profit-making within a not for profit enterprise. While the paper remained for profit, Atkinson insisted it stay true to five principles that included commitments to civil liberties and social justice. Times were good for decades at The Star until recent changes in the consumption of news have imperiled its business model.
Today, The Toronto Star is part of the larger Torstar Corporation that owns various media assets in addition to its largest newspaper. A voting trust comprised of seven of the founding familes of Torstar controls practically all of the shareholder votes of the corporation and 27% of the economic equity. In 2004, when Torstar’s stock price peaked, the families stake was worth a combined C$673 million, but today only C$33 million. New management at the company has said that everything is on the table as it looks to unlock the value of its assets. Comparing the assets owned by Torstar to valuation placed on the company by equity investors reveals that investors are quite pessimistic that management will be successful.
Star Media Group houses not only The Toronto Star, but also the free daily Metro, distributed to subway riders across Canada. National advertising in Canada has been absolutely abysmal and the future of both titles is heavily in doubt. Revenues peaked in 2011 at C$507 million. The decline to C$280 million in just five years has been savage and eaten up the entire profitability of the division.
Unlike some metropolitan areas around the world, Toronto has not consolidated to a single newspaper. The Globe and Mail continues to compete with The Star. Logic would impel the two companies to consolidate, but that would be a difficult transaction. The trust running The Star has a duty to maintain Atkinson’s progressive principles. Meanwhile, The Globe and Mail is held by The Woodbridge Company, owned by the descendants of Roy Thomson. The company also has a controlling stake in Thomson Reuters. That means that the winner in Toronto will be the one with the deepest pockets. Clearly, that would mean The Globe and Mail would survive longer than The Star.
Some United States’ newspapers, primarily The New York Times, The Wall Street Journal, and The Washington Post, have a financial runway ahead of them because they successfully transitioned to digital models where readers are willing to pay for online content. The Star has attempted to implement a paywall in the past, but after failing, abandoned it. The success of paywalls is predicated on having content unavailable elsewhere. Most newspapers implementing paywalls have used a so-called “soft paywall,” which allows readers to access a certain number of free articles before needing to purchase a subscription. This approach protects ad revenue garnered from more casual readers, while gaining subscription income for more ardent readers of the newspaper.
When The Toronto Star put up its paywall it had positive results, but ultimately the churn rate was so high that the marketing expenses needed to maintain the paywall exceeded the value of the subscribers. That could potentially imply a couple of different scenarios: the company was charging too much for the digital subscription or the content its producing is not being valued greatly by its subscribers. The second scenario is obviously extremely worrisome. Not succeeding in paywall implementation also has consequences on print subscribers. Assuming someone is comfortable navigating the internet, there seems to be little reason to subscribe to a product in which all of the articles can be read for free.
After the failure of the paywall, a product for tablets was pursued by the company. A total of C$25 million was invested in the hopes it would shore up the foundation of the newspapers. It didn’t. The app was designed to be free for readers and entirely supported by advertising, but only about 80,000 readers used it each month. After its failure, the newspaper has a single app for phone and tablet use.
It is not at all clear what future The Toronto Star has. Indeed, it is not clear that it has one at all. The raison d’etre of the newspaper has to be completely re-thought as it continued to adapt to a new world.
A loss making operation can still hold value so long as there is a reasonable chance that its fortunes will change. Perpetual loss making businesses have a negative value to their owners. Is that the case with The Toronto Star? It could be. It may not even be considered a trophy by wealthy investors that other newspapers sometimes are. Still, there is a possibility that were it put on the auction block along with the other asset of Star Media that it would be salable. Based upon its revenue and similar deals in the recent past, the division could be worth C$75 million – although the fact that the Trust would be hard pressed to approve a sale and maintain true to the Atkinson Principles must be taken into account when assessing the business.
Torstar also owns Metroland Media Group, a group of community newspapers anchored by the Hamilton Spectator and the Waterloo Region Record. It also owns a collection of newspapers scattered throughout Ontario. Community newspapers have performed better than national ones as residents continue to have fewer options in getting local news than they do in getting national news. Revenue for Metroland peaked in 2007, but had a second peak in revenue following the recession in 2011. Since then revenues have fallen from C$582 million to C$408 million in 2016, a decline of about 30%. While EBITDA margins have fallen, their recent 11% is still relatively strong given the challenges in the business. The Hamilton Spectator has also been successful in implementing a “soft paywall” indicating it is likely in better competitive shape than The Star.
Even at a very low valuation of 4x EBITDA, Metroland is likely worth about C$175 million.
When Torstar sold its Harlequin publishing business to News Corp. a few years ago, shareholders were anxious to see how the company would invest the funds it received. They were relatively underwhelmed when they found out that part of the funds (C$200 million) was going to purchase a 56% stake in a company called Vertical Scope. That company owns a collection of websites, concentrated in autos, that garner more than 100 million visitors each month. Rather than distribute profits to its owners, Vertical Scope retains those profits to continue acquiring new sites. It also has about C$100 million in debt. Still, it is clearly Torstar’s most valuable asset, generating more than $40 million in EBITDA annually and growing that number. With Torstar having paid C$200 million in the past, a valuation of C$220 million is probably conservative since the company’s grown by more than 10% since the acquisition by Torstar. That valuation would imply an enterprise value to EBITDA ratio of about 12x.
Torstar also holds several smaller, but interesting stakes in businesses. Blue Ant Media owns a collection of specialty television channels across Canada. Fairfax Financial Holdings recently invested in the business and allows for a simple means of valuing Tortsar’s stake, which would be C$40 million based on the price paid by Fairfax. Eyereturn is a digital marketing company with about 11% of the Canadian market. It’s business of placing digital ads is similar to Google’s DoubleClick business.
Torstar has also held a 19% stake in Black Press for a number of years. The company had originally planned on purchasing the remainder of the company when its founder retired, although its unclear whether they would still plan to do so. Black Press owns a group of community newspapers in Western Canada that are similar in nature to Torstar’s Ontario papers. It also owns newspapers in Honolulu, Akron, San Francisco, and Everett in the United States. The company has roughly C$250 million in revenue from its Canadian assets and US$250 million in revenue from its American newspapers. Moody’s also rates about C$90 million worth of debt issued by the company, probably too much given the declining nature of the business. It still owns some valuable properties and Torstar’s stake could be worth something in the vicinity of C$20 million.
Torstar owns some other properties as well that are small, but summarizing the properties discussed means that a segmented Torstar could be worth about C$445 million after accounting for about C$120 million in pension liabilities. The implied value of C$5.50 per share is significantly higher than the current C$1.53.
Under certain scenarios, Torstar shareholders could be richly rewarded in the next few years as the value of these assets are unlocked. But, in another scenario, the profitable businesses are used to subsidize The Toronto Star, consistently eroding the current value of the shares. Given that the managers of the Trust are concerned about the value of their own stakes, it is not a bad bet to assume that the shares are a good value.
That is not exactly reassuring, though, to those contemplating the future of The Toronto Star.