And the Bottom Fell Out of Torstar, Part Two

Includes: FRFHF, TORSF
by: Mark McQueen

So there you have it. Torstar shares are now sporting a 7% yield, with the stock down 3.5% in early trading. With the Q2 results due on July 31st, is the market telling us that a dividend cut — or suspension — is all but assured (see prior post “And then the bottom fell out on Torstar shares” May 8-08)?

Last time I checked, Fairfax Financial (FFH) held 12,532,200 Class B shares (18.2% of the Class B’s outstanding), with the last 5MM or so being acquired in April 2007. Let’s guess that the cost base is C$20. The stock is down 47% since then, so, as of Monday, Fairfax’s paper loss is looking like C$125 million.

This is not how “value plays” are supposed to behave.

With a C$5 billion market cap, it isn’t a huge blow to Fairfax’s balance sheet. But the equity trading portfolio of most insurance companies involves what’s called the “surplus”, that portion of company assets that isn’t required meet policy needs. There won’t be a “tag day” for FFH any day soon, with Q1 2008 “Net gains on investments of C$1.09 billion, compared to C$98.8 million in the first quarter of 2007.” For those of us who wondered what hidden value Prem Watsa saw in the dead tree print media (”DTM”) in 2006 and 2007, the jury is no longer out on that front.

Times were tough, and there is no sign of a let-up.

I think highly of Torstar CEO Rob Prichard, and he is living through the same nightmare that has befallen the rest of the North American newspaper industry. No one could have done any better over the past couple of years given the macro backdrop. Newsroom cuts in Chicago, Los Angeles, New York and even Palm Beach are the new normal. The CDN$ move wiped out a huge part of the operating benefit of Harlequin once the hedges expired. And here the stock is, verging on single digits.

Over at Fairfax, it appears that the only near term hope to get back to being even flat on their Torstar, position is as follows:

  1. Pray that GlobeMedia goes public next year, getting liquidity for OTPPB (via BCE) and Torstar.

  2. Sell the stake in Black Press.

  3. Face up to the likelihood that a private equity deal for Harlequin is one of the few true potential solutions remaining (Dr. Prichard is on the Board of Onex, so he understands the buyout world as well as any CEO in the country).

However, in order to get support for number three, the reality is that the Torstar Voting Trust probably needs surety about i) maintaining the dividend, and ii) the long, long term viability of The Toronto Star - and not in that order.

Torstar’s banks will not be happy if the company has to raise bank debt to pay the coming Q2 dividend. Bankers hate the thought of debt being used to pay shareholders.

The midnight oil will be burning at

One Yonge Street
, and Dr. Prichard and the Voting Trust Chair, John Honderich, are the right people to fix this situation. Fairfax and Torstar shareholders will be anxious in the meantime.

Disclosure:  None

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