This article was originally published in Maclean's Magazine on December 21, 1998
Quebecor Makes Bid for Sun
One unchanging quality of The Toronto Sun is its fondness for chest-thumping. Since the self-styled "little paper that grew" was founded in 1971 by former employees of the defunct Toronto Telegram, it has become one of Canada's most successful newspapers. It may also be the most self-congratulatory, with columnists regularly evoking the paper's populist roots as apparent proof of how it differs from its competitors. So when Montreal-based Quebecor Inc. last week announced a stunning, but friendly, $983-million takeover bid for Sun Media Corp. - the newspaper's parent company - the event was treated as the journalistic equivalent of winning the Nobel Peace Prize. The headline in most Sun chain newspapers describing the bid read "French kiss": in keeping with that sentiment, two of the news stories among a dozen articles and columns on the event began with the phrases "Vive le Sun!" and "There was a certain joie de vivre among Sun Media employees . . ."
That delight is most profound among Sun Media shareholders, who have more than doubled the value of their stock since an initial hostile takeover attempt by Torstar Corp. in late October. That offer was for $748 million in combined cash and stock: Torstar sweetened the proposal earlier last week to $19.06 a share, or $900 million overall, again in cash and stock. Quebecor's offer amounts to $21, all in cash: at the time Torstar made the first bid, Sun shares were worth slightly less than $10. Small wonder, then, that at an emotional ceremony at Sun Media's Toronto headquarters, CEO Paul Godfrey toasted Quebecor officials as "our white knights." Quebecor officials were also jubilant. Charles Cavell, a senior Quebecor executive who will become chairman of the newly merged company if the deal goes through, told Maclean's: "The fit is unbelievably good."
But while the expressions of delight are understandable, the noisy exuberance of Sun Media employees is less so. Other than money, the differences between the Torstar and Quebecor bids are slight: both companies promised to treat the Sun group as a separate, independent unit. And two years ago, Sun columnists led a noisy public campaign against an attempted Quebecor takeover, portraying the firm's founder and then-chief executive officer, Pierre Péladeau, as everything from a separatist to an anti-Semite. Quebecor finally bowed out then because it concluded the asking price would be too high.
Now, following Péladeau's death last year at the age of 72, two of his sons - Pierre Karl, 37, and Erik, 43 - play key roles in the company, with plans for Pierre Karl to become vice-chairman of the newspaper division. But while Sun writers reviled his father, they variously described Pierre Karl last week as "a well-tailored international tycoon" and "a handsome knight." The younger Péladeau diplomatically moved to allay fears of the company's separatist bent by telling employees that he does "not support one political party or another." Still, Quebecor's largest newspaper, Le Journal de Montréal, has a strongly pro-sovereigntist tone in its news coverage, and its columnists include longtime separatist Pierre Bourgault. This stance is in direct contrast to the Sun chain's strong opposition to Quebec sovereignty. Cavell said Quebecor has never had any interest in mixing politics and business and cited his personal experience with Pierre Péladeau as proof: "We're talking about a man who built a great company in his lifetime who is supposedly anti-English and yet he hired me - I'm an Anglo federalist - with the most expensive contract that he'd ever signed in his history. That's a man who was working for the shareholders."
So begins another wave of upheaval in Canada's roiling newspaper market. If the deal is accepted by shareholders, Quebecor will become the second-largest newspaper publisher in the Canadian market behind Conrad Black's Southam Inc., with 19 daily newspapers in French and English and 25 per cent of national readership. (Quebecor, which has annual revenues of more than $7 billion and 37,000 employees, has a range of business interests in North America and Europe, including printing and forestry companies.) Godfrey would become CEO of a newly formed, and as yet unnamed, publishing division.
The Quebecor proposal poses, at least temporarily, a setback for Torstar. In the wake of Quebecor's proposal, Torstar officials refused comment other than to say they are studying their options. On the one hand, Torstar remains highly profitable, and its flagship Toronto Star is Canada's largest newspaper, with a daily circulation of 460,000 last year. But that marks a steady decline from the 1973 high of 550,000, and the paper risks becoming isolated at a time when the newspaper industry is consolidating. Of special interest to Torstar were Sun Media's six dailies in southern Ontario, including the Sun, The Hamilton Spectator and The London Free Press. Torstar officials said the takeover would allow them to cut costs, reduce duplication and offer special packages to advertisers. If Quebecor instead wins out, it will be able to use its new assets nationally to similar advantage - and, as part of that, increase pressure on Torstar.
The next steps are unclear. Most observers - including Cavell - do not expect Torstar to launch a counter bid. For one to be successful, analysts estimate, it would have to be at least $23 a share - all in cash. A Torstar offer also carries a risk that the federal Competition Bureau could reject the deal because it includes two newspapers operating in the same area. There is no such danger with Quebecor's bid.
While analysts applaud Quebecor's proposal, the offer values Sun Media at about 40 times its earnings over the past year. By contrast, both Southam and Torstar shares traded at far lower multiples last week. But, said Benoît Dubé, an analyst with Canaccord Capital Corp. in Montreal, "this is probably the last chance for Quebecor to be part of the Canadian publishing industry."
If the bid succeeds, it will leave Quebecor with several key decisions. In addition to paying close to $1 billion for Sun Media, Quebecor would assume its debt of about $350 million. To pay some of that down, the company might want to sell some newly acquired properties - such as the southern Ontario broadsheets outside Toronto that Torstar covets. Such a step would likely trigger a bidding war between Torstar and Southam, which is also interested. Cavell, asked about the possibility of selling assets, said only: "We're going to look at what we have and make a decision of what is best for our shareholders." Meanwhile, there are suggestions that Torstar might try expanding in a different media direction, with rumors of a bid for Baton Broadcasting Inc., which controls the CTV television network.
No matter how Sun Media's future is resolved, the biggest winner is Godfrey, the 59-year-old former municipal politician who became the company's CEO in 1992. After spearheading a management-led buyout from Rogers Communications Inc. (owner of Maclean's) in 1996 for $411 million against long odds, he has kept the same group in charge of the company and made enormous profits for everyone involved. His own payday from stock options may reach $26 million. He and other management figures would profit again if Quebecor, as is likely, establishes the publishing company as a separate entity and issues stock in it. Although Godfrey's take may seem excessive, said one friend, "the thing to remember is that he bet everything he had in 1996 on the management buyout when it could have gone either way." Now, this is Godfrey's moment to bask in the sun - as its namesake company rises ever higher.
BIG AND BIGGER
Circulation figures for Canadian newspaper companies as a percentage of total copies sold weekly, for the six months ending March 31, 1998
Sun Media (16.4%)/Quebecor (9%) 25.4%
Source: Canadian Newspaper Association
Maclean's December 21, 1998