Rogers Puts Sun Chain Up for Sale
When Lionel Schipper, chairman of Toronto Sun Publishing Corp., faced Toronto Sun and Financial Post newspaper employees last week to inform them that the company was once again on the block, he quoted singer-songwriter Carly Simon. "It's comin' around again," he said, a refrain that reflected the two short years since Rogers Communications Inc. acquired the Sun chain as part of its takeover of Maclean Hunter Ltd. When John Tory, CEO of Rogers Multi-Media Inc., stepped forward to say a few conciliatory words of his own, he thought briefly of trumping Schipper's pop-culture reference with "Don't worry, be happy," but then he could not remember who sang the tune and worried that the song had a negative undertow. So he gave it a miss.
Later the same day, Tory reflected on the fact that ever since he arrived at Rogers in February, 1995, he has been fielding calls from investors and deal-spinners, trying to smoke out the cable-and-wireless company's interest in selling the paper chain, which includes Sun papers in Edmonton, Calgary and Ottawa, as well as a passel of weeklies and seven per cent of Toronto's SkyDome. Paul Godfrey, CEO of Toronto Sun Publishing, says the "beat of the drums" increased at the Rogers annual meeting, at which chief Ted Rogers spoke of asset sales from a company he described as being in the telecommunications business, which did not sound very newsprint friendly. Two days later, the Rogers board took the decision to jettison the Sun group. Rogers chairman Gar Emerson phoned Schipper with the news that weekend. "I feel quite emotional about it," says Schipper, who has been a part of the Sun since its founding in 1971. "I've known many of the Day 1ers since Day 1." Adds Tory: "I think it's a good time to be selling a newspaper company. I just wish we weren't selling this one."
The divestiture of the Sun would appear to dull Rogers' stated grand vision at the time he took over Maclean Hunter - which includes Maclean's and Chatelaine - to build the next Time Warner. In the end, the decision to exit newspapers was compelled by a debt-heavy balance sheet that has perennially shadowed Rogers' aggressive pursuit of cable-and-wireless growth. Trolling a $250-million (U.S.) debt issue for Rogers Cablesystems last fall, the company assured institutional investors in the United States that it would plow back some equity somehow. As of the first quarter of 1996, the cable arm housed $2.4 billion of the company's overall $4.6-billion debt load. "They were talking back then of restructuring the balance sheet in cable systems," says Dean Kartsonas, an investment analyst with Federated Investors in Pittsburgh. "We were concerned with the debt load." In the end, Kartsonas took nearly $15 million worth of that issue, and waited for word on what Rogers' chief financial officer, Graham Savage, calls "right sizing" the balance sheet.
Savage says the company's asset-sale strategy was the "lesser of two evils," the greater evil being issuing equity when the share price is grim. Analysts have been scrutinizing the leverage at the cable company, its debt-to-cash flow. At 6.6 times, the leverage exceeds such U.S. players as TCI Communications Inc. of Englewood, Colo., which, in itself, would not be a problem if strong growth were anticipated. Which it is not. Oren Cohen, a credit analyst at Bear, Stearns & Co. in New York City, says that with leverage like that, and flat cash flow, the markets were getting nervous. "You're going to have to pay for that at some point," says Cohen. As it is, he says, Rogers is paying at least a per cent more for its debt than industry peers, "and when you have billions of dollars in debt, that adds up."
Further, Rogers has made capital-expenditure commitments of $800 million for 1996. Savage points out that Cantel, the company's cellular arm, spends $500 on marketing, commissions, promotions and advertising to sign up a single customer. Against that, Cantel can expect monthly revenues of $60. The game is long-term returns, and, for Cantel, growth has been phenomenal. So much so that when Savage borrows the boss's Challenger jet this week to whistle-stop through such institutional havens as Milwaukee and Kansas City, Mo., with Cantel CEO Stan Kabala, some predict that he will get a warm reception for Cantel's whopping $800-million (U.S.) debt offering. "I think it's going to be a good story for them," says Richard Johnson at J. P. Morgan in New York. Johnson is keen on the market penetration of Rogers, its combination of assets. "They're in a much better position than anything else that's offered to us in the high-yield market in the States," he says. "I think the whole firm is very conservative, including Ted. You guys give him a bad rap." Perhaps, says Savage, Canadians would have been less wary had there been a northern version of Michael Milken. "The one thing he did do was open up corporate America," says Savage. "Before he came along, you could only borrow from a financial institution if you were an A-rated credit." Savage thinks investors here are warming to the high-yield concept, and so a piece of the issue will be in Canadian dollars.
Still, after rolling over old debt, only $120 million (U.S.) will be injected into Cantel. On the disposition side, Rogers still has for sale such assets as Davis+Henderson, a cheque printing operation. If Sun Publishing fetches the expected $270 million, and if the pot of assets now for sale draws $400 million, will Savage be satisfied? "No." And how much more does he need? That, says Savage, depends on how the world unfolds in the next 12 months. He seems to be particularly focused on cable, and getting subscribers to use Rogers as their Internet access provider for $40 a month. Kartsonas believes that any hopes of returning cable to double-digit growth in the near term are unrealistic, particularly when direct-to-home satellite broadcasting becomes a reality.
That thinking has fuelled speculation about what will be cut next. Savage says some smaller cable systems could go. A secondary issue of Cantel shares is a possibility. But the street's view is that the obvious target is Rogers Multi-Media, which, after the Sun sale, will consist of 20 radio stations, nine consumer magazines and more than 35 trade publications. "I don't think it would surprise us to see more of the publishing go," says Kartsonas. Industry observers are puzzling over the value of owning, rather than buying, content. "That's the million-dollar question," says Kartsonas. "I think there will be enough content providers out there that it won't be necessary to own it." Should Rogers eventually sell out of publishing altogether, the $3.1-billion takeover of Maclean Hunter will nearly net down to the acquisition of 600,000 cable subscribers.
John Tory has accepted Ted Rogers' word that this is not the long-term plan. "I view being in the magazine business as being very much a part of the core business of a communications company," he says. "I'm sure there are others inside and outside the company who wouldn't agree with that. At the end of the day, Ted Rogers and the board of directors of the company are going to deal with this."
At week's end, Paul Godfrey was winding down from pitching two specialty-channel hearings before the Canadian Radio-television and Telecommunications Commission in Hull (page 72). This week, he says, he will meet his management group to discuss the possibility of an in-house buyout of Sun Publishing. Rothschild Canada Ltd., a Toronto investment house whose CEO is Rogers chairman Emerson, will be putting together the information package on the group for the perusal of interested outside buyers. Lionel Schipper will be busy with the independent committee of Sun directors, drafting a plan to do the best for shareholders. The day after Schipper received word from Emerson on the Sun sale, Rogers did what he always does on May 6: he visited the grave of his father, a broadcasting pioneer who died when Ted was 6. He would not comment on the most recent turn of corporate events, which precludes discussion of what might happen next. "We like to be fast on our feet," says Graham Savage. "We're entrepreneurial. As long as Ted's here, we're going to be."
Maclean's May 20, 1996