Hollinger International Inc.
Hollinger International Inc.
Public Subsidiary of Hollinger Inc.
Incorporated: 1990 Employees: 17,487 Sales: $2.21 billion (1997) Stock Exchanges: New York Ticker Symbol: HLR
SICs: 2711 Newspaper Publishing; 6719 Holding Company, Not Elsewhere Classified
Hollinger International Inc. is a publicly traded, American-based company with headquarters in Chicago and investor relations offices in New York City. At the same time, it is also a subsidiary of the publicly traded, Canadian-based Hollinger Inc., headquartered in Vancouver, British Columbia. As of December 31, 1997, Hollinger Inc. directly and indirectly owned 59.9 percent of the combined equity interest in Hollinger International, accounting for 84.3 percent of the voting power of Hollinger International’s outstanding common stock. Completing the ownership picture is the figure of The Honorable Conrad M. Black, who maintained control of Hollinger Inc. through his direct and indirect ownership of Hollinger Inc.’s securities. Black was chairman of the board and CEO of both Hollinger Inc. and Hollinger International.
Black Began Building a Global Media Empire in 1985
Conrad Black was born on August 25, 1944, in Montreal, Quebec. His father, George Montegu Black, Jr., was a prominent businessman who managed Canadian Breweries, a division of the Argus Corporation, in the 1950s. Conrad Black grew up dreaming of becoming the chairman of Argus Corporation, a dream made remarkable by the fact that he accomplished it in 1978. Conrad and his older brother, Montegu, were able to gain a controlling interest in Argus in July 1978 by combining the block of shares their father had left them upon his death in 1976 with shares purchased from the heirs of the company’s founding partners for about $18.4 million. For this remarkable accomplishment, Conrad Black was named “Man of the Year” in 1978 by the Toronto Globe and Mail, while Fortune magazine called him “the boy wonder of Canadian business.”
From 1978 to 1985, Black set about dismantling Argus, which controlled five corporations including farm machinery manufacturer Massey-Ferguson, and selling off its assets. By June 1985 he had bought out his brother’s interest and those of other minority shareholders. He then purchased a 14 percent interest in the Daily Telegraph, which was England’s leading circulation broadsheet newspaper and the newspaper of choice of the country’s ruling Conservative party. Black had begun building his global media empire.
By the end of 1985 Black had acquired a 50.1 percent interest in the Daily Telegraph for $43 million, a bargain basement price. Later acquisitions would follow a similar model, with Black stepping in and acquiring financially troubled newspapers. He also created Hollinger Inc. as a holding company for his interests. Hollinger was initially headquartered in Toronto, Ontario, but Black moved the company’s headquarters to Vancouver, British Columbia, in 1990.
Began Acquiring U.S. Newspapers in 1986
Fearful of the costs associated with big-city newspapers, Black was also interested in small-market newspapers that focused on local news. Through his U.S. subsidiary, American Publishing Co., Black acquired a large number of smaller newspapers in the United States. American Publishing Co. was formed as a privately held, U.S.-based subsidiary of Hollinger Inc. in late 1986. Its first acquisition involved 16 small-town U.S. newspapers. Through a series of acquisitions it grew to rank as the second-largest newspaper publisher in the United States in 1995 by number of titles and the 12th in terms of circulation. It owned 393 newspapers, including 96 dailies, by 1996.
In March 1994 American Publishing completed its acquisition of the Chicago Sun-Times, which at the time was the ninth largest circulation metropolitan daily newspaper in the United States. With a daily circulation of 535,000, it was Chicago’s number two newspaper. The cost of the Sun-Times was approximately $180 million. In April 1994 American Publishing launch an initial public offering (IPO) to raise money to pay for the acquisition. American had reported net losses in 1993 and 1994. At the time of its IPO, it owned 340 newspapers and was the 15th largest U.S. newspaper group based on circulation. The IPO was expected to raise $101 million, and American’s shares were traded on the NASDAQ.
Venture into Australian Publishing Eventually Had to Be Abandoned
In late 1991 a group led by Conrad Black’s Telegraph pic bought Australia’s John Fairfax Holdings Ltd. out of receivership by purchasing a 25 percent interest in the Australian newspaper publisher. Fairfax published the Sydney Morning Herald, Melbourne’s Age, and the Australian Financial Review, among other publications. Australian law prevented Black as a foreigner from owning more than 25 percent of the firm. Although Black’s 25 percent interest gave him effective control of Fairfax, he was concerned about the possibility of an Australian media mogul acquiring controlling interest. Black appealed to the Australian government to allow him to increase his ownership to 35 or 50 percent, but permission was never granted. As a result, Black agreed to sell his holdings to a New Zealand investment firm at the end of 1996 for $513 million. Although disappointed, Black’s group reportedly made $300 million on its investment. And Black, while happy with his profit, could not resist a parting shot at Australia; he told the Financial Post, “It’s not a politically mature jurisdiction and foreigners should understand what they’re getting into there.... [The prime minister] is basically an old-time Australian nationalist.” In his letter to shareholders in 1996, he again complained about “Australia’s capricious and politicized foreign ownership rules” and complained that foreigners were “treated with official bad faith and insurmountable suspicion.”
Acquired Interest in Southam Inc., Canada’s Largest Publisher of Daily Newspapers, in 1992
In 1992 Hollinger purchased a 21.5 percent stake in Southam Inc., Canada’s leading newspaper publishing company. By 1996 Black was unhappy with the way Southam was being managed, and Hollinger was seeking to boost its ownership of Southam to 41 percent by buying out the co-controlling minority interest of the Power Corporation for $294 million. Black planned to replace most of Southam’s independent directors.
Black obtained an advance ruling from Canada’s Bureau of Competition Policy, which reviewed the proposed Southam acquisition for any overlap of ownership of newspapers competing for advertising in any one market. The Federal Court of Canada subsequently dismissed a motion by the Council of Canadians opposing Black’s acquisition of Southam. During 1996 Hollinger International increased its interest in Southam to 50.7 percent. As Canada’s largest publisher of daily newspapers, Southam published 32 daily newspapers and 58 nondaily newspapers. Its principal publications included the Gazette (Montreal), the Ottawa Citizen, the Calgary Herald, the Vancouver Sun, the Province (Vancouver), and the Edmonton Journal.
Circulation Wars, Weak Capital Markets Force Black to Take Telegraph Private by 1996
In.mid-1994 the Daily Telegraph was being challenged by Rupert Murdoch’s Times for market leadership in England. When the Daily Telegraph lowered its cover price from 48 pence to 30 pence, the Times immediately dropped its cover price from 30 pence to 20 pence. In September 1993, the Times had lowered its price from 45 pence to 30 pence. The price cuts had boosted the Times’ circulation from less than 400,000 copies a day in mid-1993 to average daily sales of 517,000. With its latest price cut, the Times expected its daily circulation to climb above 600,000. The price war was having an effect on the Daily Telegraph’s readership, the figure that was used to set advertising rates. For the period from December 1993 to May 1994, the Daily Telegraph’s readership declined 9.9 percent to 2.49 million, while the Times’ readership increased 10.6 percent to 1.32 million, according to the National Readership Survey. The Telegraphs CEO Dan Colson told the Financial Post, “The Telegraph remains the undisputed market leader in the quality segment.”
Between October 1995 and August 1996, The Telegraph Group Ltd. became a wholly owned subsidiary of Hollinger International, which paid a total consideration of approximately $455.1 million for all of The Telegraph Group’s outstanding shares. By taking The Telegraph Group private, Black was following the advice of investors who warned that it would be difficult to raise equity capital in London markets. Share prices of The Telegraph had fallen dramatically in 1994 as a result of the price war with Rupert Murdoch’s Times. Subject to lingering criticism in the British press and government, Black’s comment to the Financial Post was, “Never underestimate the conservatism or xenophobic tendencies of the British.”
Hollinger International Succeeded American Publishing in 1995-96
In July 1995, Hollinger Inc. announced it would sell its interests in the Daily Telegraph and Southam Inc. to its U.S. subsidiary, American Publishing Co. Analysts saw it as a move to strengthen American Publishing’s shares, which were traded on the NASDAQ market. American owned the company’s U.S. flagship newspaper, the Chicago Sun-Times, along with other newspaper chains. The move would also mean a transfer of assets out of Canada and into the United States, where Hollinger felt they would have a higher value.
By September 1995 the plan had changed somewhat. It now involved more of a corporate reorganization of American Publishing and Hollinger Inc., with the Canadian company Hollinger Inc. creating a $1 billion newspaper company with headquarters in Chicago. The Canadian-based Hollinger Inc. would still sell its interests in British Telegraph pic and in the Canadian company Southam Inc. to American Publishing, thereby more than doubling American Publishing’s annual revenues of $422 million in 1994.
At the same time, Hollinger International Inc. would be established in Chicago as a new umbrella company over American Publishing Co. F. David Radler, chairman of APC and president and chief operating officer of Hollinger Inc. told Grain’s Chicago Business, “We’re consolidating our assets into one group with greater access to U.S. capital markets, which are the best capital markets in the world. We’re de-Canadianizing ourselves and creating an American company.”
Conrad Black was named Hollinger International’s chairman of the board and CEO. Radler assumed the duties of president and COO. Black’s strategy of entering the U.S. capital markets pajd off in February 1996, when Hollinger International went public with an IPO that raised $380 million. As described in the company’s annual report, “For most of our stockholders, Hollinger International Inc. is a new creation grouping a unique collection of high quality international newspaper assets. For other stockholders, it is a relaunch on a very broad basis of American Publishing Company, which continues as a core asset of Hollinger International.”
Corporate Debt an Issue in 1996
As Conrad Black prepared to address shareholders at Hollinger International’s annual meeting in May 1996, the company was under two credit reviews for having too much debt. Both the U.S.-based Standard & Poor’s Corporation and Canada’s Dominion Bond Rating Service put Hollinger International on credit watch. Standard & Poor said that a downgrade was inevitable “in the absence of Hollinger taking significant steps to ease its debt burden.” The company had about $445 million of debt outstanding, plus debt it had taken on to increase its stake in Southam and debt it might take on to complete its purchase of the Telegraph. Moody’s debt-rating service soon followed with an announcement that it, too, was reviewing its rating of Hollinger’s debt. At the time, Hollinger International was the third largest newspaper chain in the world behind Gannett Co. Inc. and Rupert Murdoch’s News Corp.
In August 1996 Hollinger International completed its acquisition of the minority shares of Telegraph pic, taking the company private and making it a wholly owned subsidiary called Telegraph Group Ltd. In addition to publishing various editions of the Telegraph, the Telegraph Group published Spectator magazine and owned 24.7 percent of Australia’s John Fairfax Holdings Ltd. (which would be sold later in the year for $513 million). As part of the financing of the acquisition, Hollinger International sold 11.5 million shares of its Class A common stock and 20.7 million shares of preferred stock to raise $301.1 million. Those proceeds, together with related bank financing, were used to pay for the acquisition.
Ownership of Newspaper Assets Moved from Canada to United States in 1997
Black began to implement his strategy of moving ownership of his newspaper assets into the United States, where they would be valued higher. In January 1997 Hollinger Inc. announced it would sell almost all of its Canadian publishing assets to its U.S.-based subsidiary Hollinger International for $342 million, excluding working capital of about $181 million. Those assets included Hollinger’s interest in Southam and the Sterling Newspapers Company, which owned 26 daily and 49 non-daily newspapers in Canada.
Hollinger Inc.’s other assets included a 20 percent stake in the Financial Post; about five percent of Key Publishing, which published Toronto Life magazine; an interest in Toronto’s Sky-Dome; and part of Gordon Capital Corp., a Toronto securities firm.
In March 1997 Hollinger International’s stock hit a two-year low, and the company announced it intended to repurchase up to three million of its Class A common shares as well as some of its preferred stock. Since reaching a high of $13.125 in May 1996, the stock dropped to just under $9 in March 1997 before closing at $9.25.
One analyst explained that the company’s complex transactions of 1996 and early 1997 turned off a lot of investors, who wanted companies that were easy to follow. John Reidy of Smith Barney Inc. told the Financial Post, ’ They don’t want to talk about EBITDA (earnings before interest, taxes, depreciation, and amortization) or cash flow. Hollinger is an EBITDA and cash flow story, rather than an earnings story.” Reidy admitted that Hollinger had a complex capital structure and that the company went through a radical transition in 1996, referring to taking The Telegraph Group private, Hollinger International’s IPO, the sale of its interest in Fairfax, and the transfer of assets from its Canadian parent in early 1997.
In April 1997 Hollinger International established a new subsidiary, Hollinger Digital, with offices in the Soho district of New York City. Hollinger Digital would be responsible for managing and making investments in new media properties. One of its management functions would be to coordinate the 90 web sites of Hollinger’s more than 350 newspapers. The subsidiary’s chairman and CEO was Richard Perle. Perle was also a director of Hollinger International and former assistant secretary of defense for international security during the Reagan administration. He was known as the architect of Reagan’s Star Wars defense program.
In November 1997 Hollinger International announced it was selling about 40 percent of its U.S. community newspaper group. These included 160 weekly, small daily, and free circulation newspapers in 11 states with a combined circulation of approximately 900,000. The buyer was the Los Angeles-based Leonard Green and Partners LP, a firm which specialized in leveraged buyouts. The sale price was $310 million, which Hollinger International would use to reduce debt and finance the previously announced purchase of the Post-Tribune in Gary, Indiana. The sale was completed on January 27, 1998.
During December 1997 Black also told the Financial Post that Hollinger International would probably be cutting back on its acquisitions, because prices were too high. He expected to use the $310 million from the sale of 160 small U.S. newspapers to reduce debt, not make acquisitions. As if to calm investors, he promised a more conservative financial approach in the future. “We will not issue stock at silly prices,” he told the Financial Post. “We will not issue non-investment grade paper again. It’s a much more conservative company.” In the past, Hollinger had relied on high-yield junk bonds to finance its acquisitions. Hollinger’s financial executives never seemed overly concerned about the company’s debt level, though, because of the company’s strong cash flows.
Black noted that circulations were increasing among the company’s Canadian newspaper publishing group. The Vancouver Sun was leading with an average weekly increase of 10 percent. “I think we’ve earned our spurs,” he told the Financial Post. ’ The whole theory of the inexorable decline of newspapers, I still say, is bunk.”
For 1997 Hollinger International reported earnings of $104.5 million. Operating income was up, but overall earnings declined from the previous year’s levels due to higher taxes, interest payments, and other expenses not directly related to operations. The company benefited from improved advertising revenues in a good business environment. It also took steps to allay investor fears by reducing costs and making other improvements.
In April 1998 the Jerusalem Post announced it would buy 49 percent of the Jerusalem Report, its competitor. It was expected that the two English-language publications would merge their administrative, advertising, and circulation departments while remaining independent editorially. The twice-monthly Jerusalem Report was established by former Post reporters and financed primarily by Canadian businessman Charles Bronfman, chairman of the Seagram Company. It had lost money steadily since it began publishing in 1990.
Hollinger International’s History Characterized by Complex Financial Transactions
By the end of 1997 Hollinger International owned or had an interest in 167 paid daily newspapers. Its major newspapers were the Chicago Sun-Times, the Daily Telegraph, and the Ottawa Citizen. It also owned or had an interest in 361 non-daily newspapers as well as other magazines and publications. For the past ten years the company had pursued a strategy of growth through acquisitions. Since 1986, the company had acquired some 400 newspapers and other publications (net of those sold) in the United States, the Daily Telegraph in the United Kingdom, the Jerusalem Post in Israel, and has made significant investments in newspapers in Canada, including a controlling interest in Southam Inc., Canada’s largest newspaper publisher. In 1997 it acquired the Canadian Newspapers division of its parent company, Hollinger, Inc.
Hollinger International’s history, including that of its Canadian parent, has been characterized by complex financial transactions and an aggressive acquisitions strategy. Since Conrad Black successfully entered the U.S. capital markets with Hollinger International’s IPO in 1996, he has sought to calm investor fears and simplify the company’s financial structure. In 1996 the company divested itself of its 25 percent interest in John Fairfax Holdings Ltd., increased its stake in Southam Inc., and took 100 percent control of The Telegraph Group Ltd. In 1997 it addressed investor concerns by accomplishing three financial goals: 1) it steeply improved operating and net profit; 2) it repurchased some of the company’s underpriced stock; and 3) it sold non-strategic assets at advantageous prices. The company also increased its stake in Southam to 58.6 percent. Enjoying a cleaner balance sheet and circulation gains at its major newspapers, Hollinger International appeared ready to consolidate its gains and embark on a more conservative acquisitions and financial program for the future.
Hollinger Publishing International Inc.; Hollinger Canadian Publishing Holdings Inc. (includes Southam Inc. and Sterling Newspapers Co.); Chicago Group (includes Chicago Sun-Times); Community Newspaper Group; The Telegraph Group Ltd. (United Kingdom); The Jerusalem Post (Israel).
Dalglish, Brenda, “Analysts Support Hollinger Move,” Financial Post, January 9, 1997.
_____, “Black Bites Back,” Maclean’s, November 15, 1993, p. 24.
_____, “Black Pulls out of Fairfax,” Financial Post, December 17, 1996.
_____, “Black Wants All of Telegraph,” Financial Post, April 25, 1996.
_____, “Debt, Competition Issues Dog Hollinger,” Financial Post, May 29, 1996.
_____, “How Black Plans to Finance Southam Purchase,” Financial Post, May 28, 1996.
Fitzpatrick, Peter, “Third Debt-Rating Agency Puts Hollinger Under Review,” Financial Post, June 5, 1996.
“Jerusalem Post Buys 49 Percent of Jerusalem Report,” Reuters Limited, April 6, 1998.
Kirbyson, Geoff, “TD’s US$650M Loan Will Allow Hollinger to Make Telegraph Bid,” Financial Post, July 2, 1996.
Laver, Ross, and David Estok, “Face to Face with Black,” Maclean’s, June 10, 1996, p. 44.
McGugan, Ian, “Publish and Flourish,” Canadian Business, August 1994, p. 31.
Reguly, Eric, “Telegraph Faces Long War with Murdoch,” Financial Post, July 6, 1994.
Siklos, Richard, “Hollinger Takes Telegraph Private,” Financial Post, August 1, 1996.
Sorenson, Jean, “The Paper Chaser,” BC Business, August 1991.
Theobald, Steven, “Hollinger Sells Batch of Community Papers, Plans to Use $440 Million to Pay Down Debt,” Toronto Star, November 25, 1997.
“Two Jerusalem Newspapers to Merge,” Associated Press, April 5, 1998.