Good morning, ladies and gentlemen. Welcome to the Torstar Corporation's Investor Call regarding the sale of Harlequin. Please be advised that this call is being recorded. Your speakers for today are Mr. David Holland, President and CEO and Mr.
Lorenzo DeMarch, Executive Vice President and CFO of Torstar Corporation. I would now like to turn the meeting over to Mr. Holland. Please go ahead.
Thank you very much. Good morning everyone and thank you for joining us today. A day that is significant at Torstar and I want to say equally significant for our many friends and colleagues at Harlequin, it has been 39 years. Let me begin with a short statement regarding forward looking information. Certain statements in the remarks that follow may contain forward looking information and can generally be identified by the use of forward looking terminology such as anticipate, believe, plan, forecast, expect, intend, would, could, if, may and other similar expressions.
These statements reflect current expectations of management regarding future events and performance and speak only as of today's date. By its very nature, forward looking information requires management to make assumptions to rely on certain material factors and is subject to inherent risks and uncertainties. Actual results could differ materially from the predictions, conclusions, forecasts or projections in the forward looking information. Additional information regarding the material factors, assumptions, risks and uncertainties that could cause actual results to differ materially from the predictions, conclusions, forecasts or projections in the forward looking information and regarding the material factors and assumptions that may have been implied in making such predictions, conclusions, forecasts or projections is described in more detail in our news release issued today and our MD and A for the year ended December 31, 2013, which can be found on our website at www.sedar.com. Good morning again.
I am very pleased to be joined on the call today by Lorenzo DeMarchi, Executive Vice President and Chief Financial Officer at Torstar. I plan to provide a brief overview of the transaction and some commentary. I'll then turn it over to Lorenzo, who will provide some further commentary. Terry, at that point, either of us will be very happy to take your questions. As I'm sure most of you have seen in the news release that came out this morning, we announced a definitive agreement to sell our book publishing business, Harlequin Enterprises Limited to HarperCollins division of News Corp.
You can access a copy of the press release on our website if you haven't seen it. The purchase price is CAD 455 1,000,000 payable in cash at closing. The transaction which has been unanimously approved
by
the Board of Directors of Torstar is subject to customary approvals and closing conditions including regulatory approvals. The transaction is also subject to the approval of Torstar's Class A shareholders. The voting trustees of the Torstar Voting Trust, which control approximately 98% of the Class A voting shares of Torstar have entered into a voting support agreement pursuant to which they have agreed irrevocably to vote all Class A shares under the voting trust in favor of the transaction at a special meeting of shareholders of Torstar to be called to approve the transaction. The Board of Directors of Torstar is recommending that holders of Torstar Class A shares vote in favor of the transaction. We anticipate the transaction to close by the end of the Q3 of 2014 and obviously that date could slip subject to regulatory process.
While making the decision to sell has been difficult, we are confident that this transaction represents excellent value for Torstar shareholders and importantly further strengthens Torstar's financial position and capital base as we continue in our evolution as a company. This also importantly sets the stage for the next chapter in the Harlequin story. HarperCollins is a very well respected publisher with a tremendous track record of success and will be a good home for Harlequin. There is a real strategic fit. The sale will benefit Harlequin in the years ahead by providing the company, its terrific management team and its employees with exciting opportunities to continue to grow.
Harlequin will remain headquartered in Toronto. With respect to use of proceeds, Torstar would intend to apply a portion of the net proceeds to debt reduction. The company will retain the remainder of the proceeds pending a thorough review of its future cash requirements and potential investment opportunities. I want to just pause here and be clear that we will be thorough and that we will be disciplined as I believe we have demonstrated in our approach to employment of capital over the past number of years and we will do what we judge is in the best long term interest of the company with emphasis on long term. I'll now pass this on to Lorenzo.
Thanks, David, and good morning, everyone. As David mentioned, the transaction we announced today is for the sale of our book publishing business, Harlequin. Total consideration is CAD455 1,000,000 and the transaction is subject to certain post closing purchase price adjustments, including working capital, cash and taxes. The transaction is structured with the sale of 100% of issued and outstanding shares of Harlequin. News Corp is funding the consideration by internal cash resources and as such, there's no financing required for the purchaser.
Closing is expected to be in the Q3 of 2014 and is subject to customary approvals and closing conditions, approval of Torstar shareholders and regulatory approvals that David outlined earlier. From a valuation perspective, we believe the transaction consideration of $455,000,000 represents an excellent value for Harlequin. Based on 2013 actual EBITDA, this consideration represents an EBITDA multiple of 8.1x. From a financial standpoint, based on 2013 results, Harlequin contributed total segment revenue of $398,000,000 and segment EBITDA of $56,000,000 which accounted for 29% 32% of Torstar's consolidated revenues and EBITDA on a segmented basis, respectively. Looking at Torstar on a pro form a basis immediately after the transaction, our business will be split approximately fifty-fifty between Star Media Group and Metroland Media Group.
That's a brief financial overview of the transaction, and I'll hand it back to David.
So thanks, Lorenzo. And just in summing up, I really do believe that this is a transaction that will prove to be beneficial to Torstar, the Harlequin operation and Harbor Collins. And I think when that gets accomplished, you've got the best kind of deal. And with that, we'll open it up to your questions. And maybe there are none.
It's all pretty clear.
We will now take questions from the telephone lines. The first question is from Adam Shine from National Bank. Please go ahead.
Hi, good morning. So obviously congratulations. I think a number of us on the call never thought this would actually happen. In terms of the tax implications, are there any? I presume not, but maybe I'm wrong there.
Yes. We expect the tax situation to be pretty modest, Adam.
Okay. David, is there any background to sort of some of the thought process to how this came about in terms of the decision to finally sell and whether indeed there was an auction process?
There was not an auction process. I can confirm that we were approached by HarperCollins. We were not actively looking to sell Harlequin. I can also say I think it's fair to say that I think when you're in my role, you're constantly kind of asking yourself about value within your own company versus value to someone else. And I think this is one of those circumstances where we felt that there was a gap and we obviously engaged in a constructive dialogue and got to the point where it was mutually beneficial to move ahead.
So I think in a nutshell, I think that's the process, Adam.
Okay. No, I appreciate that. And I know others have questions, but let me throw one out to you. In as much as you've indicated very clearly, David, that first debt reduction and then ultimately a very thorough review, in terms of the dividend, which has historically been something that you guys have looked at heading into the Q1 reporting. You were very clear a year ago that there was not likely to be a dividend bump.
Is that something that we should be thinking about potentially in the short term this year, number 1? And number 2, is there an indication from the Board or any cues in terms of where we might be leaning in the context of what comes next for this company, whether it's adding to the historical newspaper fold or potentially ultimately a privatization of this entity?
Let me answer the dividend question first. Obviously, as you mentioned, we do try to speak to the dividend at the annual meeting, which is next week. I think my and I haven't kind of made a recommendation to the Board, which would happen next week. But my current thinking would be we would just remain at the current level. So that's on the dividend.
I think your question about what comes next is a very fair one. I think we acted on this because we thought it was a very good opportunity. We've been pretty focused on concluding this. There's obviously a period of time, including a regulatory process before there is a closing. And I think we are going to do a lot of careful reflection on how to move forward as an organization.
But I want to really emphasize, I think I've been pretty consistent in taking pride in the financial strength of this company. And I think it's important that we continue to have that financial strength. So my bias would be to try and figure out a way to effectively employ capital. But I'm also sensitive to the fact that I'm and I'm committed to being very disciplined about that process. So, I think it's still pretty early days in terms of that, but I think my bias would be to see Torstar figure out a way to employ the capital, but I acknowledge that we've got a big process to work through around determining what investment opportunities may be available to us.
And I'm not sure, as of today, The real screen for me is, can I get myself convinced that whatever we choose to do is important to adding to the long term value of this organization? And that's my screen and that will influence the direction that I certainly will be recommending to our Board and I'll emphasize over time. So I'm not sure there is much more I can say, Adam.
Okay. No, I appreciate that. And obviously, my best to Donna Hayes and all the gang at Harlequin. I'll leave it there. Thanks.
Thank you. The next question is from Harren Posner from RBC Capital Markets. Please go ahead.
Yes, thanks. Good morning and congrats guys. Maybe starting with you David, I think historically when you've been asked about Harlequin and this asset, you've always mentioned how important the free cash flow generation was to the overall portfolio. Just wondering and I guess kind of a follow-up to Adam's question, but outside of obviously the opportunity to sell at a nice multiple, has anything changed from your perspective whether in terms of your confidence in the digital transformation of this asset or maybe it was subscale in this environment?
Look, I think we were continuing to work through the transition. I think the Harlequin business will perform well going forward. And I think that it's I think we were trying to come to grips with, as I mentioned to Adam, the value of this to a strategic buyer versus the value to us. And I think that's what's kind of influenced our decision to sell at this point in time. You are absolutely right.
The cash flow of Harlequin has been incredibly important to Torstar over this 39 year period. And it was not, as I mentioned in the press release, it was not a decision we took lightly. And because of exactly where we find ourselves, which is, I think we think we did the right thing in exiting. But as I've just acknowledged, we don't have a blueprint to employ the proceeds. But I'm happy to have made the decision.
I think one thing I've always believed is that I think operating companies like this, you'd have to have the attitude of a marathoner. This isn't a sprint and I think if we take our time, we'll figure out the way to continue to build the company. But I'm not sure there's much more I can add for it.
No, I appreciate that, David. And then maybe just with respect to use of proceeds, obviously, you've made some comments. I'm just wondering if internally or with the Board, is there sort of a timeframe you can give us in terms of by a certain date or would you expect to have a better sense of what's next?
I can be absolutely clear with you on that. No. There may be more evolve over time. But as of today, as I said, we have been pretty focused on concluding this transaction and there is no specific timeframe, which I think you should probably infer means long.
Okay. No, that's fair. And maybe just last one for me before I pass it on. With respect to regulatory approvals, obviously, there is some standard stuff. I am just wondering if you see any sort of potential hiccups here along that line?
As you mentioned, there is a regulatory process. I think I want to be respectful of it. And we do we would anticipate the approvals in due course. And frankly, I don't think there is much more that I can constructively comment on at this point.
All right. Thanks very much.
Thank you. The next question is from Paul Steep from Scotiabank. Please go ahead.
Great. Congratulations, guys. I guess, David, just to go back to that point, and I'll push you too hard, but so that we don't end up going over the same ground every quarter. Is it fair to think of, given the CTV history, that investors should expect up to a year of sort of reflection and thought on this process and that maybe 6 months in or 2 quarters in, we get a stop check that sort of says we're going to go down this path and start to explore or is it even longer than that?
It could be even longer than that, Paul. I think look, I think at some point in the next few quarters, I'd probably be willing to certainly provide an update to you on our thinking. But as of today and as I said, we've just closed this transaction and it was a lot of work to get it closed. So, I don't think I want to commit myself at all right now as it relates to timeframe. I may be able to say more at some future date, but I think I'd be leaving it pretty open ended and if you interpret that as it being long, that's okay.
No problem. That helps frame it at least. If we think just about net proceeds, what about the pension obligation? How does that sort of move back and forth?
Yes, Paul, it's Lorenzo. The pension is as a share deal, the pension goes with the company.
Okay. So that's already I assumed you'd already cleared it, but that helps. And then I guess the last one, just what other considerations did the Board maybe make? Like obviously, it is a fantastic price that makes sense, but what other thoughts did the Board go through in terms of the process here, David?
Well, I think they were quite interested in what management's recommendation was. And management's recommendation was this was the right thing to do. I think it's fair to say that they asked the questions that are coming up on the call about what's next. And there was an understanding that we've got some work to do going forward. So, I think we thought it was the right time to crystallize the value we've always felt existed in Harlequin and that then the next step is to kind of reflect on how what's the Torstar of the future.
And as I've mentioned to you, my bias is to figure out a way to employ this capacity back into the business so that the business remains strong and complements our existing media assets in the sense that we've got a media division today. We feel good about the Toronto Star brand and the Metro land operation throughout Ontario and Metro across Canada. So, we feel like we've got a decent media operation in a time that's not easy for media, but there's some Metro is a growing franchise. So I'm not I think there is clearly a recognition that we've got to come to grips with what the next stage in the evolution of Torstar is. And to be frank, I have not brought forward to the Board a recommendation on that.
They're prepared to be patient with me around how to deal with this capacity that we've generated.
Makes sense. Two last ones for me. You addressed it a little bit with Adam and you gave me a good answer in terms of the process and the length of the process. Obviously, when you sort of pro form a things out, the dividend payout ratio is going to go significantly higher post deal. Is it sort of a fair takeaway from your statements that it's status quo at least for the dividend until you get whatever the future direction is that you're going to announce and the dividend would sort of be coupled in with that announcement?
Is that a good way for investors to think about this?
Yes, I think absolutely. And for those investors who thought there was an issue with security of dividend, I hope those fears are allayed now. I think we're obviously, we may have a high payout ratio, but we're we would obviously be in a very, very strong financial position. So if I understood you right, Paul, that is the way I would think about it is that I think that we just go forward with the dividend at the current level until we determine what the next stage is and at that point it may be addressed.
Perfect. And then the last one, maybe we table or push to next week when we talk again is the shop. Ca investment and just maybe framing next week how that fits into the thinking about the future here, because it looks like you did a future further investment in that venture as well?
Yes. Just for those that aren't aware, just so we put it in perspective, it was $1,000,000 investment. So why don't we talk about that next week?
Thanks
guys. Thank you. The next question is from Erudhinder Galatidec from Canaccord Genuity. Please go ahead.
Good morning. Thanks very much and congratulations. Just one left for me. With respect to free cash flow, I was wondering if you can give us a sense of how much of the company's free cash flow was hollowquin. Specifically, I know that you've guided to $40,000,000 in extra pension funding.
I was wondering how much what component of that was booked? And also perhaps if you can maybe a breakdown of the CapEx how it broke down between the divisions?
On the cash flow a bit, I'll handle that maybe next week on the call. And on the CapEx, if you think about our total company range in the $27,000,000 to $28,000,000 range, Hardik would probably represent around $4,000,000 of that.
Okay. And with respect to the pension $40,000,000 component, is that what you're going to is that going to be on the call as well or?
Yes, I'll provide an update on next week.
Okay, great. That's all I had. Thank you.
No problem.
Thank you. The next question is from Jim Casey from BMO Capital Markets. Please go ahead.
Thanks. Good morning. Dave, could you provide a little more color on the negotiations you had with HarperCollins? Like when did they approach you? And what was the dynamic there?
You're going to write a book, Tim, or what?
Well, on just this deal we've been talking about this deal for 20 years and all of a sudden, all of a sudden it happens.
Okay. What I will share is that we were approached in the fall of this year. And as I said earlier, I don't think it's unusual. Between 2 parties, it takes a while to sort out what is mutually beneficial. So obviously, there was dialogue.
I would say there was dialogue off and on for some period of time. And obviously, over the past few months, it became more intense.
Okay. In the past, one of the I don't know if it's a concern, but one of the issues was in getting a deal approved that there might have been some concern over what we used to call the Bay Como rules in selling cultural assets. Is there any concern there?
Well, I think, you know, obviously this is this requires approval of investment the Investment Canada it's under Investment Canada and it's under Heritage. There certainly has been some preliminary dialogue, but there is an approval of process that's required, but we would anticipate working through
that. Lorenzo, for you, on the tax issue, how are you able to shield all the tax given the cost base to the company would be virtually 0 given you bought it so long ago?
Well, it's the fact that we have quite a high tax basis, Tim.
How is that possible? You bought it 39 years ago.
Well, I'll provide a bit more color on the call next week.
So do you expect to pay any cash taxes on this deal?
Pretty modest.
All right.
I think in terms of $5,000,000 to $10,000,000 Tim.
Okay. And last one, Dave, over the years, I don't think there's any doubt that the stability of Harlequin has protected a lot of shareholder value as the economy has come in and out of recessions. Going forward, would you have a bias to retain some of those cash proceeds on the balance sheet? Would you want to sit in a net cash position to protect long term shareholder value against the cyclicality of the New Saver business and the economy?
Yes. It's a good question, Tim. I think that that's part of the reason I constantly am emphasizing financial strength even with Torstar, including Harlequin and our newspaper operations. So I think part of what Lorenzo and I will need to reflect on in working through all this over the coming period of time is what and it may relate to what we actually would recommend employing the capital in obviously. So I do think a strong balance sheet going forward will likely be very important to us.
Okay. Thanks for that.
Thank you. The next question is from David from Cormark Securities. Please go ahead.
Yes, a couple of questions. I don't know if you talked addressed this, but how much of that $455,000,000 are you going to use for debt reduction? How much are you going to need in your mark for investment? And do you have a target leverage ratio now going forward?
I think our net debt position is $180,000,000
$160,000,000 net debt, we would pay that down.
Like eliminate it?
Yes. Yes.
Okay. So you'll be debt free and lots of cash. So then, in terms of investment, would your bias or preference be to invest on the in terms of digital assets?
You know, David, we're just it's just too premature at this stage for us to comment very specifically on that. We've got some work to do to try and develop our thinking in that area.
Okay. And as you evaluate potential investment opportunities, would you consider going outside of Canada?
I think my primary screen is we want to do things that would over the long term contribute to the successful evolution of this company and it's that basic. So I think we are prepared to be very open minded, acknowledging that we want to be very disciplined.
Okay. Can you tell us what the free cash flow impact is of Hardikland?
I'll provide an update on that in the call next week.
Okay. I'm just wondering what the payout ratio will be on the dividend going forward. But you said that dividend is totally safe now with the financial position of the company, right?
Yes, that's right. I think Paul asked about this. My expectation is that, and again, it's always subject to the Board's agreement, but certainly my thinking is that we would continue with the dividend at the current rate until we've kind of worked through what we've worked through and then we'll probably revisit at that point.
Right. Okay. Thank you.
Thank you. The next question is from Adam Shine from National Bank. Please go ahead.
Thanks a lot. Two last ones maybe specifically for Lorenzo. Tim was going I guess in this direction, but just in terms of tax rate going forward, is that something we'll hear more about next week or can you talk to us in terms of guidance?
I'll do that next week.
Okay. And then lastly, just in the context of how you're going to treat Harlequin even going into next week, will it be immediately discontinued ops with Q1 reporting or post facto?
Again, I'll clarify next week.
Okay. So we'll just keep the Harlequin in our estimates. Okay. So maybe I'll just go back and I'll correct myself. Obviously, Don is not there anymore.
So my best to Craig and the team. On that note, congratulations.
Thanks. Thanks, Adam.
Thank you. There are no further questions registered at this time.
Thank you. Thank you very much. And as some of you realize, I guess, we'll be speaking with you next week. Thanks again.
Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.