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 DeMarchi, 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. Thank you for joining us today, a day that is significant at Torstar. 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, expecting, can, 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 applied in making such predictions, conclusions, forecasts, or projections is described in more detail in our news release issued today. Our MD&A for the year ended December 31st, 2013, which can be found on our website at www.sedar.com. Good morning again. I'm 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 turn it over to Lorenzo, who will provide some further commentary. 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, a 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 million, 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 third quarter 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 will 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 CAD 455 million, and the transaction is subject to certain post-closing purchase price adjustments, including working capital, cash, and taxes. The transaction is structured as a sale of 100% of issued and outstanding shares of Harlequin. News Corp is funding the consideration by internal cash resources, and as such, there is no financing required for the purchaser. Closing is expected to be in the third quarter 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 CAD 455 million 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 CAD 398 million and segment EBITDA of CAD 56 million. Which accounted for 29% and 32% of Torstar's consolidated revenues and EBITDA on a segmented basis, respectively. Looking at Torstar on a pro forma basis, immediately after the transaction, our business will be split approximately 50-50 between Star Media Group and Metroland Media Group. That's a brief financial overview of the transaction. Now I'll hand it back to David.
Thanks, Lorenzo. 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 HarperCollins. I think when that gets accomplished, you've got the best kind of deal. With that, we'll open it up to your questions. Maybe there are none. It's all pretty clear.
We will now take questions from the telephone line. If you have a question and you're using a speakerphone, please lift your handset before making your selection. If you have a question, please press star one on your telephone keypad. If at any time you wish to cancel your question, please press the pound sign. Please press star one at this time if you have a question. There will be a brief pause while participants register for questions. Thank you for your patience. The first question is from Adam Shine from National Bank. Please go ahead.
Hi, good morning. 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.
Yeah, we expect the tax situation to be pretty modest, Adam.
Okay. David, is there any background to 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 asking yourself about value within your own company versus value to someone else. 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. I think in a nutshell, I think that's the process, Adam.
Okay. No, I appreciate that. 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 one? 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 haven't 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.
Okay.
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's a closing. I think we're going to do a lot of careful reflection on how to move forward as an organization. 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. 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 committed to being very disciplined about that process.
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. 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? That's my screen, and that'll influence the direction that I certainly will be recommending to our board, and I'll emphasize over time. I'm not sure there's much more I can say, Adam.
Okay. No, I appreciate that. 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 Haran Posner from RBC Capital Markets. Please go ahead.
Yeah. 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. I'm just wondering, and I guess this is 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 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're absolutely right that cash flow of Harlequin has been incredibly important to Torstar over this 39-year period. As I mentioned in the press release, it was not a decision we took lightly. 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. 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 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, Haran.
No, I appreciate that, David. 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 you'd expect to have a better sense of what's next?
I can be absolutely clear with you on that. No.
All right.
There may be more evolve over time, but as of today, as I said, we've 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. Maybe just last one from me before I pass it on. With respect to regulatory approvals, obviously, there's some standard stuff. I'm 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. We would anticipate the approvals in due course. Frankly, I don't think there's much more that I can constructively comment on at this point.
All right. Thanks very much.
Thank you. The next question is from Paul Steed from Scotiabank. Please go ahead.
Great. Congratulations, guys. I guess, David, just to go back to that point, to not 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 six months in or two 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. 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. As of today, and as I said, we've just closed this transaction. It was a lot of work to get it closed. 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. 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?
Yeah, Paul. It's Lorenzo. The pension is a schedule. The pension goes with the company.
Okay. I assumed you'd already cleared it, but that helps. I guess the last one, just what other considerations did the board maybe make? 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. 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. There was an understanding that we've got some work to do going forward. I think we thought it was the right time to crystallize the value we've always felt existed in Harlequin. The next step is to reflect on what's the Torstar of the future. 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 Metroland operation throughout Ontario and Metro across Canada. We feel like we've got a decent media operation at a time that's not easy for media, but Metro is a growing franchise. 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. 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, you gave me a good answer in terms of the process and the length of the process. Obviously, when you pro forma things out, the dividend payout ratio is going to go significantly higher post-deal. Is it 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, the dividend would be coupled in with that announcement? Is that a good way for investors to think about this?
Yeah, I think absolutely. For those investors who thought there was an issue with security of dividend, I hope those fears are allayed now. Obviously we may have a high payout ratio, but we would obviously be in a very strong financial position. If I understood you right, Paul, that is the way I would think about it.
Perfect.
Is that I think that we just go forward with the dividend at the current level until we determine what the next stage is. At that point, it may be addressed.
Perfect. The last one, maybe we table or push to next week when we talk again, is the Shop.ca investment. 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.
Yeah. Just for those that aren't aware, just so we put it in perspective, it was a $1 million investment.
Okay.
Why don't we talk about that next week?
Perfect. Thanks, guys.
Thank you. The next question is from Aravinda Galappatthige from Canaccord Genuity. Please go ahead.
Good morning. Thanks very much, congratulations. Just one last for me. With respect to free cash flow, I was wondering if you can give a sense of how much of the company's free cash flow was Harlequin. Specifically, I know that you've guided to it $40 million in extra pension funding. I was wondering how much, what component of that was books. Also, perhaps if you can, maybe a breakdown of the CapEx, how it broke down between the divisions.
On the cash flow event, I'll handle that maybe next week on the call. On the CapEx, if you think about our total company range in the $27 million-$28 million range, Harlequin would probably represent around $4 million of that.
Okay. With respect to the pension, $40 million component, is that going to be on the call as well?
Yeah, I'll provide an update on that.
Okay
next week.
Okay, great. That's all I had. Thank you.
No problem.
Thank you. The next question is from Tim 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? When did they approach you, and what was the dynamic there?
You going to write a book, Tim, or what?
Well, we've been talking about this deal for 20 years.
Okay.
All of a sudden it happens.
What I will share is that we were approached in the fall of this year. As I said earlier, I don't think it's unusual, between two parties, it takes a while to sort out what is mutually beneficial. Obviously there was dialogue. I would say there was dialogue off and on for some period of time, 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, one of the issues was in getting a deal approved that there might have been some concern over what we used to call the Baie-Comeau rules in selling cultural assets. Is there any concern there?
Well, I think obviously this requires approval of the Investment Canada. It's under Investment Canada, it's under Heritage. There certainly has been some preliminary dialogue, there is an approval, a process that's required, we would anticipate working through that.
Okay. 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 zero given you bought it so long ago?
Well, it's the fact that we've got quite a high tax basis there, Tim.
How is that possible? You bought it 39 years ago.
Well, I'll provide a bit more color on the call next week.
Do you expect to pay any cash taxes on this deal?
Pretty modest.
All right. Okay.
Think in terms of $5 million-$10 million, Tim.
Okay. 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 newspaper business and the economy?
It's a good question, Tim. I think that's part of the reason I constantly am emphasizing financial strength, even with Torstar, including Harlequin and our newspaper operations. 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. I do think a strong balance sheet going forward will likely be very important to us.
All right. Okay. Thanks for that.
Thank you. The next question is from David from Cormark Securities. Please go ahead.
A couple of questions. I don't know if you addressed this, how much of that CAD 455 are you going to use for debt reduction? How much are you going to earmark for investment? Do you have a target leverage ratio now going forward?
Yeah. I think our net debt position is $180 million.
$160 net debt, we would pay that down.
Like eliminate it?
Yes.
Yeah.
Okay. You'll be debt free and lots of cash. In terms of investment, would your bias or preference be to invest in terms of digital assets?
David, 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.
As you evaluate potential investment opportunities, would you consider going outside of Canada?
Look, 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. I think we're 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 Harlequin?
Well, I'd provide an update on that in the call next week, David.
Okay. I'm just wondering what the payout ratio will be on the dividend going forward. You said that the dividend's 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 worked through what we've worked through, and then we'll probably revisit at that point.
All right. Okay. Thank you.
Thank you once again. Please press star one on your telephone keypad to ask a question. 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. 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, Adam.
Okay. Then lastly, just from a 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. We'll just keep the Harlequin in our estimates. Okay. Maybe I'll just go back and I'll correct myself. Obviously, Donna's not there anymore, so my best to Craig and the team. On that note, congratulations.
Thanks, Adam.
Thank you. There are no further questions registered at this time.
Thank you very much. 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.