Author Topic: Any thoughts on the rumors  (Read 2963 times)

valuecfa

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Any thoughts on the rumors
« on: February 20, 2009, 05:29:41 PM »
http://www.kbsradio.ca/news/13/880065

I don't follow Canwest and don't know much about it other than a quick wikipedia search. Fairfax already owns a good chunk of this debt loaded penny stock. At first thoughts, I don't want them to allocate too much more capital into newspaper/media assets (in addition to ABH) as I believe newspapers and some forms of media are somewhat of a slowly dying breed in the traditional format. As far as Canwest's other assets, i'm not sure what to think. Any Canadians have any thoughts (i'm not really familiar with most of their assets being American)??

I'm sure some of their assets are pretty well known up there, with some good brands. Maybe a purcahse/asset sale would be a good option for Fairfax, though i don't imagine their are many media companies with deep enough pockets too bid for them. Personally, at first glance, i once again would rather them stay clear from these types of assets...But i'm not well informed on this media holding.


Any other thoughts??


omagh

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Re: Any thoughts on the rumors
« Reply #1 on: February 21, 2009, 03:54:16 AM »
This company (CGS) has good assets, but a ghastly capital structure.  10 years ago, this company was mostly television media assets and had an ROE of 30% with an appropriate leverage (1:1 assets:equity).  Their modus operendi was to find a desirable asset, buy it with leverage and then pay down the debt with operating cashflows.  Then, the company started on a path of "diworsification" as Peter Lynch calls it.  They purchased the assets of the Southam newspaper chain which probably had an ROE of 10% in its best year.  CGS loaded up with much more debt.  Izzy Asper became ill and eventually passed away which gave his sons and daughter the reins.  The 2nd generation led by Leonard Asper was not seasoned and was saddled with a much worse capital structure.  There was an additional purchase opportunity for Alliance Atlantis which took on more debt and a disadvantaged partnership with Goldman Sachs.  Basically, at this point, the debt became silly (forgetting numbers here, but 3.0-3.5:1 assets:equity) and rather than raising new capital or selling other assets, Leonard et al hung on.

Fairfax / Chou Funds sensing an undervaluation have piled in and bought 20+% of the company.  It's a dual-share structure with a Class A multiple voting class and subordinate single voting class.  While this share structure is more common in Canada, it's not desirable.  Fairfax also uses this structure which allows a single executive (Watsa through his SixtyTwo investment holding firm) to control the company with a minority capital investment. 

Fairfax has been counselling Leonard Asper to deleverage or seek new equity.  At this point, the company will go bankrupt without a new capital injection.  I've been predicting that Fairfax would be forced to make a decision to add capital or they would have to walk away from their equity investment.  At the end of the day, the assets are worthwhile.  Surviving this recession will allow the assets to perform in the future.  Media companies are dependent on advertising revenues which are typically dominated by auto, financial, consumer durable, retail, beverage, consumer healthcare, etc.  Some of these sectors are deadly today and aren't spending which puts the media assets business model into some question.  Any well-financed media company would be benefiting from this environment to cherry-pick competitor assets.

Bottom line: Canwest will be bankrupt without a convertible debenture from Fairfax and/or others.  The terms will be egregious, but profitable to the debtholder.  The Goldman/Canwest partnered assets will likely be sold.  Management teams will change.  I'm not sure that Fairfax has the fortitude to become an activist investor, but I'm sure that a Sam Mitchell on the board of Canwest will help push things along.

Cheers,
-O

http://www.kbsradio.ca/news/13/880065

I don't follow Canwest and don't know much about it other than a quick wikipedia search. Fairfax already owns a good chunk of this debt loaded penny stock. At first thoughts, I don't want them to allocate too much more capital into newspaper/media assets (in addition to ABH) as I believe newspapers and some forms of media are somewhat of a slowly dying breed in the traditional format. As far as Canwest's other assets, i'm not sure what to think. Any Canadians have any thoughts (i'm not really familiar with most of their assets being American)??

I'm sure some of their assets are pretty well known up there, with some good brands. Maybe a purcahse/asset sale would be a good option for Fairfax, though i don't imagine their are many media companies with deep enough pockets too bid for them. Personally, at first glance, i once again would rather them stay clear from these types of assets...But i'm not well informed on this media holding.


Any other thoughts??

valuecfa

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Re: Any thoughts on the rumors
« Reply #2 on: February 21, 2009, 12:55:18 PM »
Thank you for the reply -O-. I'll be very interested to see how this investment situation develops in the coming weeks.