In the coming days, the creditors of Metroland Media Group Ltd., the Torstar Corp. subsidiary that owns dozens of Ontario community newspapers, must decide whether to accept an insolvency plan that gives them pennies on the dollar for what they’re owed.
The plan is recommended by an independent trustee employed by Grant Thornton, charged with operating in the interest of all the stakeholders in the matter. The trustee’s report, however, is sufficiently thin on details to make creditors wonder whether they have enough information to make an informed decision.
Or, possibly, to wonder whether to accept the plan at all.
Metroland said in mid-September that it planned to make a proposal pursuant to Canada’s Bankruptcy and Insolvency Act, and it followed up in mid-October with the plan.
In his report to creditors, Grant Thornton trustee Jonathan Krieger recommends a “Yes” for the vote scheduled for Tuesday, which would give unsecured creditors 13 cents on the dollar for their claims. Key to this analysis, of course, is just how much Metroland’s assets are worth.
Here is where things get interesting. The proposal says Metroland has just under $15.5-million in assets – a little bit of cash and an estimate of how much of its accounts receivable, or money due it by vendors, it can collect.
That’s it? That’s it.
The machinery and equipment, which the trustee says is primarily used to produce newspapers and flyers? They’re worthless, as “the cost to market and disassemble the equipment in a liquidation scenario would set-off the proceeds from any sale.”
Is there a list of this equipment, so we can double-check this assessment? No.
Even more remarkable: The company’s intellectual property – the brands of 70 weekly community newspapers and six dailies, including the Hamilton Spectator – is also worthless, the trustee argues.
Given that the assets are integrated and “highly specialized” and have generated “significant financial losses,” and because there is a “relatively small number of potential purchasers in the Canadian market,” Mr. Krieger “is not in a position to ascribe a liquidation value to these assets,” he said in his report. Realizing any value for creditors would require “a lengthy, and expensive, sales process.”
The proposal includes no list of these brands, much less their number of customers and subscribers – the kind of intellectual property that seemingly has value.
Metroland also holds two minority equity positions in companies that it values at $20-million on its own balance sheet. The trustee says they’re worthless.
The companies “are overleveraged with significant secured debt and are not otherwise profitable,” Mr. Krieger said. “These investments are non-liquid, of no realizable value to the equity holders and would therefore yield no realizable value to creditors in a liquidation scenario.”
Of course, we are not told what these investments are. But you know what else has significant debt and is unprofitable? VerticalScope Holdings Inc., in which Torstar previously held an equity stake. Now a public company, VerticalScope’s market capitalization has ranged from about $60-million to $180-million in its first year on the Toronto Stock Exchange.
In short, Mr. Krieger has produced a kind of “trust-me” report. And in an e-mailed response to questions, the trustee only reiterated his conclusions.
“There was no discernible enterprise value for a business that has lost $10-million in the past year alone” and Metroland “held numerous M&A discussions with prospective buyers over the past year and could not procure a successful cash bid for any of the newspapers,” he said. The $20-million in equity stakes are undisclosed because they are “subject to confidentiality provisions.”
There does seem to be a winner here, though: Torstar and its owner, Jordan Bitove. (Mr. Bitove, who e-mailed a statement on the value of journalism and the poor health of his business, declined to directly comment on the BIA process, saying it would be inappropriate “given the proceedings are in the hands of the trustee and the courts.”)
In this insolvency plan, Torstar agrees to waive nearly $42-million in claims – of course, we can’t tell what exactly those comprise, and therefore why Metroland owes so much to its parent. And Canadian Imperial Bank of Commerce, the only secured creditor, agrees not to receive any payment under this plan for the $7.26-million it’s owed.
However, unlike other corporate reorganizations where the stockholders get wiped out in order to pay creditors, Torstar will emerge from this process maintaining its 100-per-cent ownership of Metroland, with all of its assets. And, one supposes, a better plan for paying CIBC back.
All this makes me wonder whether the creditors should say “No” in Tuesday’s vote and send the company into liquidation and see how much they can get, rather than let Torstar continue as owner. An auction of the newspapers and websites might not only yield some return, but also get them into the hands of members of the communities deeply concerned about their hometowns becoming news deserts under Torstar’s ownership.
Yet I also understand why many would vote “Yes” – the creditor list is littered with current and former employees owed tens of thousands of dollars. A rejection would allow Torstar and CIBC to reassert their $50-million in claims, contributing to the trustee’s estimate that a liquidation would get them five cents on the dollar, not 13. Any liquidation process would rack up legal and other professional fees that would eat away at the realizable value of the assets.
In his e-mail response, Mr. Krieger said “I respectfully disagree” when presented with the idea that a rejection of the proposal, and a liquidation could yield a meaningfully higher amount. While “creditors are free to make their own assessment of the merits of the proposal,” regardless of the trustee’s view, he said “the Proposal Trustee made a fulsome review of the affairs of Metroland.”
Trust me, says the trustee.