Postmedia deal unlikely to face probe on foreign investment

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The federal government doesn't anticipate a foreign investment review will be required for Postmedia Network Canada Corp.'s purchase of Sun Media newspapers because Canadians remain the controlling shareholders at the company, sources say.

The deal between Postmedia and Quebecor Media Inc., which exceeds $300-million, will hand a group of mostly U.S. investors significant influence over one of the country's largest media outlets. Sun Media Corp. is a subsidiary of Quebecor.

On Tuesday, sources familiar with the government's decision-making said Ottawa believes Canadians will retain control of the new, larger Postmedia, which will own approximately 30 per cent of the country's newspaper market.

This means a full review, as laid out in the Investment Canada Act, to determine whether the transaction is a "net benefit" to the country, wouldn't be necessary.

"Every indication ... is that it's not going to be subject to the act," a source said.

"It's about the majority control of the company – who has control, and who makes decisions in the boardroom," the source said.

While Canadian shareholders have voting control, bondholders owed about $500-million in high-risk junk bonds exert a lot of influence on the company's board, according to people close to Postmedia.

Postmedia's investors are a syndicate of U.S. and Canadian hedge funds that specialize in buying high-risk stocks and debt, known as junk bonds, from distressed companies.

Led by New York-based GoldenTree Asset Management LP, the funds financed the resurrection of Postmedia from a bankruptcy proceeding in 2010.

GoldenTree and other investors have agreed to buy additional bonds and securities to help finance the Sun Media purchase.

The Harper government has largely welcomed foreign investment, even championing it in areas such as wireless service to spur competition. It allowed e-commerce heavyweight Amazon to run its own warehouse in Canada despite opposition from booksellers.

Ottawa has been protective elsewhere, fencing off the oil sands from some forms of foreign state-owned investment, and rejecting outside takeovers of satellite technology as well as Canada's biggest potash producer and two telecom firms.

Sources caution that Ottawa is not giving Postmedia a blank cheque with respect to a foreign investment review of the Sun Media paper deal and still needs to examine the final deal structure and financing to ensure nothing significant has changed.

Prior to the deal's announcement, Postmedia representatives discussed the proposed transaction in confidence with federal officials, sources said. It's not unusual for companies to do this before proceeding with a major acquisition.

Ottawa limits foreign control of Canadian media through Canada Revenue Agency rules that impose a tax burden on advertisements placed in foreign-owned media outlets.

Postmedia's U.S. investors, which own the majority of the company's debt and shares, have managed to sidestep this restriction by converting their stock into a new class of shares with reduced voting rights.

Postmedia also appears confident foreign investment review rules won't apply.

On Tuesday, a Postmedia spokeswoman said the company will not be making an application to Heritage Canada for a review of its investment under the Investment Canada Act.

"Postmedia is a Canadian acquirer and therefore the transaction is not subject to review under the Investment Canada Act," Phyllise Gelfand, Postmedia's vice-president of communications, said.

Under the Investment Canada Act, any investment by a non-Canadian in the newspaper sector that is worth $5-million or more would trigger a review by the minister of Canadian heritage as to whether it would be of "net benefit."

The sale is still subject to approval from the Competition Bureau. It will create a newspaper behemoth with more than 190 mass market and community newspapers, and more than 12 million unique monthly visitors online.

With reports from James Bradshaw and Christine Dobby in Toronto.