Amid a business presentation heavy on numbers, Steven Shapiro slipped in this tidbit about what made a struggling U.K. bank an attractive investment to a hedge fund that specializes in distressed assets.
“And then it emerged that the bank’s chairman, an ordained minister, was caught buying drugs, earning him the nickname the ‘Crystal Methodist’,” Shapiro told the Capitalize for Kids Sohn Investors Conference in Toronto on Friday.
The audience — a well heeled Bay St. crowd of pension and mutual fund managers who had paid $2,500 apiece to hear some of North America’s richest hedge fund managers share their best ideas at a charity event — erupted in laughter.
The Co-operative Bank is just one of the intriguing opportunities GoldenTree Asset Management LP is pursuing in its search for undervalued or distressed companies.
Shapiro also talked about its move into Europe during the sovereign debt crisis and its more recent investments in Russia amid the turmoil in the Ukraine.
But the one thing Shapiro won’t talk about is GoldenTree’s stake in Postmedia Network Canada Corp., the Toronto-based company that owns most of Canada’s largest daily newspapers and related digital properties, or its role in backing a merger proposal with rival Sun Media Inc.
The $316 million deal, if approved by regulators, would make GoldenTree the single biggest shareholder in Canada’s largest English language news media company.
Shapiro, who is GoldenTree’s media and telecom expert, would personally oversee the investment’s success as a director on Postmedia’s board.
Still, Shapiro politely declined repeated requests this week from The Star for information about the company, himself or his interests.
“I am sorry but GoldenTree’s policy as a firm is that we do not comment or speak to the press regarding companies in which we are invested. I’m sorry I can’t help and wish you luck with the story,” he wrote in an email response to The Star.
Among nationalists, the U.S. hedge fund’s involvement in a major Canadian cultural asset has raised questions about the effectiveness of laws that discourage foreign domination of the media landscape through unfavourable tax treatment of ads in such publications.
Postmedia says that while GoldenTree owns 39 per cent of the newspaper company’s shares, its voting rights are limited, ensuring Canadians retain control of the company.
The arrangement complies with the letter of the law but fails to quell some media watchers’ doubts about who’s calling the shots and why.
Postmedia president and chief executive officer Paul Godfrey describes Shapiro as a numbers guy, not someone who’s interested in directing the newspapers’ content.
“At no time have they ever picked up the phone and asked about an editorial story,” Godfrey said. “Steve comes to the board meetings. He’ll ask questions, all related to financial matters.”
Still, among newspaper watchers, the proposed merger with Sun Media raises fears the papers are in for another round of cost-cutting and consolidation, particularly in the three major markets where two competing papers will be under one owner.
Since 2010, when GoldenTree led a $1.1 billion winning bid that bought the assets of Canwest Publishing Ltd. out of bankruptcy court, a deal that created Postmedia with Godfrey at the helm, the newspaper chain has cut nearly half its staff, sold its head office, fired publishers, outsourced its printing and centralized production. It should be noted almost all Canadian and U.S. newspaper companies have resorted to similar strategies but perhaps not as aggressively.
The proposed merger with Sun Media will give Postmedia ownership of competing papers in three major markets — Calgary, Edmonton and Ottawa. Godfrey has said it plans to keep all of them operating.
But John Miller, a professor emeritus at Ryerson University’s School of Journalism, says the deal could accelerate the move to online-only editions, or a merger of circulation, advertising and even some editorial functions.
“They’re in that game to make profits. They’re going to make their decisions based on whether there’s money in it for them,” Miller said of Postmedia’s owners. “It distances ownership further away from the people who value the public service role of media, to people who are trying to make a buck off it.”
Still, Miller agrees Postmedia has to do something to stem its decline. Losses at the company deepened in the fourth quarter as revenue dropped 13 per cent on lower print and digital advertising, Postmedia reported Friday.
“Godfrey has to pull a rabbit out of a hat soon,” Miller said.
In one way or another, Shapiro has been involved in Canadian newspapers since at least 1996, when he was running the media and telecom research team at CIBC World Markets in New York. At the time, CIBC was the underwriter on a bond issue that financed a management-led buyout of Sun Media Inc. by Godfrey, who became president and CEO of that chain.
The deal would prove to be a home run for the investors. The management group paid $411 million for the chain, and sold it three years later for $983 million to Quebecor Corp. Now, Godfrey and GoldenTree are proposing to buy back most of those assets for just $316 million.
In between, Godfrey left Sun Media, and later became the publisher of the National Post. Shapiro left CIBC for the more lucrative world of hedge fund investing as a co-founder of GoldenTree.
The two came together again in 2009, when Post owner CanWest Publishing Ltd. was pushed into bankruptcy court protection and GoldenTree, which owned $150 million in unsecured CanWest debt, emerged the victor with a $1.1 billion bid for the assets. The new entity that emerged, named Postmedia after its flagship newspaper, had Godfrey at the helm.
Despite their long history together, Godfrey had little to add to a request for more insight into Shapiro’s character. He called him a sports fan who is very big on hockey. His favourite team is the New York Rangers and he’s a devoted family man.
“He’s quiet by nature,” Godfrey said in an interview this week. “Very wise when he speaks. He talks common sense. He’s very decent and understanding and prepared to listen.”
From Brooklyn, Shapiro’s father was president of an engineering consulting firm; his mother was a college recruiter. He graduated in 1992 from the University of Pennsylvania Law School, after taking an undergraduate degree in history. That same year, he married law school classmate Deborah Freedman at the Mamaroneck Beach and Yacht club, a 45-minute drive from Manhattan’s Upper East Side. They have three daughters.
(In 2011, they made a substantial donation to the law school, in the range of $100,000 to $250,000.)
After a stint as a bankruptcy attorney at a New York law firm, Shapiro moved onto the financial side, working his way up from research analyst at a boutique investment firm to managing director of the high-yield group at CIBC World Markets, where he headed media and telecommunications research.
In 2000, he was invited by Steve Tananbaum, who also cut his teeth in investment banking in New York, to join the hedge fund he was founding.
With an office on Park Ave. across from the Waldorf Astoria, GoldenTree has grown to $21 billion (U.S.) in assets under management. It ranks 49th out of the 100 biggest hedge funds in the Americas.
With more than 190 employees including 40 investment professionals, it’s considered a team-oriented firm. Still, it’s primarily the CEO Tananbaum who has the public profile.
Tananbaum is “a tough dude. The same way they all are,” says Josh Friedlander, editor of Absolute Return, an online industry publication. Tananbaum was the keynote speaker at an Absolute Return investment conference in March. “Shapiro? I really don’t know him. The man is the silent guy.”
In New York, a rival fund described GoldenTree as “aggressive.”
“We cross swords occasionally,” said Porter Bibb, managing partner of MediaTech Capital Partners, a frequent media commentator and the first publisher of Rolling Stone magazine
“I’ve never done a deal with them,” Bibb added. “They’re aggressive. They’re fairly highly regarded here as significant players in the industry.”
For hedge funds in general, the more that a business is in distress the better, as long as the investors can see a potential upside and also make some money along the way.
Since the rise of the Internet, traditional print media, such as newspapers, magazines and even phone directories, have proved fertile ground for GoldenTree, whose other media investments have included Readers Digest and the Yellow Pages.
“Newspaper companies are worth about a tenth of what they were in the year 2000,” said Ken Doctor, a U.S. news industry analyst with the Nieman Foundation and author of Newsonomics: Twelve New Trends That Will Shape The News You Get.
“The only people left are the hedge funds, which say these are beaten down assets. The prices are very low. We can profitably run them for the next three to five years and get out,” Doctor said.
In a low-interest rate environment, where few other kinds of investments pay more than 3 or 4 per cent, distressed debt, which can pay anywhere from 7 to 13 per cent, can be very appealing to investors with an appetite for risk, the Toronto hedge fund conference heard this week.
The proposed takeover of the rival Sun chain will be positive for Postmedia, the debt rating agency Moody’s Investors Service said shortly after the deal was announced on Oct. 6
While it will increase the company’s debt load, it will also improve the company’s cash flow, thus reducing leverage and risk, Moody’s wrote in an Oct. 9 report.
In fact, Postmedia needs the merger, Moody’s said in a report that foreshadowed Friday’s quarterly results, noting that both revenue and earnings before interest, taxes depreciation and amortization (EBITDA) are declining.
On Friday, Postmedia said the company had a net loss of $49.8 million, or $1.24 per share, for the quarter ended Aug. 31, compared to a revised net loss of $47.9 million, or $1.19, in the year earlier period, the company said.
Revenue slid to $146.8 million as print advertising fell 21 per cent to $74.2 million and digital revenue dropped 5 per cent $20.2 million, Postmedia said. Print circulation revenue slipped to $48 million from $49.4 million, the company said.
Moody’s said it expects this downward trend to continue for the next two years as competition for advertising dollar from other media platforms remains intense.
The newspapers’ transformation into digital businesses is taking longer than expected, Moody’s also said, noting Postmedia earns just 13 per cent of its revenue from digital advertising, while Sun Media earns just 6 per cent.
Moody’s said it expects Postmedia to continue to match declining revenue with cost-cutting over the next 12 to 18 months. – tighten and move next to earnings
Postmedia chair Rod Phillips called the proposed purchase of Sun Media a “great day for Canadian journalism.” Godfrey said its investors were placing a “big bet” on the future of the industry that would help it achieve the scale necessary to compete with internet giants, like Google and Facebook.
But in a conference call with journalists, Godfrey also acknowledged: “Without this, I think both newspaper organizations could flounder.”