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A Dreamy Turnaround Story

03/31/2010 10:08 am EST


Benj Gallander

President, Contra the Heard

The publisher of the Toronto Star and Harlequin romances may yet enjoy a happy ending, write Benj Gallander and Ben Stadelmann in Contra the Heard.

At Contra the Heard, we’ve never been ones to shy away from sectors that analysts don’t like. The idea is to buck the current negative trend by finding a company in a patch of trouble, but not so serious that it won’t survive to see better days ahead. Torstar Corporation (Toronto: TS-B) fits the profile.

Torstar’s value can be found in its broadly based ownership of newspapers, digital properties, and book publishing. The Star Media Group includes the Toronto Star and Internet properties such as,, Workopolis, Olive Media, and eyeReturn. The Metroland Media Group publishes many small community newspapers in Ontario. Perhaps not as well known is Torstar’s ownership of Harlequin Enterprises, the leading global publisher of books targeted at female readers, although there are no rules against men turning the pages.
Any company that has a major focus on newspapers is very contrarian, to be sure. But we aren’t buying into the hype of a swift obliteration of newspaper readership. At 118 years of age, the Toronto Star is Canada’s largest daily newspaper and perhaps an undervalued asset. Though scary to many investors, it has initiated a huge restructuring effort to lower costs. Stacks of buyouts and moves to outsource are helping [it] adapt to a new landscape.
Harlequin is actually a growth and diversification component in Torstar’s story. With the strategy of making it a global brand, revenues have been rising and foreign exchange benefits are enhancing the bottom line. There has been a successful push into South Korea and Thailand. As women’s incomes continue to grow in these countries, so could demand for an enjoyable discretionary product like a romance novel. It’s doubtful that an airbrushed cover shot of male model Fabio will ever get lost in translation.

Results for Torstar’s third quarter were mixed. Revenues from the newspapers and digital divisions continue to drop, while the restructuring efforts and growth at Harlequin still fall short of making up for it. However, the company has been profitable for a long time and currently remains in the black.
In November, the company confirmed a new chief executive officer/president, David Holland, who had been the chief financial officer since 2005 and was in senior leadership positions within the company since joining Torstar in 1986. He might make some quick, tough decisions like writing down the investment in CTVglobemedia. Additional goodwill markdowns are also probable. Over the past few years debt has risen, but the CEO has already made progress on his ongoing commitment to reducing net borrowings.

We’re hoping that Mr. Holland also keeps the dividend at a healthy quarterly figure of 9.25 cents per share, yielding about 4% annually. Back in early 2009 the dividend was cut from an understandably unmanageable 18.5 cents per share. Having dividend payers in the portfolio tends to grease returns.

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