Transcontinental buys 74 Sun Media community papers in Quebec for $75M

MONTREAL – Sun Media is ending a battle in Quebec with media rival Transcontinental by agreeing to sell its 74 publications and related websites for $75 million as it continues to adjust to a loss of advertising revenue caused by the digital revolution.

The agreement announced Thursday has been approved by the boards of both companies but the subsidiary of Quebecor Media (TSX:QBR.B) will continue to operate the papers until the transaction receives regulatory approval, including from the Competition Bureau.

“Advertisers now have a multitude of platforms available to them that did not even exist little more than 10 years ago. We believe in the future of print media but we cannot ignore the new market realities,” said Quebecor Media CEO Robert Depatie.

He said the transaction will ensure that the newspapers will stay in the hands of a Quebec company. Not included in the deal are Quebec’s largest daily newspaper Le Journal de Montreal, Le Journal de Quebec, the 24 Heures free daily and the QMI news agency.

The deal comes a day after Sun Media announced it was laying off another 200 employees across its network, including 50 journalists outside Quebec.

Transcontinental CEO Francois Olivier said the transaction will “accelerate the implementation” of its strategy of strengthening its core assets and developing a local digital media offering for businesses and communities.

“There is still a future (in newspapers),” he said in an interview. “These are very local publications. We will probably go more towards unique content to get away from national news.”

If approved by regulators, the transaction would add about 600 new employees to the 1,000 who work for Transcontinental in local markets across the province.

Although Transcontinental would become the dominant community newspaper publisher by nearly doubling its weekly presence, Olivier said the acquisition doesn’t mean the end of some publications that already coexist with regional weeklies.

“We’ll take the time to make a market-by-market study. This is not a national matter. It is about doing what is good for each community.”

While some publications will be merged, it could result in an increase in the number of pages in some weeklies, he said, later telling analysts that Transcontinental will be focused on producing “ultra local content” to compete with new web-based entrants.

Olivier said he’s confident the transaction will receive regulatory approval despite the complexity of the application that will require an examination of the competitive environment in each region or community.

As part of a separate agreement, Quebecor Media said it will print some of its magazines and direct marketing materials with Transcontinental Printing starting in February.

Together, the Quebecor Media transactions are expected to add about $20 million in operating income before amortization. Revenues from the acquired newspapers will be $75 million to $80 million. Transcontinental said its local business including community newspaper and distribution represents nearly half of its media sector revenues.

Olivier called the printing deal “historic” and said the Quebecor Media newspapers and other materials can be “easily” and quickly integrated into Transcontinental’s existing printing network.

Haran Posner of RBC Capital Markets said the addition of Sun Media’s weeklies to its own stable of 76 weekly publications “should ease what has been a highly competitive community media environment in Quebec in recent years.”

Analyst Aravinda Galappatthige of Canaccord Genuity said the transaction may include some “synergistic” cost savings because of the overlap in newspapers.

Transcontinental said that while the local advertising market remains “soft” it hopes for improvement in its media sector next year.

“I think we have a lot of catalysts going in 2014 to continue to improve our profitability and contrary to the last two or three years it might be a year where media could be the catalyst in 2014 for Transcontinental as opposed to print which has been the catalyst for the last at least three years,” Olivier said during a conference call.

Transcontinental (TSX:TCL.A) also announced Thursday that its net losses in the fourth quarter nearly doubled to $92.2 million from $51.9 million a year earlier.

Adjusting for one-time items, Transcontinental earned $58.2 million, down six per cent from $61.9 million a year earlier. Earnings for the period ended Oct. 31 decreased by two cents per share to 75 cents, beating analyst forecasts by one cent.

Revenues fell 3.2 per cent to $566.3 million from $585.1 million.

For the full year, it lost $14.5 million or 19 cents per share, compared to a loss of $183.3 million or $2.27 per share in the prior year. Adjusted profits increased 5.2 per cent to $157.2 million from $149.4 million. They were up 9.2 per cent on a per share basis to $2.02 from $1.85 in fiscal 2012.

Transcontinental’s printing division was helped by the acquisition of Quad/Graphics, which helped to offset the loss of the Zellers business and weaker media division results caused by “the soft advertising market.” It realized $30 million on cost synergies during the year, and $40 million since the Quad acquisition in March 2012.

During the quarter, it took a $165-million writedown including goodwill mostly related to its printing sector. The sector’s operating profits increased 6.7 per cent to $90.8 million on $390.4 million of revenues. The media segment’s earnings dropped 22 per cent to $27.7 million on $196.5 million of revenues, down 4.8 per cent from the prior year.

On the Toronto Stock Exchange, its shares closed at $15.93, down 59 cents or 3.57 per cent in Thursday trading.