Source: Globe and Mail

It’s no secret there’s a lot going on at Postmedia Network Canada Corp. – layoffs have been announced, Sunday editions scrapped, buildings put up for sale and production has been centralized for its 10 daily newspapers to save costs. The company posted a $12-million loss in the last quarter alone, as print advertising revenue fell 10 per cent and subscription revenue fell 6 per cent.

But it’s been posting losing quarters for some time, which has caused some to wonder why chief executive officer Paul Godfrey suddenly decided to initiate an aggressive restructuring in May that will lead to almost $40-million in savings by the end of the year.

That sense of wonder was further extended this week when he said the company now has plans to save another $80-million within the next three years. He didn’t provide any details – when asked how he could possibly find another $80-million worth of cuts he said “let your imagination go.”

So why now? Has the print environment changed so drastically that the company needs to cut $120-million out of its budget ASAP? Well, yes. Things are pretty brutal.

But it’s a little more complicated for Postmedia because of its debt load, which is near $481-million at the end of the last quarter (down from about $555-million a year ago). One of its loans – for $248-million – carries a covenant that says its total debt-to-EBITDA ratio (which gives investors a sense of approximately how long it would take a company to pay its debts if you don’t include things like interest, taxes, depreciation and amortization) must remain under 4.5:1. At the end of the last quarter, it was at 3.6:1 – so far, so good.

But that covenant drops to 4:1 in November, and with revenue falling the company could have had trouble meeting the target if it didn’t institute the most recent round of cuts. So while all of the troubling things we’ve heard about in the industry are undoubtedly true, the company was forced to move aggressively to ensure creditors didn’t come knocking on the door in November demanding their $248-million.

As for the more aggressive approach in the future, Mr. Godfrey said on the company’s conference call that the company won’t likely be saved by rising revenue. Instead, he wants to cut costs and make changes that would see the company make a profit on a much smaller revenue base.

“Going forward we'll be a smaller revenue company and a smaller expense company,” he said. “We will be a more profitable company."

© Globe and Mail