DEALTALK-Canwest needs credible model to draw financiers

* Pension funds, high net-worth individuals are candidates

* Industry pundits divided on price tag for Canwest papers

TORONTO, Oct 6 (Reuters) - Investors may give serious consideration to financing a buyout of Canwest’s chain of daily newspapers -- but only if presented with a new business model to address the industry’s chronic ailments.

Industry insiders say Canadian pension funds, high net-worth individuals or buyout firms like Onex Corp OCX.TO may consider backing a deal worth at least C$1 billion ($943 million) for the 13 big-city dailies owned by Canwest Global Communications Corp CGS.TO, including the flagship National Post.

At least one well-known Canadian newspaper executive, Paul Godfrey, has held talks with financiers capable of bankrolling such a buyout, according to a recent newspaper report.

But to have any chance of persuading them, a would-be buyer must come armed with a credible plan to wring profits from the papers, an uncertain proposition given what might prove a permanent industry downturn.

“Buying an asset in a class in decline like a newspaper company is attractive from a risk/reward standpoint because it’s the risk of loss, of failure, that creates all the value -- the reward -- in success,” said Jim Hall, the former chief executive of the Journal Register Co, a smaller-market publisher based in the northeastern United States, which emerged from bankruptcy protection in August.

Some of those signaled as potential suitors in the report in the Globe and Mail’s report denied interest, while others, including Godfrey, simply declined comment.

Canada’s newspapers, like those elsewhere, have been hard hit by the recession, which has prompted massive cutbacks in corporate advertising spending, and by growing competition from the Internet, which is biting into circulation numbers.

Even so, “there is still a segment of the population that believes strongly in the print media, but there’s a lot of restructuring that has to go on,” a leading Canadian buyout industry expert said on condition of anonymity.

RECAPITALIZATION PLAN

On Tuesday, Canwest ended months of negotiations with debtholders and announced a recapitalization plan that will see parts of the company filing for bankruptcy protection. The newspaper division -- except the flagship National Post -- was not part of the protection filing.

Some of Canwest’s debt dates back to its 2000 purchase of newspapers from Hollinger International in a deal worth C$3.2 billion. It included 13 dailies, 126 community newspapers, Internet assets and a 50 percent stake in the National Post. The company later bought full control of the Post.

The Globe and Mail reported last week that the Canwest papers could sell for about C$1 billion, or five times effective cash flow, or earnings before interest, taxes, depreciation and amortization. But industry pundits can’t agree on how high the price would have to go to satisfy Canwest.

The value of North American newspaper assets has fallen to about 2-1/2 times EBITDA, from levels near 12 or 14 times just a few years ago, industry sources said.

Bob Bek, an analyst at CIBC World Markets, said C$1 billion would be a low price for the assets of Canwest, suggesting that it would take closer to C$1.3 billion.

“If anybody can get it for that price, that would be a decent if not a strong acquisition,” he said. “I would doubt that (Canwest) would allow it to be sold at that price.”

POTENTIAL BIDDERS

Among those who may kick Canwest’s tires are the massive Canadian pension funds like Teachers, OMERS, the Canada Pension Plan Investment Board, and Caisse de Depot et Placement du Quebec, sources in newspapers and private equity said.

A spokeswoman at the Ontario Teachers’ Pension Plan, one of the country’s largest investors, said the fund does not comment on investment decisions.

Another candidate mentioned by insiders was Onex, one of Canada’s leading private equity firms. The company could not be reached for comment.

Pundits say Brookfield Asset Management BAMa.TO could also be in a position to back a buyout, perhaps with Godfrey or David Black, a newspaper publisher in the province of British Columbia.

“He’s smart, he’s shrewd and he’s very aggressive these days, and he’s a real believer in the future of newspapers,” Hall said.

Black, the president and CEO of Black Press Group Ltd, which owns mostly smaller-market newspapers, was reached by Reuters by telephone but would not comment on the situation at Canwest.