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SaltWire lawsuit alleges Transcontinental inflated news companies’ earnings, dealing publisher ‘very significant blow’

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Atlantic Canada’s largest newspaper publisher says it overpaid when it purchased a number of publications and printing presses from Transcontinental and has suffered “significant damages and loss” as a result of the deal.

SaltWire Network Inc. acquired 28 Atlantic publications in April 2017, including the Cape Breton Post, The Guardian in P.E.I., and The Telegram in St. John’s, N.L. The deal also included three printing plants and added to SaltWire’s existing holdings, which included the Halifax Chronicle Herald.

Last week, SaltWire launched a multi-million-dollar lawsuit against Montreal-based Transcontinental Inc., the country’s largest printing company, in the Supreme Court of Nova Scotia, alleging the deal was made based on inaccurate and inflated numbers.

According to SaltWire’s statement of claim, Transcontinental provided it with a prospectus slide presentation in October 2016, highlighting the media assets Transcontinental wanted to sell.

Court documents say Transcontinental said the assets were expected to generate more than $69.5 million in revenue and more than $12.6 million in earnings before interest, taxes, depreciation and amortization (EBITDA) in 2016.

But between October 2016 and April 2017 — when the deal was signed — EBITDA dropped by $9 million on an annualized basis, rendering the prospectus figures “unrealistic and inflated.”

“The drop off in EBITDA was both unexpected and damaging,” said Ian Scott, SaltWire’s chief operating officer, in an interview. Revenue was also “markedly lower” than predicted, he added.

Other claims allegedly made by Transcontinental, such as a predicted substantial rise in digital advertising and potential cost synergies of over $3.4 million, also failed to materialize in full, according to court documents. In all, SaltWire alleges Transcontinental made “material misrepresentations” about the assets.

“It’s not that they threw us the keys and the business deteriorated from that point,” Scott said. “It had deteriorated markedly prior to that point.”

The drop off in EBITDA was both unexpected and damaging

Ian Scott, SaltWire’s chief operating officer

Scott says SaltWire was expecting declines over time, but revenue and earnings suddenly fell off a cliff.

“It’s been a very significant blow to SaltWire,” he added. “We paid more than should have been paid.” SaltWire is seeking unspecified damages. None of its allegations have been proven in court.

For its part, Transcontinental says it stands by the deal. “We are confident that the sale of our media assets in Atlantic Canada was conducted based on fair, accurate and timely information,” chief executive François Olivier said in a release. “We intend to vigorously defend ourselves in court.”

SaltWire’s claim gives the impression that most of the key deal information came from Transcontinental’s prospectus slide presentation, raising questions about how much due diligence SaltWire actually did.

According to Scott, Deloitte aided the due diligence process, but SaltWire was not permitted to inspect all the physical assets, including the printing press in Sydney, N.S. Problems later emerged at all three printing presses, Scott says. Other components of the deal were plagued by “significant problems,” the court documents said.

According to Transcontinental, SaltWire has failed to fulfill its payment obligations and is in breach of contract. It said it is considering a countersuit.

Scott said SaltWire has made every payment required under the agreement and calls the threat of a countersuit, “a little bit of hyperbole.”

Like most newspaper companies, SaltWire has struggled to adapt to the internet age, with circulation, and advertising revenue all dropping as readers and marketers move increasingly online.

Last week, 30 jobs were cut when the company changed the Western Star, in Corner Brook, N.L., from a paid-for daily to a free weekly. Scott blamed the layoffs on the Transcontinental deal, saying additional changes and layoffs aren’t planned, but he can’t rule them out in future.

“We’re working very hard to make sure that doesn’t happen,” he said.

Postmedia Networks Inc., has a content sharing arrangement with SaltWire.

Financial Post

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