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Why Postmedia is buying Sun Media (and how they can afford it)

Toronto Sun and National Post newspapers are seen on a news stand in Toronto, October 6, 2014. Postmedia Network said on Monday it will buy Quebecor Inc's Sun Media assets for C$316 million ($282 million) in a deal that would create the dominant English-language newspaper publisher in Canada. The agreement, which will be closely scrutinized by competition authorities, would transform the country's newspaper landscape, making Postmedia the owner of competing major local dailies in cities such as Ottawa, Edmonton and Calgary. REUTERS/Mark Blinch (CANADA - Tags: BUSINESS MEDIA)

Postmedia’s announcement to buy 175 English language publications and digital properties from Quebecor subsidiary Sun Media for $316 million is sure to cause a bit of head scratching for anyone familiar with the brand's manoeuvering over the past few years.

The deal, which would give Postmedia the reins to most of the major newspapers in Canada including National Post competitor the Toronto Sun, comes at a time of dwindling print ad revenue and layoffs.

Postmedia has gone through heavy restructuring over the past two years, selling its Toronto headquarters, laying off employees at its Calgary office and outsourcing printing of the Montreal Gazette to Transcontinental.

While Postmedia reported a net loss of $20.6-million in its latest quarter, the brand is hoping the acquisition – which excludes Quebecor holdings in Quebec and is still pending a several month long regulatory approval – will broaden its digital properties and help it save $6 million to $10 million annually.

Digging into the coffers

President and CEO of Postmedia, Paul Godfrey’s former role at the helm of Sun Media will certainly help with the transaction but the deal will require still some fancy financial footwork.

Postmedia plans to issue $140-million of new debt and raise the other $186-million through a rights offering of subscription receipts.

The company will also sell off some of its more than one million square feet of space, for $50 to $60 million to help finance the deal.

As part of the deal, Postmedia will acquire Quebecor's Islington printing plant and 34 other real estate properties littered throughout Ontario, Alberta and Manitoba.

Split the difference

Forking over $316 million for a portfolio of community newspapers is part of a wider strategy says Paul Knox, associate professor of journalism at Ryerson University and an expert on the Canadian media industry.

“You look at the price which isn’t very high so clearly they’re not buying these because they think they will make them a whole lot money off the top,” says Knox. “But obviously they’re expecting to integrate them into a (goal) – complete coverage of the country or as complete as possible, both in terms of news and for their advertisers.”