Conrad Black

by A Matter of Principle

  With these and other smaller sales, we eliminated all but our long-term debt and reduced the number of outstanding shares at what would prove very advantageous prices. As we shrank the company, we cancelled shares for less than the per-share value of assets we sold, adding to underlying per-share value. As we had expanded our company, we had had recourse to some exotic instruments to maintain our control of the company while obtaining the funds necessary for expansion. The method was to find debt instruments that were technically equity or at least had characteristics that would not affront ratios and covenants on existing debt. In shorthand, for readers not conversant with financial jargon, we had to find a way to raise money and we did it through such methods as Liquid Yield Option Notes (LYONs) and a Total Return Equity Swap (TRES), to buy and cancel shares and increase our interest in the company, as well as reduce debt.

  This arrangement worked well, until the banks started to become skittish. The first sign of this occurred in 2001, when Bank of America began to agitate. The banking system was approaching another one of its cyclical crises of unwise lending. Middle-echelon bank executives were insisting on shorter-term loans and higher fees for renewing them. The best accounts were made to suffer equally with the underperforming accounts. We were on a treadmill that was being swiftly accelerated, but whenever I called the senior bankers with whom I dealt, I was assured that everything was satisfactory. It wasn’t.

  THIS WAS A CLOUD ON THE HORIZON when Barbara and I embarked on one of the most misconceived holidays I have had, in August 2001. We were thinking of returning to Australia, where we had had a happy commercial and personal experience, to see whether the endless reports of a changing political attitude to foreign media ownership were accurate. I had always had a romantic notion of Bora Bora and Tahiti as tropical paradises that had a brave Gaullist political history, rejecting the cowardice and defeatism of Vichy as soon as de Gaulle founded the Free French movement in 1940. I had mentioned Bora Bora to Barbara as a place we might visit en route to Australia the previous year. She had vetoed it on mistaken grounds. Barbara, as she herself would agree, has a very weak grasp of geography but sensed that Bora was somewhere in the Pacific. She assumed, since I was interested in it, that it must be a U.S. naval camp on some atoll. When confronted about her assumption, she confessed that, actually, she had connected the name with an old film she didn’t like called Bora! Bora! (she was thinking of “Tora, Tora, Tora,” an excellent dramatization of the attack on Pearl Harbor) that she thought had servicemen in it. All the same, I gave in and we went on our usual continental holiday in France instead. But this year she had given me the role of vacation director. I decided that since Australia loomed once more, now was the moment to resurrect Bora Bora as a way station. I went ahead and made the arrangements as a “surprise.”

  So it was. Bora Bora proved to be a completely aptly named and boring island. A drive around it took fifteen minutes and revealed nothing of interest. There was no town, no colonial buildings, no churches of note, no bars or restaurants. There were only the hotels, and these were infestations of honeymooners: large, loutish young men in droopy shorts and their perky brides or girlfriends. Apart from the slightly bibulous manager of our hotel, who had formerly worked at the King Edward Hotel in Toronto and claimed to remember my brother and me, the only social connection we made was the Indo-Madagascarian doctor, an alumnus of the University of Strasbourg, whom we called because of the acute bronchitis I swiftly contracted and to recover a contact lens lost somewhere in Barbara’s eye. We conversed in French inside our thatched bungalow while Barbara worked on her laptop. Her French is fairly primitive, but she did hear the word “dengue” as we chatted and swivelled around like a cobra raising its head. “Dengue,” she said, fixing the doctor with her injured eye. This elicited the hitherto unknown information that the island was in the grip of an epidemic of dengue fever, something the authorities and travel agents had omitted to mention. Should we decide to venture outside the hotel’s beach area, which he strongly advised against, we should be sure to wear thick socks and cover up. Barbara’s single contribution to the vacation itinerary, a suggestion that we might try to escape the honeymooners by a good walk in the less developed part of the island that still had some wild vegetation, was clearly off limits. The doctor came back a third time to minister to a severe laceration on my leg, the result of an unplanned encounter with coral. We had been taken to an area where snorkelling would permit us to swim with sharks – sand sharks only, I assumed (mistakenly). Snorkelling while suffering bronchitis is at best a doubtful exercise, and the blood from my wound caused the guide to round us all up into the boat and return to the hotel lest I become shark bait. This did not endear me to the other divers, especially the two young, attractive Japanese honeymooners kitted out in the most sophisticated diving apparatus and useful accessories of all kinds.

  Tahiti was no better. There was more on the island, but the ever-popular over-the-water bungalow in which we were billeted was at the bottom of the package tour spectrum as well as what appeared to be runway number one of the Tahiti airport. The food was inedible. The bed linens were as raspy as a lion’s tongue, and Barbara, a light sleeper, could not sleep at all on them. I found her wrapped up in my raincoat on top of the covers. When she went to plug in her laptop to file her Telegraph and Maclean’s columns, nothing happened. The “technician” who eventually turned up like a fugitive from an Ionesco play fiddled about with a screwdriver for a while and then acknowledged to me in his rich Polynesian French that he knew nothing about technology or even electricity. With a bright, dentally challenged smile, he said that his instructions were to put on a show so that we would not realize the hotel had no facilities for Internet connections. I gave him twenty dollars as a reward for straight talk. We took a forty-five-minute taxi tour of Papeete the next morning, gave up on the whole voyage to the South Pacific, and returned to Seattle, where we had tickets to attend the Ring Cycle.

  There were problems even here. Fierce heat made days too hot to do anything that involved walking. My bronchitis was still so tenacious, even after all the ministrations of the Indo-Madagascarian doctor, that I was afraid I might not be able to sit through the opera without disrupting the house by compulsive coughing. Barbara developed a terrible migraine as well as skin and muscle discomfort related to her dermatomyositis, so, after the Four Seasons Hotel doctor abdicated any prescribing responsibility, I took her to a local hospital to get some medicine. The emergency ward was crowded with overweight marathoners under observation for heat prostration, having run in favour of some local charity. Hours passed until finally Barbara whispered in a pathetic little voice: “I want to go home.” We both limped back to the hotel, where she found some old pills in her medicine bag. I know nothing about such things, but she told me they were Demerol and Percocet and would help. She took several in case they had lost their potency and appeared to go happily into some trance, rather fitting for the Ring.

  I set out on foot to take communion in the Roman Catholic cathedral and tripped over an uneven paving stone and badly skinned an elbow, the first time I had fallen on a street sidewalk since I was a toddler. With torn shirt and dirty trousers, blood still oozing from my forearm, I returned to our hotel only to encounter a number of opera lovers, including the impeccably dressed former British Conservative cabinet members David (Lord) Young and Michael Portillo and their wives. The “holiday” was assuming the farcical proportions of the travel fiascos described by Evelyn Waugh or John Mortimer (such as where Mortimer confused the king of Libya for the head bellhop of the Mammounia Hotel in Marakesh).

  AS THE RING CYCLE PROCEEDED, the next instalment of our recurrent financial problems came to the fore due to the steady tightening of credit and the indiscriminate nervosity and pettifogging of bankers. The Hollinger Inc. banking group was agitating for a paydown of the company’s loans for no particular reason, while noisily protesting their faith in the company and the value of the connection with us. This would re
quire the sale of some remaining Canadian assets by Hollinger International, including CanWest notes. For any sale of the CanWest commercial paper, which would now be at a discount because of the accumulated clumsiness of the CIBC as CanWest’s financial adviser and the unconvincing launch of the Aspers as newspaper operators, the agreement of the Aspers was necessary. I found myself, in scorching Seattle with lingering bronchitis and a tender elbow, between Siegfried and Götterdämmerung in the familiar position of trying to negotiate out of a tight financial corner. My frequent similar past experiences didn’t make the activity any less tiresome.

  Our discussions quickly revealed that Izzy felt that co-ownership of the National Post with me as publisher was not working. I felt the same way. But the cards were in Izzy’s hands. He had the newspaper chain across the country that printed and distributed the Post in all the places where it surpassed the Globe and Mail, and an unenthusiastic co-owner would be a real danger to it. In addition, constant vigilance was needed to make sure the individual editors of local newspapers didn’t try to sabotage the national paper they saw as a competitor. The Post was losing about $1 million a week, not greatly exceeding my expectations for a start-up cost of a national franchise, and though we were now only responsible for half that, it was a strain on the downsized Hollinger Inc. Izzy believed that the losses at the Post were largely due to my indulgence of Ken Whyte’s spending propensities, which was a canard, but he felt confident that under his control this would be solved. Painfully, to solve the latest financial jam, I had to buy Izzy’s consent to sell his notes with the National Post. We dodged a large annual loss in this, but selling out our entire position in the National Post was a wrenching decision for me.

  The only honourable course was to go to the National Post and address the staff, which I did with Leonard Asper shortly after my return from Seattle, two days after working out an arrangement with Izzy Asper. I still, and will always, recall the faces arrayed in front of me as I explained what had happened and why. As always, I was impressed with the appearance of the National Post personnel: attractive and alert people of all ages and descriptions, motivated, bright, interesting, a workforce to be proud to be associated with in any capacity. Christie Blatchford, an excellent writer and refreshingly straightforward and raunchy woman, who had worked with Barbara when she was editor of the Toronto Sun, embraced me. Some people wept. I shared the impulse, though I didn’t act on it. I never cry, other than in laughter.

  There was some feeling that I had created the Post and abandoned it. I did create it, and I dedicated Can$200 million to launch it (including the acquisition of the Financial Post), but I left it in secure hands. Jean Chrétien could no longer dismiss the National Post as my bully pulpit. Now he would have to deal with a perspective that was ideologically unchanged but impossible to isolate as being hostile to the federal Liberal Party (which I wasn’t). This was an important step forward in the possible influence the National Post could exercise, provided the Aspers played their cards well.

  The participations in the CanWest notes were promptly sold and the looming Hollinger Inc. financial crisis subsided. Once again, our timing was exemplary, as a few days later terrorists seized civil airliners and smashed them into the World Trade Center towers and the Pentagon, plunging financial markets into chaos and further depressing the U.S. economy. We had had a narrow escape from a possible financial scramble.

  I WAS INDUCTED INTO the House of Lords at the end of October 2001, sponsored by Margaret (Lady) Thatcher and Peter (Lord) Carrington. Henry and Nancy Kissinger, who happened to be in London, sat with Barbara in the gallery. I took the oath by the dispatch box where Benjamin Disraeli (once he became the Earl of Beaconsfield) and Salisbury had stood. On this first day, the House was well attended and by a much less geriatric group than the usual caricature. The Lord Chancellor, Derry Irvine, greeted me warmly. This was as close as I would get to having any status as a legislator. It was, and is, an honour.

  After the second transaction with the Aspers in September 2001, financial concerns again receded from the Hollinger companies for a time. But I was never to get clear of them. Keeping editorial franchises healthy without damaging their editorial quality was rewarding but difficult. Fighting the growing rapacity and cowardice of banks, rating services, aggressive institutional investors, and changing regulations was simply a survival scenario with debilitating effects. Barbara would come down to the library in London at 3 a.m. as I was struggling with new plans and sending out lengthy emails to Toronto and New York and see what she called my “fist-face” of concentration. Any pleasure in my work had been far outstripped by the financial worries that had begun with Murdoch’s price war and had multiplied as the economic and financial climate changed and the electronic media hypnotized investors. As the post–September 11 advertising recession and banking liquidity problems deepened, our stock price declined and prudence required a reduction in the Hollinger International dividend. The banking consortium in the “swap” (the financial instrument containing Hollinger debt and backed by a group of banks) became very neurotic.

  By early 2002, Bank One and the Bank of Nova Scotia (BNS) were both agitating. Once the BNS began to express concern, the remaining constituent bank in the swap, the Toronto-Dominion Bank (TD), was moved to do the same. As always happens in bank club deals, when one bank demands concessions and professes alarm, the others claim to be much more resolutely confident of the account but are forced by the protocol of the banking industry to require an equivalent level of security, regardless of whether this translates itself into a rockslide that crushes the equity of the borrower. At the best of times, lending banks show neither cunning nor agility. When the times are difficult and unpredictable, as they were after September 11, 2001, the banks resemble nothing so much as large, stupid, frightened animals, charging mindlessly in a shared direction, oblivious of the consequences.

  In the case of Hollinger International’s swap, this was particularly complicated and potentially dangerous, because BNS and TD were swap participants and, with CIBC, lenders to Hollinger Inc. The recourse open to the swap participants, should they become concerned with that arrangement, was to liquidate their Hollinger International shares.

  But Hollinger International shares underpinned, and were the collateral for, the loans to Hollinger Inc. At no time did either BNS or TD show the slightest recognition that in dumping millions of Hollinger International shares into the market, they could trigger a default of Hollinger Inc., entitling them (if litigation by us did not prevent it) to seize the collateral and liquidate it without regard to the impact on the equity values of the borrower. We had only the good sense and goodwill of the banks to rely on to prevent this. This counted for something with CIBC and to some extent TD and BNS, but was a negative factor with Bank One.

  After we had bought out Bank of America, Bank One was the first of the remaining swap banks to bug out. They made threatening noises about liquidating their positions. David Radler was the logical person to see them, as they are a Chicago bank, and to point out the underlying values, the impossibility of them or any lender losing money lending to us, and the irresponsibility of an overhasty liquidation of their shareholding.

  The banks were contractually committed to the avoidance of precipitate action, but their undertakings in this as in many other respects proved to be unreliable. David arrived in Chicago ready to persuade only to be informed that Bank One had sold their position. Fortunately for us, an institutional investor, Southeastern Asset Management (SEAM) of Memphis, bought virtually all their shares, so the divestiture did not shake the share price, as would have happened if our trading volumes had remained at their normal levels.

  Bank One’s departure further aroused the Bank of Nova Scotia. By late spring 2002, I was advised that the derivatives desk of BNS in New York was threatening our controller with default and demanding that dividends be maintained regardless of what the covenants on the high-yield debt imposed through ratios and the so-called bas
ket of eligible funds. They wanted the revenue to protect the SWAP value. At the same time, BNS personnel in Toronto were demanding that the dividend be lowered. They wanted to stay away from any debt covenant problem. It proved useless advising them that their own people were demanding, in the most belligerent terms, exactly opposed dividend policies in New York and Toronto. This problem was becoming more worrisome as we approached the annual meeting in New York in May 2002.

  As has been mentioned, the main CanWest transaction generated sizable non-competition payments, demanded by Izzy Asper in respect of David Radler and me. These totalled Can$80 million (divided unevenly between Ravelston, our ultimate parent company, and David, Peter Atkinson, Jack Boultbee, and me) and did not reduce the promised return to Hollinger International of ten times pre-tax cash flow of Hollinger International. Our Canadian lawyers, Tory & Tory, whose New York office also acted for us, assured us that these non-competition payments did not have to be disclosed. In the context of arranging a debt issue, we were advised by Cravath, Swaine & Moore that they did have to be disclosed, and we were able to publish them adequately and promptly in the financial results for 2000.

  Our third-largest shareholder after Hollinger Inc. and Southeastern, Tweedy Browne, was already grumpy about our management fees and became quite demonstrative about non-competition payments. It was obvious from correspondence from them and from some of their public comments that they were going to raise these issues quite vocally at the annual meeting. I did not find this prospect at all disconcerting. The non-competition payments are standard in the newspaper industry; we had paid them ourselves dozens of times, sometimes to companies and sometimes to individuals. Without them, the Aspers would have had no assurance that we would not have bought the competing Sun newspapers.

  The management fees were also not hard to justify. The total of what we received had been sharply reduced when we shrank the company. It would have been possible to retain the fee pretty much where it had been and still reduce debt by pouring out cheap stock had we not perceived ourselves to be pre-eminently shareholders rather than paid placemen. The Audit Committee had approved all the original management fees and non-compete payments, and the shareholders were the clear beneficiaries of the $1.5 billion of capital gains we added to the value of the company and its shares by the American Publishing and Southam transactions.