View from City Road: Questions still unanswered on Telegraph deal (CORRECTED)

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The 5,600 shareholders of The Telegraph, the publisher of the Daily Telegraph, have every right to be puzzled. Last month they were invited to approve a complex deal in which their company would, in effect, buy shares in the Canadian newspaper publisher Southam at Cdollars 18.10 apiece. The seller was Hollinger, the Canadian owner of 68 per cent of The Telegraph.

The proposal raised several questions: (1) Why should the Telegraph buy at Cdollars 18.10 when it could have picked up Southam shares on the Toronto stock exchange for Cdollars 13.50 each? (2) Why should the company be investing in North America at all when it hinted, in its flotation prospectus last year, that it planned to concentrate elsewhere? (3) Why should the independent directors, who approved the deal, choose to rely on the advice of NM Rothschild, which also advises The Telegraph?

Since then the company has told shareholders to ignore the proposal, announcing it wants to modify the original deal because Hollinger has agreed to sell some of its Southam shares to its long-standing corporate buddy Power Corporation of Canada - at a price of dollars 14 a share. The Telegraph still plans to go ahead with a revised version of the deal, and still pay the Cdollars 18.10 price.

Yesterday Conrad Black, the tycoon who heads both Hollinger and The Telegraph, wrote to the Financial Times, saying the deal was 'an almost risk-free opportunity' for The Telegraph's minority shareholders - a curious claim for any equity investment, let alone a minority stake in a loss-making company that relies for its income on something as mercurial as advertising revenue. The Telegraph has an emergency exit, allowing it to reverse the deal, but this only lasts 12 months.

All three of those original questions remain relevant. Shareholders might also wonder why the Telegraph should pay a higher price for the Southam shares than Power Corp. Even after the recent rise in the Southam price, The Telegraph is still expected to fork out Cdollars 2 a share more than the prevailing market price. Its emergency exit is surely not worth the difference, and any bid premium for a large stake could have been exacted equally from Power.

The independent directors meet later this week. They include some heavyweight businessmen including BA's Lord King, BZW's Sir Martin Jacomb, Lord Swaythling of Rothmans International, the merchant banker Rupert Hambro, Henry Keswick of Jardine Matheson and the newspaper man and deputy chairman Sir Frank Rogers.

The Power deal gives them a second chance to consider whether the plan, which dilutes earnings, is in all shareholders' interests. It seems Mr Black still has to make his case.



Sir Frank Rogers, deputy chairman of the Telegraph, has asked us to point out that Hollinger has not agreed to sell Southam shares to Power Corporation. Rather, Southam has agreed to issue to Power Corporation Cdollars 180m of common shares of Southam from treasury at a price of Cdollars 14 a share.