Torstar Case Report

Group-based case report Torstar Corporation BUSN81 Theory of Corporate Finance 2011 nightfall 1. Introduction The case of Torstar Corporation suggests the plan and result of repurchasing its Class B shargons in December of 1997. Besides this, the situation of its business mental synthesis, capital structure and expenditures, incoming plan atomic number 18 also described in the case. Therefore, the purpose of our case study is to state, analyze and drew to some important conclusions about Torstar Corporation, and try to theme its power to compete with a new national publisher. . Background Torstar Corporation was incorporated on February 6, 1958 and published Canadas largest newspaper Toronto Star. It had two main rivals which are Sun Media Corp. and the Globe and Mail. One launching second national newspaper by Southam Inc. would also be one competitor of The Star. Since 1975, by acquisition of domestic and international book issue and supplementary educational products, Torst ar found its three major business, newspapers, book publishing and supplementary education.After the acquisition of Troll in fiscal 1997, it also has one 3-year-time plan to acquire more companies which fit with its core business at the reasonable price. As of March 31, 1998, Torstar share structure included 5 million Class A voting shares and 34 million Class B non-voting shares. Since they believed prevailing Class B stocks were undervalued, they began to repurchase it patronise from December 17, 1997. In 1997 the debt-to-total-asset ratio was 18%, and management believed that 30% was more fascinate.Actually they also suppose that they could carry a 50% debt-to-total-asset ratio if they had a suitable strategic acquisition. Therefore, based on this background, we will analysis the effects of repurchasing stocks of Torstar, the advantages and disadvantages of its leverage ratio and its ways to investment. Then by adding some assumptions, one foretelling of Torstars power to comp ete with new launching rival is possible. 3. Analysis 4. 1 Overview of specie Flow, debt, Operating Situation and Income The company was doing fountainhead so far, until 1997.The specie run away, operating situation and the income were all healthy. We can conclude that from the Balance-Sheet the company had adequate cashflow, exhibit 3 shows that the operating cash flow kept change magnitude from 1995 to 1997 with the free cash flow, this was enough cash for Torstar facing with some possible risky. The only problem is that how to stop the continued increasing free cash flow since too much cash means increasing costs of keeping cash and decreasing market value of cash. The amount about $50,000 would be a effectual expectation.The three main business of newspaper, book and supplementary education were operated well, they had sustainable increasing revenue and stable expenditure, so the profit was increasing positively after 1993 acquiring the business of supplementary education, e senselessly in 1997, it got a rapid increasing of net income. See the return of uprightness below, it shows a well increasing on return of investors. (Base on Net Income over Total Equity) The debt ratio was a little bit low as our analysis, it had space to increase. nevertheless how? Increasing dividend payment or repurchase in the open market? We analyzed these two possible ways below. 3. 2 Dividend policy Torstar Corporation has a stable dividend policy recent years which was to pay out 30 to 35 percent of the previous years operating cash flows. Cash dividend was paid regular quarterly which was keeping $0. 26 per share in 1997. Dividend empirically decreased in the propensity of firms due to its benefits are not benignant than repurchase, but it is all the same important for management. Advantage of payout dividends * Dividends may appeal to investors who desire stable cash flow but do not want to get transactions cost from periodically selling share of stocks * On behal f of stockholders, paying dividends can keep cash from investors * Dividends can be used to reduce mathematical process cost of managerial discretion * Managers may increase dividends to signal optimism concerning future cash flow * Disadvantage of payout dividends * Dividends are double taxed * Dividends can reduce interior(a) sources of financing.Dividends may force the firm to forgo positive NPV projects or to reply on costly external equity financing * Firms often view dividends as a commitment to their stockholders and quite hesitant to reduce an existing dividends. Once established, dividend cuts would adversely affect the firms stock price as a negative signal As illustrated by Torstar, a stable cash flow in paying dividends implied a well operating status. The sale of Hebdo provided extra pecuniary flexibility in 1997, free cash flow increased rapidly as can be seen in Appendix.An extra or special cash dividend and share repurchase are two choices to payout adequate cas h. Special dividend is expressly not intended to be a recurring event, but as mentioned above, paying dividends with the tax drawback and may produce a negative signal when fluctuating. So keeping the stable payout ratio was a better choice for Torstar. 3. 3 Repurchase Compared with dividend payout, shares repurchase have the listed effects on Torstar Corp, * Send a costly signal to investors that stock of Torstar is a good investment.Recent investments seem to campaign side-effect on investors confidence about the company. As mentioned in the article, institutional investors treat Torstar as a pure play investment into the area of newspaper and book publisher. But from year 1995 to 1997, acquisitions into childrens supplementary education products are viewed as not favorable. They hope Torstar Corporation can continue the historical elaborateness of the newspaper and book division. In order to mitigate the side-effect caused by recent investment.Repurchase would result in fewer s hares outstanding and thus higher equity value per share which leads to a better performance of the stock. It also sends a signal to the market that the management believes the stock is undervalued. The price of the stock would go up. As a result of the repurchase sends a strong signal to the investors. The signal is costly as a repurchase would use up corporate cash and hard to mimic. * Increase the EPS which shows great confidence of future performance Repurchase would decrease the number of shares outstanding which leads to directly change of EPS of the Torstar Corporation.In the interim pecuniary statements, the EPS shows great improvements after the repurchase. (Show in Figure 1) Figure 1 EPS change in 1997 * Availability of excess cash from operations By checking the interim financial statements, cash provided by operating activities of Torstar Corporation face an increase in the year 1997, from 25. 6 million to 130 million dollars. The retained cash from operation activities is too much as the normal on-going capital expenditures was expected to be 25 million to 30 million dollars.Additionally, Capital cycle in the publishing industry is approximately six years and Torstar Corporation has recently modernized its plant. Theres no major capital expenditures were forecast for the near future. Thus, excess cash should be paid out. By checking the retained cash in the Quarter 1, 2008, the operating cash is 27. 97 million dollar. It is sufficient for on-going capital expenditure. (shown in figure 2) Reduction in excess cash would reduce the agency cost of managerial discretion as the manager has fewer resources to pursuing consuming perks.Figure 2 Cash provided by operating activities Compared with the dividends payout, repurchase is tax efficient as dividends is taxable. Compared with dividends payout, repurchase avoid price drop results from dividend issuance. Institutional investors are happy when the performance of the stock is good. High price shows th e strong performance of the stock. * Optimize capital structure. Torstars long debt outstanding was reduced from 321 million in 1996 to 197 million in 1997 result in a debt-to-total assets ratio of percent.While the management believed that a 30 percent target debt-to-assets ratio was more appropriate. also less debt may cause the loss of tax shield and influence the value of the firm. While at this level of debt-to-assets ratio, the risk is still acceptable. Torstar Corporation still has excess debt capacity for future capital expansion. Thus repurchase can decrease the shares outstanding, and also decrease the value of assets. It would push up the debt-to-assets ratio to the appropriate level. By using the interim financial statements, we get the trend of debt-to-assets ratio.In December 31 1997, the decrease of debt-to-assets ratio is mainly a result of the long-term debt decreasing from 510. 007 million to 197. 322 million dollars. And in March 31 1998, the increase in debt-to -assets ratio is a result of repurchasing shares (decreasing in value of total assets). 4. inference After analyzing, we all agree with the activity the Torstar hold, stock repurchasing transfer a strong and credible signaling to the market that the company is in a good situation and will do better in the future, the debt ratio increases and the market value will also goes up.We estimate that Torstar will keep increasing in the next financial year. 5. Appendix Cash Flow Analysis (CDN$000) 1995 1996 1997 operating cash flow 78. 3 102. 9 130. 0 dividends 30. 9 35. 1 40. 3 Capital expenses 20. 3 29. 8 26. 6 free cash flow 27. 2 38. 0 63. 1 Dividends 1st Q 1997 2nd Q 1997 3rd Q 1997 4th Q 1997 Dividends($000) 10120 9965 10080 10095 fair shares 39151 39107 39060 39044 Dividends per share $0. 26 $0. 26 $0. 26 $0. 26