Hollinger's Poison Pill

Most of the time, shareholders cringe at the thought of company directors setting up "poison pill" mechanisms that block them from selling stock. Let's face it, anti-takeover schemes like poison pills -- more euphemistically termed "shareholder rights plans" -- are the last refuge of bad managers clinging on to power in the face of a hostile takeover.

But in the case of newspaper company Hollinger International (NYSE:HLR), there is an odd twist. Rather then blocking a sell-off of the company assets, the board's rights plan, freshly approved by a Delaware court, places the firm up for auction to the highest bidder. Long-standing Hollinger shareholders ought to be jumping for joy. But others should still think carefully before jumping in.

The poison pill spoils a side deal that ousted CEO Conrad Black had been trying to cut with Britain's Barclay brothers for the transfer of a controlling interest in Hollinger International's parent, Hollinger Inc. As the sole bidders, the Barclay brothers had hoped to get a bargain basement price for The Telegraph, Britain's best-selling broadsheet newspaper and Hollinger's most-sought-after asset.

Approval of the poison pill allows for a real auction of Hollinger's businesses, though. With the Barclay deal now dead, literally dozens of interested buyers will be sniffing at Hollinger's pieces. Possible bidders include The U.K.'s Daily Mail and Express newspaper groups and a host of private equity investors.

Buy Hollinger only if you can stomach some risk. Yes, buyers get seriously underperforming assets and potential for growth -- but if, and only if, Hollinger's assets are placed in the right hands. Newspaper businesses are notoriously hard to manage. The kind of energy, talent, and commitment needed to run a successful newspaper can be hard to find.

Besides, assessing Hollinger's growth prospects is next to impossible. Thanks to a confusing ownership structure and questionable payments made to Black and others, it's hard to know how much the company really earned in past years. That leaves investors without a performance baseline to measure growth.

Having run up 15% since late last week, the stock price is now within the $18.71 to $24.63 fair-value range defined by Lazard, Hollinger's investment banker. At 14 times EBITDA, that should give investors some pause for thought. Pure-play newspapers fetch no more than 12 times EBITDA. The poison pill makes a deal possible, but today's price makes it harder to swallow.

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Motley Fool contributor Ben McClure hails from the Great White North. Ben doesn't own any shares mentioned here.