City: The Black stuff

CONRAD BLACK's acquisition of the Telegraph group in 1985 will surely go down in history as one of the outstandingly successful business transactions of the decade. He hit the company right at the nadir of its fortunes, as it was trying to make the difficult and costly transition from old to new technology. Luck, charm, the right connections, who knows how Mr Black, a virtual unknown in the UK at that time, managed to get his original foothold. But with the City refusing to cough up the necessary money to refinance the company, Lord Hartwell, then the proprietor, had little option but to turn to him for help.

Mr Black spotted what the City, with all its investment analysts and strategists failed to see: a gold-mine down on its uppers. Since he stepped in, the company has never looked back and today accounts for more than 80 per cent of the earnings of Hollinger, Mr Black's Canadian holding company. The tail has come to wag the dog.

But despite Mr Black's undoubted entrepreneurial flair and successes, the City has never quite been able to come to terms with him; in some quarters, he is still regarded with suspicion. It may be unfair and unjustified, but it's a fact. Anyone who has voiced such concerns, including this newspaper, has generally ended up with a bloody nose. We paid substantial damages and apologised to Mr Black for alleging that being a minority shareholder in one of Mr Black's interests hadn't always been a pleasant experience.

One of the things that makes the City wary of Mr Black is a penchant for shuffling assets around his business empire in a manner that is often difficult to follow and hard to understand. Robert Maxwell used to do something similar, though that doesn't mean there is anything wrong or bad about it per se. In some groups, notably Anglo-American, it is a modus operandi that has often been of benefit to shareholders. However, in nearly all cases, asset-juggling between separately quoted parts of the empire tends to create controversy and confusion. Rightly or wrongly someone, somewhere always thinks they are being short-changed by it, and as far as Mr Black is concerned, everyone assumed it would stop after the Telegraph was floated.

When he took control of the Telegraph, he assured the City that henceforth, everything would be done in a straightforward, by-the-book manner. He even said in the offer for sale prospectus that Hollinger and the Telegraph had agreed a division of their respective newspaper interests worldwide, and that this precluded them from engaging in newspaper or other media activities in the areas where the other had existing operations, though there were letouts.

So what on earth is the Telegraph doing buying half Mr Black's 22.5 per cent stake in Southam, a loss-making Canadian newspaper group, at an apparently inflated price? If it's such a great deal for the Telegraph, as Mr Black insists, why is Hollinger selling in the first place? Why doesn't it keep the shares itself so as to take advantage of the 'astronomical upside' and the 'classic corporate recovery' situation that Mr Black foresees?

Mr Black believes he is being misunderstood and unfairly criticised over the deal. He actually had very little to do with it, he says. It was the Telegraph, which has money coming out of its ears and is on the look-out for suitable opportunities to apply its management skills, that wanted to buy the stake. As he puts it: 'What was I supposed to do? Tell them to get lost?'

Furthermore, the Telegraph is being given an option to sell the shares back to Hollinger after 12 months at the same price, making this an almost risk-free opportunity for the company. Fine, except this fails to take account of the fact that Paul Desmarais's Power Corporation has subsequently emerged as the buyer of a similar sized stake in Southam at a considerably lower price (though not from Hollinger); so the Telegraph seems to be overpaying Hollinger for its shares.

Nevertheless, Mr Black is sticking to his guns, and with the backing of the Telegraph's star-studded cast of independent directors (including Lord King and Sir Evelyn de Rothschild), he is persisting with the original deal. Just because someone else got a better deal than us doesn't mean we got a bad one, he says.

Hmm, yes, well. If this were an arm's-length transaction, you might not quibble too much, but it's not; it's the proprietor who's on the other end of it. An independent adviser might have told Mr Black: 'You could well be right about this being a great long-term opportunity for the Telegraph, but in the short term, the mathematics doesn't work. In the short term it doesn't look good, and for that reason alone you shouldn't be doing it. Your enemies in the City and the press are going to have a field day. They are going to be able to say 'here at last is Mr Black revealing his true colours'.' And so they have.