Torstar ends romance with Harlequin books, sells to News Corp. for $455M

TORONTO – After nearly four decades of romance, Torstar Corp. and book publisher Harlequin are breaking up.

The owner of the Toronto Star newspaper and other publications announced Friday that it is selling its romance novel division, Harlequin Enterprises Ltd., to global media company News Corp. for $455 million in cash.

“We think we did the right thing in exiting,” David Holland, president and CEO of Torstar, said during a conference call to discuss the sale.

Torstar (TSX:TS.B) said the deal will see Harlequin stay headquartered in Toronto and run as a division of HarperCollins Publishers, also owned by media mogul Rupert Murdoch.

“While making the decision to sell was difficult, we are confident that this transaction represents excellent value for Torstar shareholders and importantly further strengthens Torstar’s financial position and capital base as we continue in our evolution as a company,” Holland told financial analysts.

Shareholders welcomed the news, as Torstar’s stock shot up 22 per cent, or $1.47, to close at $8.15 on the Toronto Stock Exchange. Its previous 52-week high was $6.95.

Holland said the media company will use the cash proceeds to pay down $158.5 million of debt as of the end of 2013, and look to other business opportunities, whether that’s through acquisitions or expansion.

“There is clearly a recognition that we’ve got to come to grips with the next stage and what the next stage in the evolution of Torstar is. To be frank, I have not brought forward a recommendation to the board on that,” he said.

Adam Shine, an analyst with National Bank (TSX:NA), called the move “long-awaited” and one that was “seemingly overdue.”

He also noted that the sale of Harlequin may be a sign of more major news to come, including the possible sale of Torstar. The media company is slated to report its latest quarterly earnings May 7.

Harlequin has been a part of Torstar for 39 years after the media company purchased a controlling interest in 1975. It acquired the rest in 1981.

Most known for its grocery-store paperbacks featuring cowboys, millionaires and bored housewives, Harlequin has felt the squeeze on profits for the past few years as it made the transition to keep up with a new digital environment. Higher digital royalty rates for its authors and weakness in the global economy also hurt the publisher of bodice-rippers featuring such titles as “The Italian’s Inexperienced Mistress” and “The Ultimate Betrayal.”

In 2012, Harlequin was hurt by blockbuster sales of the “50 Shades of Grey” series, which was published by a division of competitor Random House. At the time, Donna Hayes, publisher and CEO of Harlequin, said despite the boost for the genre, sales of the 50 Shades books totalled more than the company’s entire retail division in North America.

Harlequin has about 1,000 employees worldwide — with 350 employees in Canada. It publishes the work of more than 1,300 authors and releases more than 110 titles monthly through publishing operations in 16 countries. About 95 per cent of Harlequin’s revenues are from outside Canada.

The Harlequin book publishing division of Torstar has long been a boon for the media company, which has struggled in recent years amid declining newspaper subscriptions and advertising sales, while adapting to a growing digital environment.

The transaction, subject to approval from Torstar shareholders, competition regulators in Canada and the U.S., and a review under the Investment Canada Act, is expected to close later this year.

HarperCollins president and CEO Brian Murray said the acquisition will help the publisher move into high-demand countries outside North America, particularly the large markets of Germany, Japan and France. Currently, HarperCollins only publishes in English and operates a small romance fiction division in addition to other genres.

“(Romance readers) tend to be voracious readers. They read sometimes as many as 50 to 100 books a year. I don’t see that as going away any time soon,” he said.

“Certainly our whole industry is going through a transition from print to digital, so the business will change but I think the reading of romance books is not going away.”

Murray admits he has never finished a Harlequin novel from front-to-cover, but he understands the appeal behind fiction and such a valuable “consumer book brand” for women.

Queen’s University English professor Robert Morrison said the appeal of the Harlequin novels boil down to their often-formulaic plot lines and fantasy-like characters, likening them to fairy tales for adults.

“The fantasy of romance novels and Harlequin romance is that you get these gorgeous guys, guys as women would wish them to be,” he said.

Last March, investment manager Fairfax Financial Holdings Ltd. (TSX:FFH), led by Bay Street investor Prem Watsa, expanded its stake in Torstar by 3.4 per cent to nearly 23 per cent for $12.8 million.

News Corp. is a media and information services with news and information services, cable network programming in Australia, digital real estate services, book publishing, digital education, and pay-TV distribution in Australia. It’s headquartered in New York and has activities in the United States, Australia and United Kingdom.

Torstar, which owns the Toronto Star, Canada’s largest newspaper, also holds an investment in The Canadian Press as part of a joint agreement with the parent companies of the Globe and Mail and Montreal La Presse.

Follow @LindaNguyenTO on Twitter.

Note to readers: This is a corrected story. It corrects to say that Torstar will sell Harlequin to News Corp. and it will become a division of HarperCollins Publishers