The tangled web that leads to the Telegraph: Gail Counsell follows the threads that connect Conrad Black's publishing empire The investment in the Telegraph is the linchpin

HOLLINGER is the corporate spider at the centre of Conrad Black's publishing empire.

Yet until its recent controversial decision to reduce its stake in the Telegraph from 66 per cent to less than 57 per cent just weeks before the newspaper group cut the price of its flagship title and sent its shares into free fall, it was an acquired taste akin to Kremlinology.

At the last count the company had only 18 UK investors; 85 per cent of its shareholders - 2,160 out of 2,526 - were Canadian and they owned 97 per cent of its shares.

Yet Hollinger and the Telegraph exist in an uneasy symbiosis, with the latter fuelling the former's rapid, acquisition-driven growth.

Although it owns more than 490 newspapers, plus a few assorted magazines, the Daily and Sunday Telegraph contribute more than three-quarters of Hollinger's profits. The Telegraph provides a vital component of its cash flow, tying the fate of the fast-growing Canadian company firmly to its UK titles. The direction of the British company is equally glued to its Canadian parent, not only because of the dominant personality of Mr Black, who is executive chairman of both groups, but because, as the recent furore surrounding the Hollinger share sale demonstrates, decisions taken in Toronto can easily undermine the credibility of decisions taken in London.

Hollinger is the last public link in the chain of companies controlled by Mr Black. It is quoted on the Toronto stock exchange, its main shareholder Ravelston, a private company controlled by Mr Black and his associates, which owns just under 46 per cent of the Canadian group. (It controls a further 12 per cent via share warrants, as well as having first refusal rights on some of its many preference shares.)

The personal links are strong. As well as being Hollinger's chairman and chief executive (though day-to-day operations are run by his longstanding first lieutenant, David Radler) Mr Black is the Telegraph's executive chairman.

Hence the Telegraph pays Hollinger a pounds 1m-plus fee for the services of Mr Black. (It meets two- thirds of the costs of Hollinger's chairman's office, such as 'insurance, assistance in the arrangement of finance and assistance and advice on acquisitions, disposals and joint venture arrangements'.)

The paper chain continues; Ravelston has a management agreement with Hollinger, under which it carries out head office and executive responsibilities - for a fee that last year amounted to Cdollars 7.4m, a considerable proportion given Hollinger's tiny profits.

Relations between the private and public companies are often tangled. Until recently, for instance, Ravelston owned Cdollars 30m of Hollinger's adjustable rate debentures. Yet Domgroup, a Hollinger subsidiary, was owed Cdollars 4.15m by a company controlled by Ravelston's controlling shareholders. To read Hollinger's accounts is often to glimpse corporate incest at its most confusing.

Nevertheless, the most striking thing about Hollinger is its size relative to net profits, given the diversity of interests. Despite sales of Cdollars 873m last year, many titles are performing poorly and net earnings were only Cdollars 25m ( pounds 12m). Even in 1992, its best year in recent history, they only reached Cdollars 74m ( pounds 36m).

But it is Hollinger's investment in the Telegraph that is the linchpin. Hollinger owns two giant Canadian newspaper groups, UniMedia and Sterling Newspapers, the Jerusalem Post in Israel, and American Publishing, a US newspaper group. Yet the vast bulk of its earnings, about Cdollars 130m operating profits out of a total Cdollars 170m - 76 per cent - came from its UK newspapers last year.

They have fuelled expansion, which of late has primarily been via American Publishing: 1993 saw it adding 18 daily and 45 non- daily newspapers, with smaller purchases by the Canadian newspapers (at a net cost of Cdollars 28m); in February this year American spent a further USdollars 180m on the Chicago Sun Times plus about 62 Chicago freesheets.

But this cash- hungry strategy is extremely vulnerable to any fall in the share price, since stake sales have helped provide the cash flow for expansion, or to any drop in the Telegraph's earnings.

Share sales are also a double- edged sword since each stake sale cuts the Telegraph's contribution to Hollinger's profits.

And the cover price war may prove a devastating blow to Hollinger. The exact impact remains to be seen - Hollinger was unable to issue its own figures before the Toronto Stock Exchange closed yesterday.

Nevertheless, the headache is easy to see. The price cut will probably cost the Telegraph at least pounds 15m- pounds 20m in profits this year, on top of which there is the reduction in Hollinger's Telegraph holding - and so its share of the Telegraph's profits - to consider.

Unless Hollinger can achieve a spectacular turnaround in the profitability of some of its other titles, group's profits could shrink by Cdollars 40m or more this year. More than enough to wipe out last year's Cdollars 25m of net earnings - never mind what it would do to the Cdollars 14m loss the company recorded under stiff US Gapp accounting rules.

(Photograph, graphs and graphic omitted)