As the lights go out across our planet, a mighty roar emerges from the Telegraph’s engines of doom

Posted by Peter Kirwan on 25 July 2008 at 15:55
Tags: Media

I haven’t checked. But almost certainly, Ambrose Evans-Pritchard isn’t an anagram for Hieronymous Bosch.

Still, in recent months, I’ve started to wonder whether this one-man engine of doom strapped to the Telegraph’s business desk can take the strain.

The Telegraph and Evans-Pritchard have been whipping their readers into a singular frenzy about recession and depression for several months now. I’ve started to imagine City editor Damien Reece emerging ashen-faced from the business hub and crying out to Will Lewis: “Cap’n, the engines cannae take it anymore”.

But they can, they certainly can.

Today, online, the Telegraph’s business section features a piece by Evans-Pritchard which suggests that the global economy is “at the point of maximum danger”.

It claims that the IMF has “abdicated into schizophrenia”. The European Central Bank is “fixated on the rear-view mirror, not looking through the windscreen”. Washington has its back to the wall. All over the world, it seems, the darkness is encroaching:

Britain, Japan, and the Antipodes are stalling. Denmark is in recession. Germany contracted in the second quarter. May industrial output fell 6pc in Holland and 5.5pc in Sweden.

The coalitions in Belgium and Austria have just collapsed. Germany’s left-right team is fraying. One German banker told me that the doctrines of “left Nazism” (Otto Strasser’s group, purged by Hitler) had captured the rising Die Linke party. The Social Democrats are picking up its themes to protect their flank.

This is the healthy part of Europe. Further south, we are not far away from civic protest. BNP Paribas has just issued a hurricane alert for Spain.

What does this call to mind? How about Edward Grey, the 1st Viscount Grey of Falloden, speaking on the eve of World War One (”The lamps are going out all over Europe; we shall not see them lit again in our lifetime.”)

Or perhaps W.H. Auden 25 years later, waiting for another war to start while sitting in “one of the dives/On Fifty-second Street”.

Thankfully, the Telegraph’s web folks are quite so high-falutin’. They have decided to illustrate Evans-Pritchard’s piece with a mock yellow triangular sign featuring a skull and crossbones. Bless.

Anyway, enjoy. For as Ambrose knows, it’s always later than you think.

Hot money from Old Mumbai: Bid talk swirls around Trinity Mirror

Posted by Peter Kirwan on 25 July 2008 at 15:10
Tags: Trinity Mirror

“Remember, the market tends to overreact sometimes.”

No wonder the analyst who offered up this pearl while discussing Trinity Mirror with Nikhil Kumar of The Independent this morning wanted to remain anonymous.

Yesterday afternoon, Trinity Mirror’s share price shot upwards on rumours of a bid from Bennett Coleman, which owns The Times of India.

Last week, Trinity Mirror’s shares bottomed out at 41.5p. Yesterday, they closed at 92.25p. As I write, they were down slightly at 87.75, as everyone reflects on the difficulty of doing a deal.

If the moniker Bennett Coleman calls to mind the signage above an Edwardian grocer’s shop, you’ll need to think again. Controlled by the Sahu Jain family, the company has been valued at anywhere between $15bn and $25bn.

A week ago, I suggested that a bid from a big investor was a strong possibility for Trinity Mirror. Not that this confers brain of Britain status on yours truly. As Chris Tryhorn notes in the Guardian this morning, Trinity Mirror has become “a natural market rumour stock”.

That said, it remains to be seen whether (a) the bid is real, (b) whether it’s friendly and (c) whether Trinity Mirror will welcome it.

The reported (rumoured?) tactic of buying up shares from big investors before approaching Trinity Mirror’s management doesn’t seem particularly friendly, it has to be said.

By the same token, it’s hard to see how Trinity Mirror could invite Bennett Coleman into its tent via a rights issue that offered a similar deal to existing shareholders. (Not for the first time, this makes the timing of Johnston Press’s recent rights issue look smart.)

In passing, it’s encouraging to see that Robert Lindsay of The Times seems intent upon endearing himself even further to Sly Bailey.

According to Lindsay, “some bankers in Bombay” (surely that’s Mumbai?) are asking why Bennett Coleman would want to “acquire an ailing asset in a shrinking UK market when it has better growth opportunities at home”.

By contrast, the analysts at UBS did some sums. In a note quoted at FT Alphaville, UBS has this to say:

If one assumed a potential requirement for further contributions into their pension scheme, on our estimates, an LBO* at an assumed 110p with 3x leverage would require additional cost savings of c£30m (4% of cost base) to achieve a c15% IRR.

In addition to these dire calculations — £30m of cuts ain’t small — UBS points to “limited visibility on the extent of potential advertising declines near-term, limited scope to remove additional costs given previous efficiency programmes and structural pressures longer term”.

Translation: it’s too early in the game for a bid, and Trinity Mirror’s pension liabilities continue to spook all-comers.

Much hangs on Trinity’s results, due on 31^st July. In particular, the company’s pension liabilities will attract lots of questions from analysts.

The market’s incessant fretting on this score is becoming tedious. This morning, for example, an analyst from Kaupthing suggested that Trinity’s pension fund “would no doubt be even more difficult to deal with than most pension schemes given its troubled history”.

This, of course, is a bit like saying that Chelsea have little chance of winning the Premiership this year because they only managed to come top of the Second Division in 1991.

Some clarity is needed. How much of that precious commodity Trinity Mirror wants to give the market remains to be seen. It might be a remote prospect, but a better-than-expected scenario on pension liabilities could open the door to all sorts of mayhem.

* Leveraged buy out: precisely the kind of bid, financed by bank debt, that a private equity firm might contemplate.

Not only in Kamchatka: What happened when Mr Sabbagh went down to the woods. . .

Posted by Peter Kirwan on 25 July 2008 at 13:54
Tags: Telegraph Media Group, Trinity Mirror

As this week’s events in Kamchatka reminded us, bears have sharp claws and teeth. The latter bite chunks out of investors frequently. And commentators get bitten, too.

The Times has had a torrid time of it in recent weeks. On 16 July, its reporter Robert Lindsay suggested that an analyst had concerns about Trinity Mirror breaking its banking covenants.

Breaking promises to bankers ranks as one of the City’s greatest sins. Accordingly, Trinity’s shares slumped. Acting rapidly, the company pushed out a highly unusual announcement outlining the actual terms of its agreements with the banks.

Next, Sly Bailey reached for her lawyers. What is being coyly described as an “exchange of lawyers’ letters” ensued with The Times.

On 17 July, Dan Sabbagh, the paper’s media editor, wrote up what seemed like a considered account of Trinity’s position.

(That said, Sabbagh did quote Richard Desmond’s mischievous suggestion that he would look to buy Trinity Mirror when it went into administration. The following day, for good measure, he wrote an accompanying piece hinting darkly that it simply wasn’t good enough for Trinity to blame its predicament on “irrational advertisers and an advertising downturn”.)

But this, it seems, wasn’t the end of The Times’s media reporting troubles.

This morning, in a space normally reserved for one of Sabbagh’s jaunty vignettes about the media business, The Times carries a curious legal-sounding clarification.

It suggests that Telegraph Media Group was irritated by a piece by Sabbagh that appeared in the paper’s Media Business section on 4^th July.

Partly or wholly written by m’learned friends, the “clarification” makes it clear that Sabbagh had no business comparing Trinity Mirror with The Telegraph Media Group.

Why not? Well, as the clarification points out, Trinity Mirror has a pension fund of £1.5bn and a deficit against that liability of £125m.

We’re further informed that the Telegraph Media Group has no pension fund liability — and “more than sufficient funds to discharge all of its borrowings whenever it chooses”.

Oddly, I can’t locate the original article via Times Online’s search engine. (Perhaps the Media Business section is filed away in a special cupboard somewhere on the site. Maybe Mr Sabbagh will reply to my inquiring email with a link. . . )

But given that the Barclays are to the Telegraph what Roman Abramovich is to Chelsea Football Club, the clarification does seem a little superfluous.

Funnily enough, it may achieve the opposite effect to the one intended.

Although I haven’t considered the possibility until now, it seems entirely obvious that the Barclays will need to write down the value of their vast property estate during the next year or two.

Whether this will force a change in the tempo of investment at Telegraph Media Group is anyone’s guess.

But in the current market, prospects that once seemed as far-flung as Dr Who’s travel itinerary are rapidly becoming as real as the bus stop at the bottom of the road.

The Fallon brothers: A counter-cyclical media dynasty

Posted by Peter Kirwan on 23 July 2008 at 19:13
Tags: Daily Mail & General Trust

Those counter-cylical brothers-in-media Ivan Fallon (The Independent) and Padraic Fallon (Euromoney) will have plenty to discuss on family get-togethers this summer.

The Indy is going south with the rest of the consumer media. But as today’s trading update for Q2 proved, Padriac Fallon’s Euromoney Institutional Investor is firing on all (or most) of its cylinders.

Euromoney’s home page gives a flavour of the exotica generated by the company’s employees — everything from Petroleum Economist (which must be rocking at the moment) to a two-day summit for tax specialists in Rome in September that will cost £1,295 to attend.

Padraic Fallon started out editing Euromoney (the magazine) 34 years ago and is now the company’s £2m-a-year chairman. For years, while many in the B2B sector were content to live off dwindling recruitment revenues, Fallon perfected a business model that now defines the ideal.

That’s to say: minimal dependence on advertising, a big events business — and, if you can get it, plenty of subscription revenues generated by high-quality specialist content.

Less than one-fifth of Euromoney’s revenues come from advertising. Subscriptions account for nearly 40%, and the balance is generated by a mix of databases, conferences and training.

In March, the company reported revenues up by 7%. Today, the company unveiled even faster growth. During Q3, revenues rose by 13%.

How has a company that made its name in the financial sector managed this feat? The answer partly lies with Euromoney’s focus on emerging markets, where revenues are roaring upwards at 25%+ per annum.

The company’s interest in booming commodity markets must also have something to do with it — although Euromoney does seem noticeably coy about the performance of Metal Bulletin, which it acquired for £220m in 2006.

Neither do today’s interims specifically mention what’s happening inside the company’s core financial publishing division. But during the six months to March, revenues in this division fell by just 1%.

This feels like a creditable performance, one that reinforces the currently bullish logic of both the FT and The Economist: in a slowdown, the demand for high-quality information about what’s happening in financial markets is relatively robust.

Looking ahead, Euromoney isn’t expecting any problems. Today’s trading statement suggests that the revenue pipeline for Q4 “looks similar to this time last year and [is] in line with the board’s expectations”.

Nice work if you can get it.

The economics of going private: If the predators are willing, perhaps their bankers are too weak

Posted by Peter Kirwan on 18 July 2008 at 13:21
Tags: Johnston Press, Trinity Mirror

The hysteria-fuelled bear market in newspaper stocks has been accompanied by talk of private equity interest in the sector.

In the US, the newspaper executive turned VC Alan Mutter has been thinking about the economics of taking newspaper groups private.

The same logic could be applied to both Trinity Mirror and Johnston Press, whose share prices have taken a massive battering in recent weeks.

The mention of private equity brings Mark Potts out in goosebumps.

These once-great companies are bottoming out. The sharks are circling. The horrors of the next few months may make the last few months look like a golden age – except to savvy investors who try to wring the last few pieces of gold out of those downtrodden newspaper companies.

All of this talk incites Jeff Jarvis to say that he wouldn’t “invest a dime in an old newspaper company, no matter how cheap”.

Jarvis goes on to hint that the share price decline has continued for so long precisely because private equity investors are avoiding the sector. Far better, he suggests, to wait for “some of the giants [to] topple, leaving holes in the ground that’d be easier to fill from scratch”.

This exchange underlines perfectly the will-they-won’t-they debate about taking newspapers private.

Some believe that the predators are biding their time, waiting for the market to bottom out. Others believe that most of the big private equity groups have written off the newspaper industry.

Instead, they’ve been investing aggressively in B2B publishing, where the route out of structural decline seems more clearly signposted. (Not that the anonymous author of B2B Media would agree.)

Mention of this brings to mind a second constituency of doubters, who worry that private equity groups won’t be able to raise enough cash.

This is speculative territory. At the FT, as elsewhere, hacks hold diverging views. At Alphaville, for example, Paul Murphy tends to think that private equity groups can still access the debt required to do big deals.

But only this morning, Ben Fenton and Martin Arnold are suggesting that a 506p private equity approach for Informa will fail. In the words of one anonymous source: “They are struggling to get it financed”.

Does private equity intend to bid for newspaper assets? Can it raise the cash? As the waiting game continues, tempers are becoming frayed in a bear market that’s starting to show its true destructive potential.

The alternatives for Trinity Mirror: Strategic investor or private equity bid?

Posted by Peter Kirwan on 18 July 2008 at 12:34
Tags: Media, Trinity Mirror

At The Times, Dan Sabbagh does the sums on Trinity Mirror’s share price. When Sly Bailey arrived in 2003, it was 370p. On Wednesday morning, it was 41p, valuing the entire company at a derisory £106m.

This, writes Sabbagh, means that the market is allocating a value of £72 to each of the Daily Mirror’s 1.47m buyers. That’s around the value of six months’ continuous purchasing. As Sabbagh puts it:

Perhaps at that point the City believes that all of Britain will become blinded by a Triffid invasion, and hence unable to read. One can only wonder how investors would react if something genuinely serious happened.

Presumably, that’s what Richard Desmond is hoping for. Sabbagh suggests that the owner of the Express reckons it would cost £800m to take Trinity Mirror private. (This sum includes a bid premium, the company’s existing debt and some cash to top up Trinity’s pension funds.)

In relation to the £150m of operating profits expected from Trinity Mirror this year, that’s a fairly big number. It would imply doing a deal with net debt at x5.3 EBITDA. According to Alan Mutter, that’s not impossible.

If Trinity Mirror then nixed its dividend payments, which amounted to £63.7m last year, the company would enjoy wiggle room to accommodate the further YOY declines in operating profit that seem inevitable. Hell, it might even be able to pour some real money into investing for the future.

So a deal is do-able. But there are doubters. Desmond, who thinks £800m is too expensive, is one of them. As he told The Times mischeivously this week: “When it’s in receivership, we’ll look at it.”

Of course, there’s another alternative — specifically, the possibility of someone taking a strategic stake in the company.

Trinity Mirror will present its 1H results to the City on 31^st July. At that point, conjuring a strategic investor out of thin air might be one way for Sly Bailey to keep her job.

Whether the de facto endorsement of her conservative regime that would accompany such a move is the right medicine for Trinity Mirror remains dubious.

Digital ad revenues are still growing, but the signs of distress are everywhere

Posted by Peter Kirwan on 18 July 2008 at 10:36
Tags: Media

How vulnerable is digital advertising?

In the US, a company called ValueClick — the second-largest online ad network in the country — yesterday announced weak earnings and cut its financial forecasts.

Logically enough, the company’s boss told investors that advertisers are becoming “increasingly performance-oriented”. In other words, they’re less interested in branding, more interested in lead generation.

Theoretically, this should rebound to the advantage of Google. Yesterday, however, Wall Street marked down the company’s shares aggressively when it revealed slowing revenue growth (43% YOY vs. 63% a year ago.)

MSN has problems, too. In Q1, Microsoft’s ad business (excluding aQuantive) grew by 26%. Yesterday it revealed organic revenue growth of just 8%.

Against this backdrop, here in the UK, there’s some plausibility in the recent claim by New Media Age that portals like AOL, MSN and Yahoo! are “offering inventory, in some cases premium space, at cut-price rates as they struggle to hit targets”.

Something equally unpleasant — or worse — must be going on inside the digital departments of newspaper groups.

A few optimists suggest that the shriveling of financial services ad spend is causing the trouble.

“There’s been a drop-off in advertising from financial services so [media owners] are having to chase money harder, so it makes sense to drop prices.” That’s the verdict of Paul Wright, director of sales at Sky Media.

Ron Horler, managing director of Diffiniti, actually qualifies as an outright optimist. He tells NMA: “We haven’t seen a downturn.”

By contrast, NMA itself seems to think that UK digital ad market has just endured a nasty turn for the worse.

The magazine claims that price cuts are being made to both premium and niche inventory, and that portals are pushing more inventory through exchanges in a bid to hit targets. Budgets are being “slashed” and there’s talk of “half-price rates”. Online display ads are being pulled, and money is going into SEO and affiliate schemes instead.

According to David Hart, co-founder of digital agency Codegent, clients are focusing “optimisation, usability and customer insights. . . making what they have work much, much harder.”

All of this might be true, but it’s still too early to suggest that the forward march of digital revenues has been halted.

This much is clear from The Institute of Practitioners in Advertising’s Bellwether Report, which was published on Monday.

The report, which surveys the marketing intentions of 250 large UK-based companies, does suggest that marketing spend has fallen for the third quarter in a row. And it does say that spend is now declining at the fastest rate since the aftermath of 9/11 in 2001.

But — surprise, surprise — The Bellwether Report also notes that expenditure on online marketing is still increasing. In fact, it’s the only medium on which marketers are spending more money as the economy continues to deteriorate.

Granted, the rate of growth is disappointing. According to the report, internet ad budgets are only growing at 6% annually.

That’s still reasonably nice work if you can get it. But the next question on the horizon is a nasty one: can digital advertising budgets avoid going into reverse?

MSN’s internal problems might have contributed to the division’s single-digit percentage growth rate in Q2. But the signs are that a large slug of the digital economy is following it down the dreary path toward zero, or even negative, growth.

Common sense, a decade late: James Murdoch cuts 20% of sales jobs at News International

Posted by Peter Kirwan on 9 July 2008 at 16:40
Tags: News Group Newspapers, News International, Times Media

James Murdoch’s decision to merge the separate sales teams that used to service Times Media and News Group Newspapers might sound a bit radical.

In reality, it’s hard to describe the move as anything other than common sense, implemented a decade late in a sector well-known for its old school approach.

From September, News International’s sales teams will flog space through “agency-focused hubs, each housing between six and 10 people”.

The stated aim, of course, is for sales folk to build deeper relationships with the big agencies that generate most of NI’s ad revenues.

The unstated aim involves cutting perhaps 20% of the employment costs out of NI’s sales organization. News International is planning to make 100 out of 450 sales staff redundant.

From a bean counter’s point of view, the timing is excellent. The reorganization was worth doing anyway. But no doubt Murdoch Jr. has grabbed the chance to add a bundle of recession-related job cuts into the total.

The anonymous jeers from rivals quoted in Media Week cut very little ice. One suggests that asking the same team to sell space in both The Sun and The Times is “not a natural fit”.

Why not? Despite demographic differences, both papers trade in the same currency of eyeballs. By selling across a portfolio of titles, News International will hope to generate more incremental revenues than it will inevitably lose by demolishing title-focused sales teams.

The second complaint from an anonymous competitor goes like this:

“I am not convinced it is the best way to go forward. The changes will not grow their revenue base, but it will be a more efficient way to generate sales. This is about cutting out costs.”

. . . Which, last time I looked, seemed to be a perfectly sensible response to recession.

US newspapers: The 30-year transition from print to digital

Posted by Peter Kirwan on 9 July 2008 at 13:33
Tags: Media

Robert Coen, the forecasting guru who works at Universal McCann in New York, has halved his prediction for US advertising revenue growth.

A year ago, Coen thought the US ad industry might grow by 5% during 2008. Last December, Coen was forecasting 3.7% growth. Now, he is predicting 2%.

Coen also suggests that advertising has fallen from a steady 2.25% of US GDP to around 2.02%. That’s the lowest level since 1981.

Predictably, the biggest victim in all of this will be the newspaper industry. Overall, Coen is predicting an 8% decline overall for revenues from printed newspaper ads in the US this year.

Alarmingly, Coen reckons that spending on newspaper classified ads fell by 25% during Q108. (In June, the Newspaper Association of America reported that property and job ads both declined by 35% during Q1.)

These numbers come on the heels of data from the Newspaper Association of America, which suggest — alarmingly — that advertising on newspaper-owned websites in the US is growing by a measly 7.2% YOY.

During Q1, advertisers spent $8.43bn on printed newspaper ads. They spent less than one-tenth of that amount — some $804m — on buying ads on newspaper sites.

At this rate, US newspaper sites will finally generate as much revenue as their print counterparts at some point in the early 2040s.

It’s been said before, but bears repeating, that this isn’t the kind of timetable likely to be appreciated by shareholders who interpret the expression “medium term” to mean six months’ hence.

PS/Update: It’s 3pm and Universal McCann have just sent me the slides behind Cohen’s presentation.

Actually, the bit about advertising representing a “steady 2.25% of US GDP” turns out to be rubbish. (Reporters, eh?)

In the US, advertising expenditure last hit a trough of 2.12% of GDP during the recession of 1992-1993. It then expanded gradually, toward a peak of 2.52% in 2000.

But after the dot.com bust, there was no recovery. From 2000 onward, decline has been constant — right through the Naughties.

Currently, ad spend constitutes 2.02% of US GDP — the lowest proportion for at least two decades (McCann doesn’t supply any data for pre-1987).

This underlines the fact that we’re heading into uncharted territory. Already, the combined effect of economic crisis and web-led deflationary pressure on ad budgets looks startling.

Quite what the market will look like as we emerge from this slump in two years’ time is anyone’s guess.

Also worth bearing in mind: here in the UK, digital advertising has advanced further and faster than in the US. This suggests that web-led deflation is biting UK media organisations much harder than their US counterparts.

Is the Daily Mirror worthless?

Posted by Peter Kirwan on 3 July 2008 at 14:55
Tags: Trinity Mirror

After this week’s major share price falls, have newspapers become worthless in the eyes of investors? In the case of Trinity Mirror, we’re getting mighty close to that moment.

In February, Trinity announced that 3.7% of its revenues come from digital.

As it happens, we can put a value on that digital revenue. Even better, because we know how fast web advertising is growing, we can forecast the value of that revenue five years’ hence.

Let’s start off with the analysts’ mean forecast of £916m in revenues for Trinity Mirror as a whole for the year to December 2008. Of this amount, only £33.9m — or 3.7% — will be digital revenue.

Excluding the effect of acquisitions, Trinity’s digital revenues are growing at around 25% a year. For the purpose of this argument, we’re assuming (not unreasonably) that 25% remains the norm for the next five years, through good times and bad.

Here’s the digital revenue picture for Trinity Mirror under those circumstances:

2008: £33.9m

2009: £42.4m

2010: £53.0m

2011: £66.2m

2012: £82.7m

2013: £103.4m

If Trinity Digital can grow a little bit faster — say 30% — then revenues would top out at £125m by 2013.

What might someone be willing to pay for such revenues in five years’ time?

A toppy comparison is readily available in the form of CNET Networks, the US-based pure-play digital publisher recently sold to CBS Corporation for 3.9 x revenues.

On this (admittedly sketchy) basis, Trinity Mirror’s digital operations could be worth £400m-£500m by 2013.

Perhaps, in Trinity’s case, we should assume a more modest return. Assume, instead, that Trinity Digital generates a 25% margin on its turnover by 2013.

That’s an operating profit of £20m-£25m. Apply to this a multiple of ten times operating profits and you reach a sale price of £200m-£250m by 2013.

That’s the absolute minimum that Trinity’s digital operation would fetch in five years’ time.

Coincidentally, it’s about the same as the £230m valuation currently attached to Trinity Mirror as a whole by the market.

In other words, anyone thinking of buying Trinity Mirror at the moment should think in terms of paying money for its digital operation — and picking up print for free as part of the deal.

This would have its attractions. Managed aggressively, Trinity’s papers could be made to generate £150m-£200m in profits annually. For a while, at least.

Some of that would have to fund Trinity’s pension pot. A bit of it would have to be invested in Trinity Digital. In preparation for a future of diminished revenues, a large portion of it could be used to pay off Trinity Mirror’s £425m of net debt.

Not bad for a bit of bunce attached to the main deal.

Of course, the essential requirement for any such buyer will be nerves of steel.

They will need to set the managers of Trinity Digital free to cannibalise the company’s print business.

Their other objective will be to shoehorn Trinity Mirror’s print-sized cost base into the pint pot of digital revenues within five years. In terms of destructive intensity — if not absolute damage — this would be on a par with what happened to the British steel industry in the 1980s.

Of course, running down the print business in this way will be a good deal easier knowing that you’ve effectively paid nothing for it in the first place. . .