Murdoch’s Teflon margins: Even with Dow Jones aboard, News Corp’s newspapers still look good

Posted by Peter Kirwan on 8 August 2008 at 17:25
Tags: Media, News Corp, News International, emap

If you work at Wapping, what should you think of News Corporation’s full-year results? Here’s the stuff investor relations would like you to shout about:

• Revenue up by 9%
• Operating profit up by 18%
• Q4 net income per share up 27%

Yadda-yadda. So is everything really rosy in the garden? Given News Corp’s typically miserly approach to disclosure, it’s hard to say.

In particular, News Corp’s second-quarter earnings release is studiedly guarded about progress at Dow Jones, which became part of the P&L in Q1.

It tells us, for example, that Dow Jones generated $48m in operating profit before amortization and depreciation during News Corp’s Q4 (Q2 in calendar terms).

But it doesn’t tell us how much Dow Jones generated in revenues. As a result, there’s no way to assess the unit’s margin performance.

There’s probably a very good reason for this.

Last year, before the acquisition of Dow Jones, News Corp’s newspapers generated margins of 20.9%.

Any hint that these profits are being diluted by Rupert Murdoch’s high-priced acquisition would have enraged investors and analysts.

Happily, this week’s year-end results from News Corp don’t offer any real evidence of dilution.

Even with Dow Jones & Company on board for two quarters, News Corp’s newspaper division still managed to generate operating margins of 19.2% during the 12 months to 30 June.

It might not look like much, but this is really quite a feat.

The important point to remember is that pre-Murdoch Dow Jones was a dog (there’s no other word for it) in terms of profitability.

In Q307, for example, the company generated operating profits of $40.9m on revenues of $493.3m. That’s a paltry operating margin of 8.2%.

Historically, it was never much better.

• Q207: 12.5%
• Q107: 7.5%
• Q406: 13.1%
• Q306: 3.3%

The question is this: how has News Corp managed to shoehorn such a large and underperforming asset into its newspaper division without hammering its own margins?

Dow Jones was a biggish acquisition in revenue terms. Its $1.8bn annual revenue base compares with News Corp’s pre-acquisition newspaper-related revenues (for 2007) of $4.5bn.

And yet. . . despite absorbing the big revenues and poor profitability of Dow Jones, News Corp’s margins have barely registered the impact. Here’s what’s been happening on a quarterly basis:

News Corp newspaper margins Q208: (with DJ) — 19.2%

News Corp newspaper margins Q108: (with DJ) — 17.9%

News Corp newspaper margins Q407 (without DJ) — 21.3%

News Corp newspaper margins Q307 (without DJ) — 18.7%

News Corp newspaper margins Q207 (without DJ) — 23.4%

News Corp newspaper margins Q107 (without DJ) — 20.3%

(NB: These margins are calculated before depreciation and amortization)

Yes, there’s a small dent visible in the margin during Q108, the quarter in which Dow Jones was included within News Corp’s numbers for the first time. But apart from that, the margin performance looks unbroken.

How have Murdoch & Co. managed this feat? The answer to the question — I suspect — falls into two parts:

1) They’ve been pressing every possible button in a bid to increase margins at Dow Jones & Company (not terribly surprising).

2) They’ve been stripping costs out of every other News Corp-owned newspaper worldwide.

Is Rupert Murdoch’s obsession with the Wall Street Journal going to weaken The Sun, the News of the World, The Times and the Sunday Times? Does the competition have an opportunity to benefit from this in the short and medium term?

My guess is that the answer to both of these questions is yes — notwithstanding recent largesse in terms of new print plants, redesigns and a “permanent” 5p cut in the price of The Sun.

Dow Jones won’t get fixed overnight. Until it does, the rest of the Murdoch empire will almost certainly need to share the burden of rebuilding it.

Memo to private equity: Why not try a proper challenge?

Posted by Peter Kirwan on 2 July 2008 at 17:46
Tags: United Business Media, emap

So a consortium of private equity firms has got round to bidding for Informa.

This, however, feels like one of those deals that — like climbing Mt. Everest — lacks a rationale apart from the fact that it’s capable of being done.

Currently, Informa carries around £1.25bn of debt. At 4.4 times EBITDA (roughly equivalent to operating profits), that already looked high. Indeed, reducing debts was supposedly one of the attractions of talking with United Business Media.

So what will private equity bidders do? Yep: they’re going to increase, rather than reduce, Informa’s debts.

Specifically, according to the FT, they are proposing to ratchet up the company’s loans from £1.25bn to £1.85bn.

This will help to pay for the deal (in the same way it helped the Glazer family buy Manchester United). But it would also mean that Informa’s net debts would amount to more than six times EBITDA.

And take a look at the interest rates that a newly-private Informa would have to pay on its shiny new loans, as reported by the FT:

• £1.39bn at 3.75% over Libor: in other words, around . . . 9.7% *
• £463n in high-yield (a.k.a. junk) debt costing. . . 11.75%

Under these circumstances, after a successful private equity deal, Informa would find itself making interest payments of £188m a year.

In a recent conference call with analysts, Informa suggested that it expected to pay a “blended” interest rate of 6.25% on its debt during 2008.

Of course, this will have increased since then, but it’s worth noting that under such circumstances, Informa would find itself making interest payments of around £78m this year.

What’s £110m between friends?

Actually, quite a lot — even if Informa’s new owners don’t demand much in terms of dividends from their investment in the short term.

If this deal goes through, employees can expect the mother of all cost-cutting programme to swing into action from Day One.

Unless Informa’s board has been deceiving investors about the company’s prospects, this acquisition would take a moderately stressed, but fundamentally solid, company and put it through the wringer without much justification.

By contrast, if private equity were really doing its job, it would be tackling a proper challenge — like restructuring the regional press.

The only silver lining is the market’s suspicion that Informa’s private equity suitors won’t be able to raise the money required for a bid. This is evident in a share price that’s stolidly refusing to perk up to anything like the anticipated offer of 506p.

* I’m using three-month LIBOR (5.95%) here: it seems to be the benchmark.

Who will save Kelvin?

Posted by Peter Kirwan on 20 June 2008 at 11:00
Tags: GCAP PLC, Independent News & Media, Media, News International, United Business Media, emap

The happy-go-lucky saga of Kelvin MacKenzie’s potential candidacy in the by-election at Haltemprice and Howden cannot be allowed to hide the bleak reality.

Kelvin MacKenzie is a man who has lost an empire, but has yet to find a role.

Friends are worried that he is turning into the media world’s equivalent of Gazza.

The drink-sodden Geordie’s latter years were a steady downward spiral of broken dreams in dreary places: Gansu Tianma, Wolves, Boston United, Kettering Town and Burnley.

All the time, he was being helped through the darker moments by old mates from Spurs like Terry Vanables and Gary Mabbutt.

It’s a similar story with MacKenzie, who never properly recovered from the shock of leaving The Sun.

He was edged out of Sky after a few months in 1994. (The job had been arranged by his mate Rupert.) Then it was on to broken dreams in dreary places: LIVE TV, Talk Radio, Highbury House, Media Square.

Every one a winner? Not quite — despite the quiet behind-the-scenes help from his old mates Rupert and Les. At every port of call, MacKenzie’s self-destructive talent for destroying shareholder value resurfaced to devastating effect.

In the Sun column he used to announce that he wouldn’t be standing against Davis, McKenzie admitted that cashflow is, er, a little bit tight.

Will anyone help this once-proud man to conquer his demons? For his own good, MacKenzie needs to be prevented from ever running a business again. . .

Who will buy back Europe’s media industry when private equity has done its work?

Posted by Peter Kirwan on 10 June 2008 at 14:25
Tags: emap

Financial News has a handy assessment of private equity’s rampant thirst for media companies.

The Europe-wide boom in media buyouts started in mid-2006. During the past 12 months alone, 42 media buyouts deals worth Euros 6.5bn have been finalized in Europe.

These are enormous numbers. The spike on the graph that accompanies Financial News’s story would make Jimmy Choo proud.

It’s obvious why. Private equity funds are recycling experts. They take away difficult propositions, knock them into shape or convert them into something else — and then sell on the revamped article.

The size of the private equity boom tells you that stock market investors are seriously spooked about the future of media. Across Europe, they’ve been calling in the recycling experts willy-nilly for the past two years.

All well and good. But as David Gilbertson, the newly-appointed chief executive of EMAP, wrote in an email to staff in April:

At some point, private equity firms sell their stake in the business for more than they paid for it and retire to the wine bar.

Question is: two or three years hence, who will underwrite all of that champagne? Or as Crevan O’Grady, head of media at 3i, puts it in sober fashion: “The question is where the exits are going to come from.”

UBM & Informa: B2B consolidation just got interesting

Posted by Peter Kirwan on 10 June 2008 at 14:13
Tags: Reed Elsevier, United Business Media, emap

How many ways can you skin a cat?

Johnston Press solved its debt problems by asking investors for cash and accepting the advances of a Malaysian billionaire.

Now comes Informa. After experiencing debt-induced palpitations, the £1bn-turnover B2B publisher is wondering whether it might be best to fall into the embrace of United Business Media.

Actually, the merger-of-equals rhetoric isn’t too far wide of the mark. The markets value Informa at £1.8bn and United Business Media at £1.6bn.

Neither company looks particularly distressed in operating terms. Despite the current signs of a slowdown, both Informa and UBM grew at around 9% last year — not bad at all for companies of their size.

There’s symmetry at the level of motivation, too.

Informa has £1.25bn in debts and wants to reduce that number — fast. Combining with UBM, which has minimal debts, will improve matters. Besides, both companies will benefit from up to £50m of cost savings if they merge.

For its part, UBM will benefit from a deal by reducing its dependence on print and advertising revenues.

The result would be a post-print B2B behemoth turning over £1.7bn a year.

How problematic are Informa’s debts? This, after all, is a company that has grown rapidly on cheap credit. In 2001, Informa was a £300m-turnover company focused on subscription revenue and events.

Just seven years later, its revenues have quadrupled via apparently well-chosen acquisitions in academic publishing (Taylor & Francis), conferences (IIR) and research (Datamonitor).

Last year, however, Informa’s net debts reached a peak of 4.8 times the company’s operating profits.

By comparison, Johnston Press was forecasting 2008 net debts of 3.5 times operating profits before company announced its rights issue. (The multiples involved are similar to the ones used by building societies to assess the size of mortgage they’ll give you. If in doubt, think of your salary as operating profit. In the current climate, multiples higher than 3 aren’t popular among investors.)

How did Informa manage to rack up so much debt? During the naughties, it made big acquisitions. But the company’s fast-growing cashflows easily covered its interest bills.

For most of the decade, Informa looked like a good bet to bankers. It was a publisher with interests in virtually every media format you can imagine, apart from the dodgy no-go sectors of print and recruitment advertising. (In 2007, ads generated just 3% of Informa’s revenues).

Now, however, investors are much more worried by the speed with which B2B publishing profits might decline. Under these circumstances, interest repayments could become burdensome — very rapidly.

That’s why, as with Johnston Press, investors have been shunning Informa’s shares. (During the past year, Informa’s share price has dropped by one-third. The UK media sector as a whole has declined by 25%.)

It also looks as if Informa’s buoyant margins have started to slide in recent months. Helpfully, the combination of UBM with Informa should reduce the merged company’s debts to much more comfortable 2 times operating profits by 2009.

In recent years, United Business Media has avoided mega-deals. But that’s not to say that the company’s managers have been asleep at the wheel.

Far from it.

UBM has sold off Exchange & Mart, its 35% stake in Five and the NOP market research unit.

And since David Levin joined the company as CEO in 2005, UBM has spent almost £400m on 52 acquisitions negotiated by three separate in-house M&A teams in London, New York and Hong Kong.

UBM has been snapping up companies at the rate of one every three weeks. Few, if any, are what you’d call traditional B2B media outfits.

The aim has been to diversify away from the company’s declining roots in print.

But if Informa was self-consciously designed and built as a post-print B2B publisher, UBM still resembles a half-renovated Victorian semi with a skip in the drive and a concrete mixer in the garden.

In 2005, print accounted for 46% of UBM’s revenues. Two years later, the figure is 27.5%. Although UBM now draws four-fifths of its profits from events, databases and press release distribution, there’s still a way to go.

A merger with Informa would propel UBM squarely into the post-print future. The combined company would be largely focused on events, market research, databases and so-called workflow solutions.

In this respect, UBM-Informa could come to resemble Reed Elsevier, whose great leap forward involves selling off Reed Business Information, its magazine division.

If the UBM-Informa deal goes through, and if Reed Elsevier offloads RBI this summer, it will mark a decisive parting of the ways among B2B publishers.

Incisive Media, EMAP — plus whoever buys RBI — would remain as the major players in traditional B2B publishing. Two of this trio are already owned by private equity investors. RBI could go the same way, setting the scene for dramatic restructuring away from the limelight of the public markets.

That’s one scenario.

Plenty of others exist — including a potential counter-bid from private equity investors for Informa. Potential bidders understand investors’ fears that UBM will buy Informa on the cheap.

But by sucking hard-to-find debt financing out of the market, an intervention like this could derail Reed Elsevier’s plans to auction off RBI.

What we’re witnessing is top-of-the-cycle consolidation. By the end of this year, the B2B publishing market will have changed out of all recognition.

Whether investors have sufficient appetite for risk to make the pieces of this puzzle fall to earth in an orderly fashion remains to be seen.

Those EMAP bidders in full: £2.5bn and counting. . .

Posted by Peter Kirwan on 4 December 2007 at 23:07
Tags: Media, emap

Reuters offers a run-down of the vultures — sorry, runners and riders in the Great EMAP Auction, the first stage of which ends this week.

Consumer magazines: circa 50 titles

– H. Bauer
– Hearst Corp (bidding with private equity house Exponent, says the Telegraph)
– TPG (private equity)

B2B Publishing:

– Apax (private equity) and Guardian Media Group
– Permira and Providence (private equity)
– Candover and Cinven (private equity)
– Reed Elsevier (”unlikely to push too hard for the business,” say Reuters sources)
Radio:

– Veronis Suhler Stevenson and Vitruvian Partners (private equity, with Phil Riley, former CEO of Chrysalis Radio)
– Global Radio (private equity-funded consortium run by ex-ITV CEO Charles Allen)
– H. Bauer (possibly)
– Guardian Media Group (interested in individual assets, according to the FT)

UBS, the investment bank, expects EMAP to achieve a break-up price of 1,030p. That divides up as follows:

• Consumer magazines: £700m

• B2B Publishing: £1.25bn

• Radio: £400m

EMAP’s shares finished Tuesday at 840p. I don’t know about you, but the substantial gap between that price and the UBS break-up value suggests that investors are plenty nervous about the sale process.

More candidates for top job at GCap

Posted by Peter Kirwan on 27 November 2007 at 10:56
Tags: BSkyB, GCAP PLC, Google, United Business Media, emap

At the Guardian, Caitlin Fitzsimmons and John Plunkett have been chatting to headhunters. They’ve come up with a few more candidates for the vacant chief executive’s role at GCap. All are very long shots.

Malcolm Wall, chief executive of Virgin Media’s content division, is one of them. Perhaps this isn’t so surprising, since Virgin Media now seems more interested in super-fast broadband provision than competing head-on with BSkyB.

But Wall looks increasingly like an almost-man. He almost succeeded Clive Hollick at United Business Media. He almost became chief executive of ITV. And he almost got the top job at EMAP when that still meant something. Too many almosts, we think.

Then there’s Shaun Gregory, the former EMAP radio exec who is now UK chief executive of pan-European free mobile operator Blyk (a long shot, given that Blyk only launched a few months ago).

They’re also suggesting Mark Howe, the country sales director at Google UK. (He’d have to be insane, right?)

Noted + quoted: Monday 26 November 2007

Posted by Peter Kirwan on 26 November 2007 at 10:50
Tags: emap

Government presses broadband providers on speeds
But are they really discussing a £15bn fibre-to-home project?
http://www.ft.com/cms/s/0/fc1fa238-9bc1-11dc-8aad-0000779fd2ac.html

Lawrence Summers, the former US treasury secretary, says we’re odds-on for. . .
. . . “a US recession that slows growth significantly on a global basis”.
http://www.ft.com/cms/s/0/b56079a8-9b71-11dc-8aad-0000779fd2ac.html?nclick_check=1

EMAP break-up bidders face unforeseen costs
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/11/25/cnemap125.xml

Searching for a radio star: who wants to run GCap?

Posted by Peter Kirwan on 26 November 2007 at 10:28
Tags: BBC, Chrysalis Group PLC, Guardian Media Group, Media, Yahoo, emap

The FT’s Ben Fenton has a depressive take on the prospects for commercial radio.

The BBC is “crippling” the commercial sector, writes Fenton. Meanwhile, growth in digital audiences — the object of much investment — is slow. (85% of homes possess digital TV; only 22% possess a DAB radio.)

The remedy? There are two schools of thought.

The first is represented by Grant Goddard of Enders Analysis, who reckons that commercial radio needs “a forward-looking strategy”.

This would involve more competition and plenty of investment in content. Of course, the assumption here is that radio has a future as a growth medium.

The second — much more conservative — approach is being championed by the private equity investors who are bidding for EMAP’s radio business.

In Fenton’s words, this camp would like to see “two, or at most three, big private players sitting around a table and sharing out stations like a fixed game of poker”. The carve-up would reduce competitive pressure. Cost cutting would do the rest.

If you take the view that commercial radio is mature, or declining, the poker game approach makes some sense. The market share configuration of commercial radio looks oddly like that of a growth industry:

GCap — 29%
EMAP — 23%
Chrysalis — 11%
Guardian Media Group — 11%

Meanwhile, three out of four of the leading players are already privately-held, or soon will be.

As Phil Riley, the former Chrysalis Radio chief executive who is running a private equity bid for EMAP Radio, puts it:

“The decisions that need to be taken to make this industry. . . would be taken so much better by companies that were not thinking about what effect such-and-such a move would have on investors and the share price”.

Of course, Ofcom would need to be squared before the game could commence. But the process of softening up the regulator has already started.

According to some, last week’s retirement of Ralph Bernard, the veteran chief executive of GCap, brings the industry a bit closer to Game On.

So who will take the reins at GCap after Bernard’s retirement?

If GCap London’s managing director Fru Hazlitt gets the job, it’ll answer a question I’ve been asking since 2005, when this feisty former sales executive quit her job as managing director of Yahoo Europe to become. . . chief executive of Virgin Radio.

In doing so, Hazlitt became that rare thing — a media executive whose career path led from Web 2.0 back to Big Media. Usually, the traffic in talent goes in the opposite direction.

Getting the top job would also explain why Hazlitt accepted GCap’s offer of a seat on the board when she left Virgin Radio in January of this year.

Hazlitt is known for her amusing turn of phrase. At a recent industry conference, she was asked to comment on a Welsh newspaper story criticizing the London 2012 Olympics.

She commented: “Who cares what the f***ing Welsh think?”

There are some who suggest that Hazlitt left Yahoo — with its famously US-centric management style — after saying the same thing once too often about her American overlords.

At Numis Securities, Paul Richards seems perturbed by Hazlitt’s candour. Her chances of getting the top job won’t have been helped by those comments, he suggests.

Has Richards ever heard the language round a high-stakes poker table? Presumably not. . .

PS: Nice to see Ralph Bernard rolling back 40 years of progress toward gender equality in his final conference call with the media.

“Thank you gentlemen, it’s been a pleasure,” he said at the end.

Then, after a pause: “And ladies, sorry . . .”

Ah, bless.