Manchester Evening News: Did GMG invest in “things that matter”?

Posted by Peter Kirwan on 11 February 2010 at 15:39
Tags: Guardian Media Group, Media, Trinity Mirror

Over at t’other place, newsquestslave casts a critical eye on yesterday’s post comparing GMG and Trinity Mirror as owners of the Manchester Evening News.

(S)he takes issue with my suggestion that GMG invested steadily in its regionals during the late noughties, even as revenues and profits declined.

1) Operating expenditure isn’t everything

I looked at GMG’s track record in terms of operating costs (wages, rent, print contracts etc). But newsquestslave suggests another dimension:

“There is no ‘investment’ as in new capital raised from shareholders - as there hasn’t been anywhere in the regional press for decades.”

The argument seems to be that GMG’s regionals were just as bad as everyone else in this respect.

But newspaper companies generate lots of cash: this is one of the reasons so few have gone bust during the recession. It’s very rare indeed for them to ask shareholders for additional capital. Johnston Press did it in extreme circumstances, to pay off debts. But elsewhere, even the huge investment in new printing presses that’s taken place in recent years has been financed out of cash flow and debt.

In any event, you’d be hard-pressed to locate shareholders who would hand over new capital to finance operating expenditure (in the form of money to hire more journalists, for example).

On this basis, criticising newspaper companies for not raising more capital from shareholders is a red herring.

By looking at operating costs, I was trying to narrow the focus to factors that affect the quality of journalism on a day-to-day basis. It still think this is a valid way of looking at GMG’s track record as a regional newspaper proprietor.

2) What did GMG’s regionals spend all that money on?

Here, newsquestslave offers two arguments:

Given that things like newsprint have gone up in price, and that GMG regional has squandered cash on the Channel M disaster and other ego projects the investment/spending in the things that matter to newspaper readers, ie newspaper editorial, have declined sharply.

On “disaster/ego projects”: yep, it’s certainly possible that GMG chose to spend money on the wrong things. Yesterday, I suggested that this might have been the case. Of course, lots of companies do this. It’s called risk-taking. The question is whether GMG took more risks, or worse risks, for longer than its rivals.

On paper costs, Newsquestslave has a point. Buying paper accounts for 15%-20% of costs at a typical newspaper. So even though GMG maintained operational expenditure between 2004-2009, the rising cost of newsprint probably did squeeze out some investment in journalism at GMG’s regionals. Yet rising paper costs were a common factor for everyone.

That said, Newsquestslave’s points did make me backtrack on the numbers I dug out yesterday. I wanted to see whether I could reinforce my argument.

So today, I’ve got two graphs for you. The first is identical to yesterday’s effort. It shows how operating costs remained fairly static at GMG’s regionals as profit (and revenues) declined between 2004 and 2009.

The second graph shows how Trinity Mirror’s managers responded to declining profitability in a very different way. Trinity Mirror squeezed operating costs in a way that GMG simply didn’t, or couldn’t. On this basis, I stand by the suggestion I made yesterday:

GMG’s exit from the market is worrying for anyone who believes that sustained investment by large companies with deep pockets is the only thing that will save local journalism. The numbers suggest that GMG has been there, done that — and met with little or no success. The notion isn’t yet dead: but it has sustained serious damage.

As I hinted earlier, there’s one proviso. Did GMG’s regionals take too many risks? If more had been invested in “newspaper editorial”, and less on peripheral projects, would things have turned out differently?

Could the Manchester Evening News have remained a viable part of Guardian Media Group? Was Channel M responsible for that not happening? Some, including AndrewT23at Media Guardian, have suggested that this was the case:

As for GMG having to support a regional title, the MEN is still very capable of making money, even for a cash sieve like the Guardian, but saddling it with the basketcase TV channel that is Channel M was just too much.

If you look around the MEN newsroom at present you can see the damage caused by making a profitable regional newspaper prop up a vanity project TV station and, indeed, The (non Manchester or Northern) Guardian.

If you’ve got a view, leave a comment below, or send me a suitably anonymous email here:mediamonied@googlemail.com

Footnote: On the Trinity Mirror graphs, you’ll note a few asterisks. For the detail-oriented among you, here’s what they mean:

* = adjusted retained businesses

** = operating costs assumption for 2009 = 2 x 1H09 operating costs (reality will be lower).

GMG & The Manchester Evening News: “C’est magnifique, mais ce n’est pas la guerre”

Posted by Peter Kirwan on 10 February 2010 at 13:19
Tags: Guardian Media Group, Media, Trinity Mirror

A few kind souls at Hold The Front Page are predicting what awaits employees of Guardian Media Group who will soon start working for Trinity Mirror:

“For those who thought [GMG Regional Media chief executive Mark] Dodson was a ruthless hatchet man, you ain’t seen nothing yet…”

“God help them….If they think they’ve been squeezed in the past, wait til TM get their mitts on them, then they will understand that it is possible to get blood out of a stone.”

Among other things, the perception that GMG’s regionals have already been “squeezed” by a “hatchet man” feeds into the suggestion that the Manchester Evening News and its stablemates have been plundered relentlessly to sustain outsized losses at the Guardian and the Observer.

Ratcheting up the rhetoric a notch or two, Ian King, at the Times, even suggests that “for many MEN staffers, the new owners could scarcely be worse than the old ones”.

The news coverage certainly suggests that cost cutting became endemic at GMG’s regionals during the late noughties. Disputes over job losses flared up repeatedly as revenues declined: in 2006, 2007 and again in 2009.

Yet the numbers in GMG’s annual reports suggest a different picture. Remarkably, GMG held operating costs at its regional newspapers static between 2004 and 2009. Year after year, as revenues and profits declined, GMG carried on ploughing the same amount — more than £100m a year — into reporting, presenting and distributing the news at its regionals.

The contrast between steady investment and the downward trajectory of operating profits during the same period is painful. (In the graph accompanying this piece, I’ve rebased both sets of numbers to 100 as of 2004 to make comparison easier).

GMG’s exit from the market is worrying for anyone who believes that sustained investment by large companies with deep pockets is the only thing that will save local journalism. The numbers suggest that GMG has been there, done that — and met with little or no success. The notion isn’t yet dead: but it has sustained serious damage.

Did GMG simply invest in the wrong stuff? Or were GMG’s regional journalists living in a relative paradise? I suspect that the commenters at HTFP are probably closer to the truth than the deputy business editor of the Times. Working for Trinity Mirror will be a whole lot different.

Bosquet, the French general, famously described the charge of the Light Brigade at the Battle of Balaclava in 1854 in the following terms: “C’est magnifique, mais ce n’est pas la guerre”.

No doubt Sly Bailey, the chief executive of Trinity Mirror, thinks similarly about GMG’s recent track record as regional newspaper proprietor.

£7m for the Manchester Evening News: Carolyn McCall isn’t related to the Barclay brothers

Posted by Peter Kirwan on 10 February 2010 at 01:17
Tags: Guardian Media Group, Johnston Press, Trinity Mirror

For most Britons, the Blair-Brown boom reached a peak in early 2008. Yet as always, the news business was ahead of the game. For most publishers, revenues hit an all-time high during 2004-2005.

One deal, in particular, signalled that we had reached the peak.

In December 2005, Johnston Press bought Scotsman Publications from the Barclay brothers for £160m. This astonishing sum represented 2.5 times the revenue generated by The Scotsman, Scotland On Sunday and the Edinburgh Evening News during the previous year.

Half a decade later, what’s to be said about Guardian Media Group’s decision to sell its 32 local newspapers to Trinity Mirror?

If GMG had sold out to Johnston Press in 2005, it might have hoped for a price tag of over £300m (on the basis that its regionals generated revenues of £128m the previous year).

Today, however, GMG is selling its regionals for £7.4m in cash.

Some will criticise GMG for not persisting with its stricken cash cow. Others will allege an excess of sentimental attachment to the Manchester Evening News.

But let’s not get too aggressive, or too dewy-eyed. It’s worth remembering that GMG’s regionals delivered nearly £90m in operating profits between 2005 and 2008. If we’re going to compare today’s thin-looking deal with what might have been possible in 2005, we’ll need to make allowances for that £90m.

In addition, as part of today’s deal, GMG finds itself relieved of the contractual need to pay £37.4m to Trinity Mirror to print the Manchester Evening News.

This represents a real-world benefit for GMG, which continues to eat through its cash reserves in a manner that calls to mind Morgan Spurlock consuming Quarter Pounders in Super Size Me.

So add it all up: in total, GMG has made a return during the past five years of something like one times its regional newspapers’ current annual revenues (and more if you make allowances for not having to pay MEN’s print bill in the future).

This isn’t the kind of coup that will see the board of GMG elected to the deal-makers’ hall of fame alongside David and Frederick Barclay. But it isn’t that bad, either.

Will the Guardian and Telegraph play nice again?

Posted by Peter Kirwan on 5 February 2010 at 14:28
Tags: Guardian Media Group, Telegraph Media Group

The ongoing spat between the Telegraph and the Guardian has been entertaining. But I wonder whether it might be drawing to a close.

In recent months, the Telegraph has become deeply interested in the Guardian’s financial performance, variously describing this as “grim”, “disappointing”, and “disastrous”.

The Guardian’s apparent inability to impose compulsory redundancies on editorial staff has become a favoured theme. In early December, the Telegraph spoke to one unnamed insider at GNM who described “highly-paid” staff journalists immune to compulsory redundancy as “bed-blockers”.

Another Telegraph story suggested that GNM employs so many editorial staff that “one features writer is reputed not to have had his name in the paper for more than a year”.

To be sure, Telegraph Media Group makes profits and Guardian News & Media makes losses – thumping great big losses. But why is the Telegraph so preoccupied with an unquoted rival whose fate doesn’t matter to investors reading the paper’s business pages?

Perhaps the answer lies in the pages of Media Guardian. In late November, Media Guardian ran a piece that portrayed Tony Gallagher, the Telegraph’s new editor, as the kind of Mail executive who destroys professional opponents after breakfast and eats their body parts for lunch — with fava beans and a nice Chianti.

Awkwardly, the piece suggested that Gallagher, during his long career at the Mail, hadn’t been averse to doing “all the things that the PCC wouldn’t allow you to do now”. One unnamed source told Media Guardian: “I can’t think of anyone in our profession that I would least like to cross the threshold of my home.”

Elsewhere, at the Observer, in early December, Peter Preston offered his best wishes to Gallagher, before going on to argue that the Telegraph’s “perpetual”, “slithering” circulation decline has been a problem since the late 1960s. The implication was that Murdoch MacLennan’s modernization project is pointless.

Sadly, the fun may be about to end. An unnamed source — yes, another one – insists that the Guardian “has no desire to compete in a tit-for-tat way” with the Telegraph.

Is that an olive branch being extended to the Telegraph? Coincidentally, Carolyn McCall, the chief executive of Guardian Media Group, gave an interview to the FT this week in which she suggested that GMG is coming “out of the recession very strong”.

“Yes we have made redundancies,” said McCall, “yes we have got the cost base down to where we want it now. . . They have done it, the GNM management are so on track. The Guardian is in good shape.”

Cumulatively, this sounds like an effort to draw a line beneath damaging coverage of the Guardian’s financial performance.

Whether the Telegraph takes the hint remains to be seen.

Telegraph vs. Guardian: The mystery of 100 job losses

Posted by Peter Kirwan on 18 December 2009 at 14:20
Tags: Guardian Media Group

Guardian Media Group is hopping mad with the Daily Telegraph for revealing its discussions with Trinity Mirror about a possible sale of the company’s regional newspapers.

GMG has been stung by several aspects of the Telegraph’s story, including the allegation that the company is turning its back “on its heartland to keep the Guardian afloat”.

The Telegraph’s suggestion that GMG is engaged in a “fire sale” hasn’t gone down well either. Inevitably, GMG is also irritated by the fact that this story was written in the first place. GMG’s managers could do without the constant flow of leaks emanating from Kings Place.

But GMG seems particularly irked by the Telegraph’s suggestion that selling its regionals represents “a desperate attempt” to save 100 jobs at the Guardian and the Observer. No doubt that’s partly because the Telegraph’s claim opens up all of the old fault lines that exist between local and national journalists inside GMG.

But I was also intrigued by Roy Greenslade’s take on this. Yesterday afternoon, he offered up what sounded like a sanitised version of GMG’s reaction to the story:

There is no relation between those very separate matters. And there is no saving of those jobs.

The dispute is a bit mysterious. For a start, it’s not clear which “100 jobs” we’re talking about. Neither Greenslade nor the Telegraph have shed much light on this.

Are either or both of them referring to the 100 commercial jobs losses already planned? When it comes to redundancies, of course, numbers get thrown around with abandon. So perhaps we should be thinking about the 80 journalists who accepted voluntary redundancy at the Guardian and the Observer earlier this year?

If the Telegraph’s “100 jobs” includes all or some of these, this part of the story looks naïve. You don’t negotiate redundancy with 180 staff only to turn on a sixpence when Sly Bailey arrives in reception carrying a briefcase full of £50 notes.

But perhaps the Telegraph was hinting at something else. Perhaps it meant to suggest that selling the Manchester Evening News could obviate the risk of compulsory editorial redundancies at GNM when the division’s latest – and second – offer of voluntary redundancy ends in January.

Under the renegotiated house agreement that accompanied GNM’s move to Kings Place, the old prohibition against compulsory redundancies was set aside in favour of the idea that they might be possible “in extreme circumstances”.

Depending on how you look at the numbers, GMG’s cash position can be characterized as fairly extreme. GNM’s losses certainly qualify as such.

Compulsory redundancies remain a real possibility. If GNM tries to impose job cuts, a ballot for industrial action will follow. It could all get very ugly, very quickly.

But if GMG sells its regionals to Trinity Mirror for £40m, the NUJ will pursue the resulting logic. Surely that’s enough lucre to fend off a few dozen involuntary job losses? Surely £40m for GMG would make GNM’s situation less extreme?

Roy Greenslade’s suggestion that there is “no relation” between selling GMG Regional Media and rightsizing GNM’s cost base is made of wafer-thin stuff. Of course there’s a relationship. It’s called realpolitik, and it runs right the way through Kings Place.

Panic or logic: Selling off the Manchester Evening News

Posted by Peter Kirwan on 18 December 2009 at 12:50
Tags: Guardian Media Group, Trinity Mirror

In itself, GMG’s effort to sell its regional newspapers to Trinity Mirror isn’t surprising. The timing is interesting, though.

Only a few weeks ago, sources at GMG played down the chances of selling off the Manchester Evening News in the near term. My assumption was that a sale would have to wait until economic recovery took hold. But now we’re looking at “exploratory talks”. It’s easy to interpret this as a distress signal on GMG’s part.

In this respect, the Daily Telegraph didn’t disappoint yesterday.

Any disposal would amount to a fire sale because it is thought that GMG Regional would fetch less than £40m. Before the collapse in newspaper advertising, the Manchester Evening News alone was estimated to be worth about £200m.

Yes: but will the Manchester Evening News or GMG Regional Media ever be worth £200m again? If anyone believes this, I’ve yet to meet them.

Set aside the talk of a “fire sale” for a moment. At a deeper level, there’s some logic, rather then panic, in this potential deal.

If, like GMG, you’ve already made the decision to get out of regional publishing, now might not be a bad time to sell. The run-up in newspaper valuations has reached a plateau. The prospect of a double dip recession looms.

Remember, too, that GMG’s regionals are a sub-scale operation. The economies of scale being generated by Trinity Mirror are the only source of profits in a declining market. Even if GMG pours management time into its regionals, it won’t be able to catch up.

Perhaps, too, it’s better to sell small assets as consolidation kicks off. The alternative involves the risk that you’ll be left behind when the serious horse-trading begins.

A window of opportunity may well have opened on Trinity Mirror’s side. For a long time, Sly Bailey has looked like the only regional publisher with the wherewithal to initiate consolidation.

Plainly, however, Trinity Mirror has been fretting about the attitude of the Office of Fair Trading. The review of newspaper competition rules initiated by Lord Carter and carried out by the OFT did little to calm its nerves.

Now, however, the election of a new government is only months away. The Cameroons will take a more relaxed view of consolidation.

The City is increasingly impressed with Trinity Mirror’s Terminator-style cost-cutting. Investors might cut Sly Bailey some slack if it can beat GMG down on price.

This vision of jigsaw pieces falling into place with slick precision is tempting. But let’s not get too carried away.

GMG’s situation is tricky. Pre-tax losses at GMG reached £90m in the year to March 2009, and the company will deliver another terrible set of results this year. The company’s cash cushion has started to look uncomfortably thin.

But GMG’s situation isn’t all bad. It has tiny debts, and could raise cash from banks or investors on a temporary basis if required. Emap has its problems, but it’s too early to suggest that GMG won’t get a return on the £300m it invested there 18 months ago.

The Telegraph is within its rights to call this a fire sale. Yet GMG doesn’t need to sell at any price, even if Trinity Mirror appears to be the only interested party.

In deals, it’s the future, rather than the past, that matters. Companies are valued on a multiple of their likely future profits, discounted for inflation. If the value of GMG Regional Media continues to fall during the next decade, selling up for £40m in 2010 could come to be viewed as a smart move.

This is the possibility that should haunt local journalists everywhere. The emotions that stalked local newsrooms when DMGT tried to offload Northcliffe in 2005 are in play once again.

The silver lining, if there is one, lies in the opportunities that will be created by further consolidation. Cost-conscious bosses working at 10,000 feet create organisations in their own image. In the chinks and voids around the footprints of the last remaining giants, new business models will emerge — eventually.

Guardian News & Media: Not that far out of line with the market, after all

Posted by Peter Kirwan on 18 November 2009 at 15:34
Tags: Daily Mail & General Trust, Guardian Media Group, Trinity Mirror

Did 25% of Guardian News & Media’s revenue base really disappear into thin air between April and September?

Last week, the Guardian itself left the door open to this interpretation. The Times appeared to confirm it, suggesting that revenues at the Guardian and the Observer had declined by £33m since April.

The contextual maths are unpleasant. In its last financial year, which finished in March, GNM generated revenues of £253m. For April-September 2008, it’s reasonable to assume that it generated half as much: say around £126m. A revenue decline of £33m during the same period in 2009 would have represented a fall of 26%.

Worse than anticipated? This would have been stunningly bad. Consider the following comparatives for total revenues (not just advertising revenues):

Trinity Mirror

– January-June: -17%
– 1st July-25th October: -12%

Independent News & Media

– January-June: -15% (in constant currency)

Associated Press

– March-June: -12% (underlying YOY figure, excluding Evening Standard)

Comparisons like these suggest that GNM’s revenue declines for April-September should be running at around the mid-teens in percentage terms.

As it turns out, that’s exactly what’s happening. A spokesperson for GMG tells me that the £33m YOY decline was a projection for GNM’s financial year as a whole — not for the six months between April and September.

On that basis, GNM should find itself 13% down on last year when its financial year comes to an end next March.

Worse than anticipated? Perhaps. But only slightly. Declines of this scale are not far off what the company was predicting last summer.

That said, GNM’s results for 2009-2010 — due to be unveiled next summer — could be the ugliest of the down cycle.

So far, GNM has cut £25m out of its cost base against 2008-2009. More cuts are on the way. But continuing revenue declines will punch another big hole in cashflow. On top of that, there’s the prospective impact of redundancy costs (these might be exceptional costs, but they represent real cash payments, unlike the notional write-downs in asset values that have become endemic among media companies).

Earlier this year, GMG’s chief executive Carolyn McCall outlined her timetable for turning around the group’s losses. “Can we afford it this year?” she asked. “Yes, but can we afford it for the next three years? No.”

The evidence suggests that McCall is on schedule. 2009-2010 won’t be a pleasant experience for GNM, but it won’t be anywhere near as bad as last week’s stories implied. By contrast, 2010-2011 should be a whole lot better.

Newspapers & live events: There’s money in affinity

Posted by Peter Kirwan on 21 August 2009 at 15:02
Tags: BBC Worldwide, Daily Mail & General Trust, Guardian Media Group, Media, News International

Simon Jenkins went to four festivals this year: Glastonbury, The Hay Festival, the Welsh Eisteddfod and the CLA Game Fair.

(The CLA Game Fair? For metropolitan types among you, the CLA bit stands for Country Land & Business Association, and its Game Fair is a three-day festival of country pursuits.)

Last week, Jenkins found himself marvelling at the vast crowds that attended each of these events — vast crowds “being parted from considerable sums of money in the cause of affinity”.

Sensibly, Jenkins went on to argue that newspapers should emulate the music industry, which has “cast off its enslavement to recording studios and recast itself, almost in Victorian mode, as a mass movement for live audiences”.

At EMI, Guy Hands wouldn’t recognise this description of an industry “casting off enslavement”, but one thing’s for sure: if it doesn’t already, the music industry as a whole will soon generate more revenue from live performance than it does from the sale of CDs and MP3 files.

The increase in performance revenues is compensating for the decline in physical music sales. The lessons for publishers are obvious.

As our lives become more virtual, as the number of shared national moments on telly dwindles, we crave live experience more than ever. It’s partly a tribal thing: attending Glastonbury or Glyndebourne says a lot about who you are.

It’s also partly about the increasing importance of experiences as opposed to products. Not for nothing does an entire sub-sector of the marketing industry devote itself to experiential marketing. In an increasingly digital world, retailers need to find more ways of getting their products in front of us so that we can look at them, touch them, smell and taste them.

Broadcasters have been quicker than newspapers to satisfy this craving. Apparently, the public’s taste for Top Gear has been sufficient to sustain “a £20m world tour”, produced in associated with Clarion Events.

Like Top Gear, Kevin McCloud’s Grand Designs started out as a reviews-based show, only to become a vehicle for all sorts of collectively-held aspirations. The original TV programme (produced by Fremantle Media and broadcast on Channel 4) has given birth into a huge exhibition (organised by Media 10).

Along the way, there’s been a massive expansion of focus. On telly, Grand Designs concerns itself with self-build homes. At the NEC, in October, it promises to interest “anyone who has an interest in design, build, interiors, shopping, home wares, gardens, kitchens & bathrooms, and innovation”.

Who’s to say that the Mail, the Guardian or the Times or the Telegraph can’t mobilise similar numbers of fans? Grand Designs is watched by around 5m viewers eight times a year, with repeats driving up reach. But the whitetops reach several million readers every day, and their brands have been around a lot longer.

Intrigued, I decided to look up the financial performance of the four festivals that Jenkins mentions in his column. The results were interesting:

Glastonbury: As the great-grandaddy of them all, Glasto is an exception to the rules in terms of size. But its size hasn’t restricted growth: even this well-established event is growing rapidly. In 2005, revenues were £16.3m. As you might recall, there was no event in 2006. But in 2007, revenue shot up to £22.3m. The numbers make me wonder whether Glastonbury broke through the £40m barrier this year.

The Hay Festival: Here, too, there’s significant growth. In 2005, Hay Festival of Literature and the Arts Limited generated £1.2m in revenues. Revenues grew by 22% in 2006, and by a further 26% in 2007. But 2008 was the breakthrough year, with revenue expanding by 53% to £2.9m – probably due to international expansion. Whatever the reason, the company behind The Hay Festival has more than doubled in size in the space of three years.

The National Eisteddfod Of Wales: The only registered charity on the list, and the only one that describes itself as “a process rather than an event”. Eisteddfod has reputedly been dogged by financial problems. But its topline looks healthy enough. In 2008, it generated revenues of £3.8m.

The CLA Game Fair: According to the most recent set of accounts at Companies House, the Game Fair generated revenues of £3.2m in 2006. The event was called off in 2007 “due to the appalling weather”. But in 2008, it generated £3.8m. Once again, the growth rate is impressive: 18%.

The story is consistent and obvious. Simon Jenkins is correct: there’s money in live events. Investing in them should be a no-brainer for newspapers.

Guardian Media Group: Mr Marx’s incredible shrinking cash cushion

Posted by Peter Kirwan on 16 June 2009 at 17:35
Tags: Guardian Media Group

So we learn that Guardian Media Group will report an overall operating loss for the 12 months to March 2009 — its first such loss for several years.

How big is the deficit? We’ll find out in early August, when GMG publishes its accounts. But based around reports of McCall’s presentation to staff yesterday, here’s what we know already:

Guardian News & Media (home of GMG’s nationals): -£35m

GMG regional media: +£1m

GMG property: Unknown loss

GMG radio: Unknown loss

Clearly, the deficit will be more than £35m. In addition, we now know that GMG won’t be benefiting from its share of the profits generated by EMAP and Trader Media Group. These should look something like this:

Trader Media (50% owned by GMG): +£50m

EMAP (30% owned by GMG): +£30m

These profits will be ploughed back into reducing debts inside these two operations, which are co-owned with Apax Partners. In the words of Carolyn McCall, GMG has exchanged “short-term profit” for “long-term security”. The hope is that GMG will “make a good return” when it exits both of these investments.

No doubt it will – in or around 2011-2013.

Meanwhile, take a look at GMG’s cash position. At the moment, GMG probably possesses something like £150m in cash, plus £200m that has been placed into a long-term investment fund.

Compared to the losses being incurred at Guardian News & Media, these diminished cash holdings could rapidly start to look thin. The cushion supporting Mr Marx’s posterior has shrunk significantly.

Psychologically, recycling profit into off-balance sheet debt and locking up £200m for the long term does something important: it strengthens the case for commercial aggression at the company’s national newspapers and guardian.co.uk.

As its rivals never tire of pointing out, Guardian News & Media isn’t run like a normal business. Internally, however, it may be starting to feel like one.

Having successfully reduced the overall size of GMG’s cash cushion, Carolyn McCall now has the leeway to impose a challenging fitness regime on these prize assets. In the words of the old saying: “A recession is a terrible thing to waste.”

Around £20m in cost savings are already planned at Guardian News & Media. This may sound like a lot, but it only represents 7.5% of the division’s 2008 cost base.

If ad revenues don’t improve in the second half of this year, there may well be room for further cuts.

The Guardian’s Marx-Engels model: Under pressure, but far from broken

Posted by Peter Kirwan on 12 June 2009 at 15:42
Tags: Guardian Media Group

Enemies were elated and then deflated; well-wishers concerned and then (somewhat) relieved.

This week’s Telegraph story suggesting that Apax Partners, the private equity group, had written off its £300m investment in EMAP initially seemed to promise a world of trouble for Guardian Media Group.

In much the same way that Engels subsidized Marx’s writing career by managing grim factories in Manchester, GMG’s cash cows are supposed to provide the wherewithal for the Scott Trust to safeguard the Guardian “in perpetuity”.

Titter at the analogy if you like, but the arrangement has proved durable.

Last year was indicative. GMG’s national newspapers (and sites) lost £25m at the operating level. But after adding in contributions from less glamorous but highly profitable subsidiaries, GMG as a whole delivered a slim operating profit of £5.1m.

Currently, GMG owns two main cash cows:

• 50.1% of Trader Media Group (the rest held by Apax Partners)
• Roughly 30% of EMAP (acquired with Apax Partners in March 2008)

In addition, at 30 March 2008, GMG had £577.5m of cash on its balance sheet, some of which appears to have been earmarked for investment in EMAP. Shorn of that amount, GMG should currently have at least £300m in the bank.

But back to the main question: does Apax’s write-down mean that GMG’s investment in EMAP is also worthless?

The answer is no -– on at least two levels. The wording of the Telegraph’s report is vague. Actually, as The Guardian’s Richard Wachman subsequently confirmed, what has been written off is Apax’s £300m cash investment in EMAP.

In addition, Apax borrowed heavily in order to buy approximately 70% of the B2B publisher. So far as we know, these loans haven’t been written off.

With EMAP expected to generate profits of £100m this year, Apax’s bankers could be forgiven for thinking that their investment still retains some value. Presumably, the biggest risk-taker (Apax) has been forced to take a bath first. (The recent suggestion by David Gilbertson, chief executive of EMAP, that his company is “worth around $1bn (£0.6m)” supports this idea.)

As more than one observer has pointed out, the Apax write-down has been dictated by accounting rules that force all companies to “mark” their assets to currently-prevailing market prices.

In the run-up to Apax’s write-down, share-based media valuations reached a nadir. Almost certainly, Apax will write back some of the value of its £300m during the next year or two. In other words: Apax’s write-down doesn’t mean that EMAP is worthless in the long-term. Not by a long chalk.

At this point, two further questions suggest themselves:

Q: Will GMG be forced to write down the value of its own investment in EMAP in its forthcoming annual report?

A: Quite probably. But if it does so, GMG won’t be alone. Every media company in the developed world has written down the value of its assets during the past year.

Q: Will an EMAP write-down have any material effect on GMG?

A: Almost certainly not. Only companies that owe large amounts to banks, or which depend on stock market investors, need concern themselves with the theoretical weakening of their balance sheet induced by mark-to-market accounting. GMG neither owes unsustainable debts; nor is it quoted.

So much for GMG’s balance sheet. By contrast with those of its rivals, it still looks reasonably spruce.

In the real world, however, it’s cashflow that counts — for Guardian Media Group (and everyone else). On this basis, GMG’s forthcoming accounts for the year to March 2009 will tell a number of intriguing stories.

We already know one of them. This week, Carolyn McCall suggested that EMAP is generating £100m of profits on an annual basis. This will generate a windfall worth tens of millions for GMG, which owns 30% of EMAP.

It’ll be needed. While she mentioned EMAP, McCall failed to talk about the performance of Trader Media Group, in which GMG holds a 50.1% stake.

Last year, the publisher of AutoTrader delivered operating profits of £91m. This year, the contribution will be thinner. Online or offline, classified auto advertising is hardly flavour of the month.

Profits will also be much-reduced — possibly non-existent — at GMG’s portfolio of regionals. Last year, the regionals delivered an operating profit of £14.3m. No-one is expecting a repeat performance this year.

With some of its cash cows malfunctioning, trading at the Guardian and the Observer has become a very real concern in recent months. As one executive puts it, GMG’s nationals have “veered off course” in terms of profitability “by several tens of millions”.

Last year, Guardian News & Media, the GMG division that contains the Guardian, guardian.co.uk and the Observer, delivered a £25m operating loss.

It would be foolish to bet on that number being smaller this year.

Similarly, however, it would also be foolish to anticipate a full-scale business model meltdown at GMG. The Marx-Engels model is under significant stress. But it’s a long way from being broken.