Irish newspapers: Lagging behind the UK’s anaemic recovery

Posted by Peter Kirwan on 15 March 2010 at 17:31
Tags: Johnston Press

Johnston Press may yet regret not selling its Irish newspapers for a firesale price last year. I say this because of what the company told investors last week about ad revenues at its division in the Republic.

During 2009 as a whole ad revenues at papers like the Leinster Leader and the Kilkenny People fell by a whopping 33% in local currency. Ad revenues at the company’s UK-based newspapers fell by 27%.

Yet as time goes on, the divergence between the UK and Ireland is looking more marked. During Q4, at Johnston Press’s Irish newspapers, print-based ad revenues declined by 21% YOY. During the first nine weeks of 2010, the decline was 23%.

In the UK, Q4 saw print ad revenues decline by 12%. During the first nine weeks of 2010, the decline was 7.6%.

“The improvements in property and motors seen in the UK were not seen in the Republic of Ireland,” the Johnston Press told investors.

No — and they won’t be for quite some time. As it happens, I was in Ireland last week. The figures for GDP suggest that the Republic emerged from recession during Q309, earlier than the UK. But it doesn’t feel that way.

Public spending cuts have been savage, and there’s more to come. The unions are mutinous. In the private sector, wage cuts and longer hours are the norm. The Republic’s banks are still announcing billions of euros-worth of write-offs, mostly connected with property deals.

If George Osbourne and the Daily Telegraph are correct, Britons are living in a fools’ paradise. On this basis, perhaps Ireland offers a taste of things to come if (or when) public spending cuts kick in alongside an anaemic recovery in the UK.

Coincidentally, the outlook seems correspondingly bleak in Northern Ireland. Richard Ramsey, an economist with Ulster Bank, suggests that the private sector in Northern Ireland “continues to experience the most severe squeeze on profit margins of all the UK regions.”

Publishing newspapers is no fun in Britain. In Ireland, it remains a nightmare.

£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.

Johnston Press: A cash machine for the masters of the universe

Posted by Peter Kirwan on 7 September 2009 at 18:07
Tags: Johnston Press

It’s the job of a banker to measure risk, and then place a price upon it. Where risk increases, bankers ratchet up interest rates. If you’re a big risk, money becomes expensive.

The problems start when you look at this process from the perspective of the real economy. From this angle, bankers start to resemble psychopathic hooligans, fond of kicking businesses when they’re down.

Last week, Johnston Press refinanced £485m-worth of debt with its banks. The company had no choice in the matter: some of its debts were starting to fall due.

According to finance director Stuart Paterson, “the initial all-in interest cost” of the company’s refinanced loans is “in the region of 10%”. Previously, it was around 5%. The change has been described by John Fry, the company’s chief executive, as “very painful”.

Certainly, the maths are grim. Last year, Johnston Press would have paid £24m in interest on its £485m debt. This year, it will attempt to pay approximately £48m.

Of course, when you take out a loan, it’s advisable to look at the APR, or annual percentage rate. This represents the true cost of money, including all of the hidden charges. Doing this in the case of Johnston Press produces truly head-spinning results. These, in turn, suggest that John Fry and Stuart Paterson are masters of understatement.

Let’s start out with the various fees and inducements. In return for doing a deal in an entirely non-competitive market, for example, the 22 lending institutions involved in this refinancing will receive fees of approximately £12m. (That’s enough to buy a second-hand Boeing 737, or to employ 480 journalists on £25,000 a year).

Professional fees paid to lawyers and the like will account for a further £3m or so (enough to employ a further 120 journalists for a year).

Next, there are the shares that Johnston Press has offered to the banks as a sweetener. At current prices, the 5% of existing share capital offered to the banks is worth £12.2m. (That’s another 737; another 500-odd journalists’ jobs.)

Although shareholders, rather than the company, will bear this cost, it still represents income for the banks. A source close to Johnston Press this week described the shares as “additional upside” for the banks “in addition to shedloads of interest”.

At this point, the running total for bank payments comes to £75.2m during the next year. Remarkably, this equates to an annualised interest rate of neither 5% nor 10%, but 15.5%.

This, remember, is before Johnston Press repays any of its outstanding loans. Here, too, the terms of the deal are draconian. In addition to everything else, the company has promised to repay £85m of debt by next May.

Now clearly, this is a lot of money for a rapidly-shrinking regional newspaper publisher that turned in £27.5m in pre-tax profits during the first six months of this year.

No doubt the bankers understand the risks involved. Almost certainly, this explains why the refinancing deal includes a ban on capital expenditure above certain (unspecified) limits at Johnston Press.

To enforce this ban, the bankers will send their representatives into the company every year between now and 2012 to go through the books. Their task will be to check that Johnston Press isn’t investing in the future of the business to an extent that endangers remittances to the City of London.

Despite this, there remains a chance that the company won’t be able to repay that £85m by next May. At this point an additional piece of exotica rears its head: penal interest rates known to bankers as payment in kind (or PIK) margins.

In the case of Johnston Press, these additional interest charges start off at 1.5% and increase over time for as long as the £85m remains unpaid. Importantly, they will be levied on the whole of the company’s outstanding debt, not just the £85m.

Johnston Press hasn’t disclosed how high these penal additional interest rates could go. But in a similar refinancing recently agreed with the housebuilder Taylor Wimpey, the surcharges started at 1.5% and rose to 10%.

During the next year, therefore, it’s possible that Johnston Press could find itself effectively paying interest rates of 20% or more on its debts.

In the run-up to last week’s debt refinancing, Margareta Pagano of the Independent On Sunday argued that it would be “inconceivable” for the banks to “pull the plug” on Johnston Press.

Pagano pointed out that HM Government owns 70% of RBS and 43% of Lloyds Banking Group. Both lent sizeable sums to Johnston Press during the boom years. The government, she added, wouldn’t be prepared to see such a big Scottish employer go down the tubes only months before an election.

Of course not. That’s precisely why what the banks have engineered a much quieter and more lucrative fate for Johnston Press.

Measure the costs as you wish: in terms of Boeing 737s. Or in terms of the hundreds, if not thousands, of jobs that will be destroyed.

The effects of this exercise in corporate vampirism will be deep and long-lasting. What used to be a newspaper publishing company has become a machine for generating profits on behalf of the masters of the universe.

The 20/20 Scenario: After a year of recession, what’s next for ad revenues?

Posted by Peter Kirwan on 2 September 2009 at 12:51
Tags: Associated Newspapers, Independent News & Media, Johnston Press

Bankers agree to look away as Johnston Press struggles with debt pile

Posted by Peter Kirwan on 30 June 2009 at 12:29
Tags: Johnston Press

As summer gets into its stride, the burdens weighing upon indebted media companies grow heavier.

Yesterday, Johnston Press announced the postponement of a test of its banking covenants from tomorrow until the end of August.

In plain language, this suggests that Johnston Press is no longer generating sufficient profit to keep its bankers happy — something the company predicted might happen as recently as mid-May.

The temporary solution involves JP’s bankers averting their gaze for the rest of the summer. Meanwhile, talks will continue about the company’s £450m debt pile, most of which needs to be re-financed between now and September 2010.

With dogged determination, finance director Stuart Paterson continues to insist that a “severe cyclical downturn” (rather than structural change or ill-advised borrowing) is to blame for the vast majority of the company’s woes.

Yet not much is going to change between now and the re-scheduled covenant test in late August — at least not in terms of underlying performance. Only recently Johnston Press suggested that analysts should revise their annual profit forecasts toward “the lower end of current market expectations”.

So change of a different kind must be on the cards. In the wake of Digital Britain, Johnston Press may finally succeed in offloading some of its assets. It would be surprising if the company wasn’t already engaged in talks about further industry consolidation.

But how much cash could Johnston Press raise by horse-trading the awkward bits of its portfolio where costs can’t be cut much further? The botched effort to sell its Irish newspapers is hardly reassuring.

Alternatively, the banks may re-finance the company’s loans on aggressive terms or swap some debt for equity. They may also insist that shareholders in Johnston Press share their pain.

This would be an unpleasant prospect for both the founding Johnston family (whose shareholding was diluted from 19.5% to 7.6% after JP’s rights issue last summer) and Tatparanandam Ananda Krishnan, the Malaysian tycoon who spent £80m buying into Johnston Press at significantly north of 100p s share last year. Today, the company’s shares are trading at 19.25p.

Johnston Press is currently telling the world is that negotiations are “constructive”.

It remains to be seen whether they stay that way. Solving Johnston Press’s debt dilemma will prove a lot more problematic than ongoing efforts to do the same at Independent News & Media.

The decline & fall of local newspapers, Part 1

Posted by Peter Kirwan on 23 June 2009 at 12:26
Tags: Johnston Press, Media, Newsquest, Northcliffe Media, Trinity Mirror

Local press consolidation: How Lord Carter and the OFT opened the door for the Big Four

Posted by Peter Kirwan on 18 June 2009 at 10:42
Tags: Johnston Press, Newsquest, Northcliffe Media, Trinity Mirror

Two months ago, Sly Bailey of Trinity Mirror told a Digital Britain conference: “All we are asking for is a 21st century merger regime to support 21st century media.”

This week, The Office of Fair Trading published a 105pp annex to Lord Carter’s Digital Britain report. In an accompanying statement, John Fingleton, chief executive of the OFT, argued that the existing merger regime for local newspapers is already “fit for the needs of the media sector in the 21st century”.

If this was intended as a rebuke to Bailey, the chief executive of Trinity Mirror didn’t take offence.

Why? Here, it’s probably important to notice that Bailey’s argument has focused less on the law itself, and more on its interpretation. When competition regulators examine markets for unfair competition or monopoly, it matters tremendously how they define those markets.

Here’s Sly Bailey putting her case in an interview with Jeff Randall on Sky News back in March:

“The problem with that is that the Regulator looks at our industry and very narrowly defines us as print markets, and what we are saying is no, we now operate in a much wider competitive market not least with, with online.”

Here she is making the same point at the Digital Britain conference in April:

“Any merger regulation which doesn’t take Google, RightMove or Monster in to account isn’t fit for purpose. Allowing us to merge and consolidate is the only way we’ll be able to meet these threats head-on.”

Reading the OFT’s response, it’s clear that the arguments voiced by Bailey (and submitted by the hastily-convened Local Media Alliance) have had an impact. Here’s the OFT response on the question of market definitions:

There is no binding precedent on the OFT or [Competition Commission] to apply a particular market definition (that is, the economic market in which the merging parties are considered to operate), or to carry out its competition assessment in a particular way, for a merger in a sector which has been looked at before.

This flexibility can result in different market definitions being applied in different cases, with the market definition being determined by the evidence.

Specifically, the OFT’s report suggests that data submitted by the LMA was “broadly supportive of the case for. . . wider market” [definitions] that include both print-based and online media.

Lord Carter’s suggestion that Ofcom could play a role is also be significant. As the OFT puts it: “The OFT will ask Ofcom to provide views, arising from its understanding of media markets, on factors relevant to the OFT’s decision.” Ofcom already performs this role in the case of broadcast mergers.

Yesterday, Bailey also suggested that Ofcom’s involvement might be “could be a clever answer to a difficult problem”.

This raises the prospect of Ofcom operating as a discreet sounding board between the regional chains and the OFT. Significantly, this week’s OFT review mentions that the regional chains are at liberty to dicuss mergers and transactions with the OFT before announcing them publicly. *

It also reminds the Big Four (as well as other Alliance members, including DC Thomson, Archant and Guardian Media Group) that prospective deals can be “fast-tracked” out of the OFT and into the Competition Commission. The OFT advises that by going down this route “a more advantageous outcome could be achieved by merging parties”.

The OFT’s careful suggestion that nothing has changed is designed to maintain respect for competition law in other sectors of the economy.

Beneath the surface, though, the regional chains have cleared some or all of the logjam. Expect attempts at consolidation to start making headlines sooner rather than later.

* UPDATE 18/06/2009: It turns out that the OFT already offers “extra-statutory advice on an informal basis on competition issues. . . arising out of a prospective merger”. Since 2006, however, the OFT has “not been approached in writing for Informal Advice on any potential local or regional newspaper transactions”.

Who pays the bill for the boom years? You do: with your job

Posted by Peter Kirwan on 20 May 2009 at 10:55
Tags: ITV, Johnston Press

The bill for the boom years is becoming evident just as the Chancellor of the Exchequer spies light at the end of the tunnel. ‘Twas ever the way.

Johnston Press has just walked away from a deal to sell its Irish newspapers for a reported €40m –- less than one-fifth of the lavish sum it splashed out on them during 2005.

Johnston Press paid for these deals with bank debt. The value of the newspapers in question has been written down drastically on its balance sheet. But in the liabilities column, that debt still exists, emitting death rays that destroy jobs in the real world.

Or take Incisive Media, burdened with so much debt relative to plummeting profits that it resembles an upside-down ziggurat.

Incisive Media will this year attempt to service net debts of around £400m off the back of EBITDA of £45m. No doubt the pressure to cut jobs in order to support profits and thus pay the company’s interest bill has been immense. Quite how fast such a company will grow in the future remains to be seen.

As for ITV, it took last week’s AGM to put the mismanagement of recent years into perspective.

At the meeting, Leslie Hill, the retired chairman of the pre-merger ITV network, asked what benefits had been accrued by the company’s expansion of net debt from £800m to £1.25bn during the past five years.

Back came the answer: the money was spent on sports rights (fail); online businesses (fail); production (hardly a roaring success).

And yes, there was the small matter of a £250m share buyback in 2006.

So ITV borrowed £250m from its banks in order to give the cash to its shareholders?

Buying back your company’s shares from shareholders is an established ruse to support the share price. But doing this with borrowed cash smells very wrong.

In this respect, ITV resembles an athlete who couldn’t keep up with the high-octane pace of casino capitalism. The answer, of course, was the financial equivalent of performance-enhancing drugs. After injecting hot money from loose bankers into the system, ITV was ready to compete.

Companies exist to allocate capital to productive use. The greater their ingenuity in doing so, the greater the return that shareholders will receive.

Doing this is hard. Withdrawing borrowed money from a cash machine and handing it to investors is a lot easier.

I suppose that the relative cheapness of debt relative to equity during the noughties provides a technical explanation of sorts.

Even so: buying back your own shares is an admission that you can’t find anything particularly exciting in which to invest. And yet look at ITV in 2006: this was a company yearning so desperately for creative investment that it enticed Michael Grade, the master impresio, to join it as executive chairman.

Mortgaging the future to invest in the present is one thing. Mortgaging the future to fend off awkward questions about your business model is something else.

ITV’s debt-fuelled share buyback doesn’t quite qualify as a Bernie Madoff-style Ponzi scheme. But it wasn’t that far off, either.

Johnston Press: The fat lady ain’t singing yet

Posted by Peter Kirwan on 13 May 2009 at 12:35
Tags: Johnston Press

Contrary to popular belief, the road to repossession for most hard-up homeowners is a long and winding one. It’s the same with companies.

NTL, the cable company that once employed Lord (Stephen) Carter, spent years staggering from debt crisis to debt crisis. Somehow, though, NTL still managed to find the money required to dig up roads and send out inaccurate bills.

Banks hate calling in debts. Why? Because it forces them to write off assets. Getting involved in debt-for-equity swaps is anathema, too. As recent events have proved, bankers don’t excel at running businesses.

Confronted by their employer’s failure to sell a dozen or so Irish newspapers for a decent price, what should journalists who work for Johnston Press be thinking this morning?

“The prices offered [for the Irish newspapers] wouldn’t have made any significant impact on our levels of debt,” said Stuart Paterson, chief financial officer at Johnston Press.

When your net debts are £448m, is a 10% reduction significant? You might think so. But selling assets at fire sale prices and breaching banking covenants all the same –- well, this wouldn’t make much sense, either. 

Johnston Press is more heavily indebted than most other UK media organisations because it made stunningly bad choices during the past decade. But its back is not yet entirely against the wall. The company’s ability to walk away from an Irish fire sale suggests that it has other options.

Johnston Press will now ask the banks to loosen their covenant requirements in terms of the ratio between operating profits (EBITDA) and net debt. It also wants to discuss “more appropriate” arrangements “extending beyond September 2010”.

Independent News & Media has already performed this trick — provisionally — with banks to whom it owes €590m. (Notably, however, bondholders are still holding out, and INM’s debts are less onerous inrelative terms than Johnston’s.)

Johnston Press will walk into talks with £30m in projected cost savings up its sleeve for 2009. The company is still generating more cash than it pays out. At some point, too, the company will benefit from the government’s impending relaxation of competition law.

We’re not yet looking at a situation in which bankers give up hope of ever getting their money back.

At the moment, I suspect that the real risks have less to do with bank debt than the state of the economy. This morning’s trading updates from Trinity Mirror and Johnston Press offered little sign of improvement.

Every media boss in the land is busily proclaiming that year-on-year comparatives will improve in the second half. Perhaps. But cash is what counts. Life will really only become interesting for Johnston Press – in the Chinese sense – if the green shoots retreat and a double-dip recession becomes a reality.

Under this scenario, attitudes would harden as profits become a distant memory. We’re not there yet, not by some distance.

Counting the cost of Tim Bowdler’s Irish empire

Posted by Peter Kirwan on 11 May 2009 at 12:52
Tags: Johnston Press

The suggestion that Johnston Press may sell its newspapers in the Irish Republic for as little as €40m prefigures an abject conclusion to one of the most spectacular acts of boom-era media hubris. 

During a whirlwind summer of deal-making in 2005, Tim Bowdler, the now-retired chief executive of Johnston Press, invaded the Republic of Ireland. Within weeks, he tied up three deals that transformed the company into the country’s largest publisher of local newspapers.

In June 2005, Johnston Press snapped up five Irish newspapers — including the Leitrim Observer and the Longford Leader — as part of its £155m acquisition of Score Press from Scottish Radio Holdings. 

Next, in September, came the £139m purchase of The Leinster Leader Ltd, home to six weekly paid-for titles including the Leinster Leader, Offaly Express and Limerick Leader.

Also in September, Johnston Press announced that it would spend £65m on Local Press Ltd, the private equity-backed company that had bought out Trinity Mirror’s papers in Ireland and Northern Ireland in 2004. Local Press Ltd was home to four Irish papers, including the Donegal Democrat.

The top line suggests a total outlay of £359m. But not all of this was spent on papers in the Irish Republic. Both Score Press and Local Press had significant operations in Northern Ireland and Scotland.

Opinions vary on how much Johnston Press paid for its titles in the Republic. The figure of approximately €240m has been widely quoted. Johnston Press itself suggests its €173.6m of euro-denominated debt equates to the “approximate value of the investments made in the Republic of Ireland”. 

Of course, the balance of power between euro and sterling has changed immensely since 2005. In 2005, €173.6m — the figure quoted by Johnston Press — equated to £121m. Today, it translates to £165m.

The more widely-quoted acquisition costs (€240m) would be the equivalent of £225m today.

Even if Johnston Press does sell its Irish papers for £50m and then uses the proceeds to reduce its euro debts, the company will remain saddled with at least £100m of loans dating back to its ill-fated Irish adventure.

This year, the cost of making interest payments on that debt will amount to at least £6m.

Given that advertising recession will probably erase most — if not all — of Johnston Press’s free cashflow during 2009, the most obvious way of paying that interest bill will be to make more journalists redundant at the titles that the company continues to publish.

If you require evidence that the casino logic of the noughties (which benefited Johnston Press directors more than most) has resulted in misery for thousands of hard-working journalists, look no further.

But as any fule no, comedy is the reliably dark underbelly of tragedy. As it turns out, the impending sale of Johnston Press’s Irish business provides comedic potential in spades.

It’s worth, for example, taking a look at who is interested in buying the Irish newspapers that Johnston Press admits are now worth a fraction of their original price.

Of the three shortlisted buyers identified by the Irish Times, two profited mightily by selling the very same newspapers to Johnston Press in the first place.

One of the bidding consortia is led by John McStay, the insolvency practitioner and former chairman of The Leinster Leader Ltd. McStay was among the 27 shareholders who sold out to Johnston Press in 2005.

Another consortium is headed by Richard Findlay, the former boss of Scottish Radio Holdings, which offloaded Score Press to Johnston Press in 2005.

But perhaps the biggest belly laugh of all should be reserved for the financier who originally induced Tim Bowdler and Johnston Press to harbour such overblown ambitions for their Irish empire. 

Back in 2005, Cathal Friel was a director of the Dublin-based investment boutique Merrion Corporate Finance. His firm advised Johnston Press on its deal-making in 2005.

Friel occupies a special place in the pantheon of spielers who talked up the Celtic Tiger. Back in 2005, he endorsed Johnston Press’s acquisitions like this: “The Irish economy holds out the prospect of double-digit growth in newspaper advertising, which compares to a stagnant market in Britain.”

Last year, Friel — who seems to have a monopoly on brokering the sale of local newspapers in Ireland – found himself selling off a small family-owned newspaper in Galway. 

Against the background of an 8.5% contraction in Irish GDP, his tune sounded familiar: “The business model is changing, there are definite challenges, but in many ways the future has never been brighter for the regional media in Ireland.”

Regardless of what happens to Ireland’s regional newspapers, the future certainly does remain bright for Cathal Friel. As the founder of Raglan Capital, the indomitable wheeler-dealer has been retained once again by Johnston Press, this time to advise the company on its withdrawal from the Irish Republic.