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.

Morgan Stanley hails Roger Parry as King of the Bears: Prepare your handbasket for hellish ordeal, say bankers

Posted by Peter Kirwan on 18 June 2008 at 12:47
Tags: Daily Mail & General Trust, Future, ITV, Johnston Press, Trinity Mirror, United Business Media

Nasty. Morgan Stanley has slashed its profits forecasts for the media sector in 2009 and 2010.

In an aggressively-worded note, the bank’s media analysts foresee distress spreading from consumer-facing media companies to their B2B counterparts. Like this:

Away from the consumer-related areas we see pressures mounting in the corporate environment.

Finance directors looking into the second half of 2008 and into 2009 are likely to seek to reduce controllable costs whether in advertising, marketing, information costs, travel and other expenses.

This means that, while the thrust of this note is to reduce expectations for consumer-related companies, we also take down numbers for those exposed to B2b markets and professional publishing.

Morgan Stanley has cut its profit forecasts for what it calls “advertising inventory companies” (I guess this means anyone who sells advertising) by a whopping 17%.

Advertising and marketing agencies have been cut by 12%. BSkyB is down by 10%. And “professional publishers” are down by 6%.

Morgan Stanley is very bearish on what it calls the “cyclicals” (ITV, Trinity Mirror), which remain dogged by “a combination of structural deterioration, heavy downgrades and, in some cases, leverage fears”.

One possible exception is Johnston Press. Having endured the pain of an early rights issue, the company “could produce very attractive returns on a 2 year view”.

(Note that reference to “heavy downgrades”: The point here is that share price collapses haven’t yet been “heavy” enough to generate buying signals. The implications of this are fairly scary.)

Among the few positives, Morgan Stanley regards United Business Media and DMG&T as “safe” and “interesting”.

A big shake-out is predicted for adland, as revenue growth moves from 3.75% in 2008 to -1% in 2009. As Morgan Stanley puts it:

In 2008, boosted by a strong start to the year and by the ‘super quadrennial’ factors (Beijing Olympics, US Presidential elections, Euro 2008) most forecasters have assumed organic revenue growth of around 5%.

In 2009 estimates for organic revenue growth tend to range in the vicinity of 3-4%. Our starting point is now to ask why there should be any global advertising growth in 2009.

Losing 1% of growth (in revenues) might not sound like much. But when that 1% falls down to the profit line, it becomes a very big number. In organisations with large fixed costs (including employees), it’s also a very threatening number. . .

Scrabbling around for corroboration on this, Morgan Stanley alight upon Sir Martin Sorrell of WPP, who has been warning of a 2009 slowdown for as long as anyone can remember.

But who is the uber-bear identified by Morgan Stanley as supporting their arguments? Step forward Roger Parry, chairman of Johnston Press, Future Publishing and Media Square, the troubled marketing services company.

No doubt Parry’s unvarnished honesty horrifies the financial PRs who have to work with him. Last week, he explained Media Square’s disappointing results by commenting upon “the amazing speed with which the advertising economy has tanked out in the last six months”.

For good measure, Parry added that “the level to which confidence has fallen is really scary.”

At the time, I was rather hoping that no-one would notice his comments.

Too bad: Morgan Stanley did.

Regulators move to uncover short-selling speculators

Posted by Peter Kirwan on 16 June 2008 at 16:40
Tags: Johnston Press, Media

Hopefully, we’re reaching the end of the road in terms of stories about wild swings in the shares of Johnston Press.

The City’s hedge funds have been mewling and puking about new regulations designed to restrain the kind of short selling that has hit the company’s shares so hard in recent weeks (and months).

From next Friday, the Financial Services Authority will temporarily require all speculators borrowing more than 0.25% of a company’s stock for the purpose of short selling during a rights issue to identify themselves.

In other words: we’re about to see a little bit of sunlight let into into one of the City’s darker corners.

In what could almost qualify as satire, Phillip Inman of the Guardian summarises the response from hedge funds:

The City firms said they were. . . disappointed at the lack of consultation before the announcement, which they said undermined their usually close relationship with the watchdog.

Bless.

As the FT pointed out on Friday, the FSA’s new rules aren’t likely to be very effective in the long term. But they should hit some speculators with a decent-sized chilling effect in the short term.

And it’s the short term that matters.

Aside from Johnston Press, the biggest targets for short sellers have been financials and housebuilders.

If the Square Mile’s resident locusts think that the most unpopular Labour government in history is going to let them get in the way of recapitalizing the banking system, they’ve got another thing coming.

Weird scenes inside the goldmine: Johnston Press shares take a hammering

Posted by Peter Kirwan on 11 June 2008 at 23:59
Tags: Gannett, Johnston Press, Newsquest, Trinity Mirror

Shares in Johnston Press collapsed 17% today, continuing a rout that started yesterday. This takes them to around 50p — below the rights issue price of 53p.

The decline is way beyond the 6% decline experienced by Trinity Mirror today.

So is this the cue for a Bradford & Bingley-style crisis?

The short answer is no. Johnston’s shareholders have already signed off the rights issue. This means that Deutsche Bank is tied into underwriting the issue at 53p. If shareholders don’t buy additional shares at that price, then the bankers are obliged to do so.

This means that Tim Bowdler and Johnston Press will get their £212m.

In turn, this makes the recent rout of Johnston’s shares even more puzzling. In theory, the company now has the ability to strengthen its balance sheet. So why the panic?

Speculation is part of the answer. Up to 18% of Johnston’s shares are held by hedge funds and other short sellers — one of the largest proportions in the FTSE-250.

This week’s swoon is part of a classic pattern in which hedge funds short the stock and buy nil-paid rights at depressed values. Once this gamesmanship works its way through the system, Johnston Press shares should stage a partial comeback.

At Deutsche Bank, they’ve also noticed that the share price declines of the past 48 hours tend to accelerate in the afternoon. For what it’s worth, this suggests that US investors are piling out of Johnston Press.

It would make sense for US investors to be more worried than most about the intensely gloomy economic indicators emerging from the UK. Sitting in New York, it must be hard to avoid the thought that Britain is heading for a destination the US has already reached.

In the US, ad revenues at newspapers in hard-hit states like Florida and California are dropping by 30% YOY. Here, according to Johnston Press, the decline was more like 10% YOY by the end of Q1. These declines can only accelerate during Q2.

Today, there was an added factor in the mix: Gannett’s announcement that it has been forced to write down the value of its newspapers by $2.5bn-$3bn. In a move that may have been designed for US consumption, Gannett blamed the bulk of the carnage on Newsquest.

Fairly clearly, this won’t have helped Johnston Press.

Never mind. It could be worse. Today, the FT reported that shares in Barratt Developments, the housebuilder once patronized by Margaret Thatcher, have collapsed by more than 90% from their peak in February 2007.

By contrast, Johnston Press shares finished the day 85% off their 52-week high of 329p.

We’re getting near the bottom. But there’s a way to go yet.

The Independent: Leader of the reactionary party, and loved by the City

Posted by Peter Kirwan on 5 June 2008 at 14:17
Tags: Daily Mail & General Trust, Independent News & Media, Johnston Press, News Corp, Telegraph Media Group, Trinity Mirror

At the World Association of Newspapers congress in Gothenberg, Independent News & Media reconfirms its web-wary credentials.

Here’s Simon Kelner, editor of the Independent, deploying a line that’s at least a decade old:

“I have the impression that the internet is like going into a bar where everybody is shouting, whereas when I read a newspaper it is much easier.”

Not to be outdone, Gavin O’Reilly also reached into the store cupboard of web scepticism to describe printed newspapers as the “ultimate browser” (oh dear). O’Reilly went on to add:

I find it rather remarkable how unsophisticated the commentary is on our industry today. They [media commentators] seem to support the conventional wisdom that newspapers are soon to become a relic of the past and that opportunities only exist in a digital sense.

For good measure, he compared bloggers who criticize ACAP to the perpetrators of drive-by shootings.

If you work at either of the Independents, frustration would be a legitimate response. And no matter where they work, Digital Bolsheviks who work tirelessly to bring about the dictatorship of the digerati will shake their heads sadly.

But hold on a second. Take a look at activist investor Denis O’Brien’s criticisms of IN&M. Is he worried about a lack of investment in digital publishing? Apparently not. Instead, O’Brien complains that the IN&M board isn’t sufficiently independent.

Is the City concerned about IN&M’s lack of enthusiasm for digital?

Nope. Nine analysts follow IN&M. Seven of them are currently advising investors to hold or buy, or expect the stock to “outperform” the market.

Only half of the 16 analysts that follow Trinity Mirror analysts think similarly. Fourteen follow Johnston Press, but only nine attach a hold, buy or outperform rating to the stock.

Although some of IN&M’s popularity is attributable to the presence of Denis O’Brien on the shareholder register, it’s also true that the City likes IN&M.

It likes the fact that IN&M isn’t very interested in the future of news organizations.

And it likes the company’s exposure to the developing world. Overseas adventures are a tried-and-tested method of generating new revenues. You can’t say that about digital investment.

In a recession, the public markets are no place for revolutionaries. Trinity Mirror has been hamstrung by its quoted status for years. Johnston Press is no longer using its quoted status to consolidate the industry. And IN&M has emerged as the leader of the reactionary party.

Among UK-based quoted news organisations, only DM&GT seems to enjoy some freedom to manoeuvre. News Corp enjoys something similar — largely because, like DM&GT, it has diversified intelligently and is still run by a shareholding figurehead who is more than a creature of the markets.

But for the next couple of years, and possibly beyond that, the best way of fomenting a digital revolution will be to do it privately.

In this respect, the Telegraph and the Guardian are both object lessons. Both are shielded in their own ways from short-term investor demands. Not surprisingly, both sit the top of the online traffic rankings for national newspaper sites.

Conicidence? I don’t think so.

Local video news on the web: It’s the independents that count, not Archant or the BBC

Posted by Peter Kirwan on 30 May 2008 at 11:29
Tags: BBC, Johnston Press, Trinity Mirror

So which side are you on? Do you like the BBC’s proposal to create up to 300 new jobs in journalism by adding video news to its local websites?

Or are you with Sly Bailey of Trinity Mirror and Ian Davies of Archant, who fear that the BBC’s investment will crush local newspapers’ “embryonic” sites?

It’s an ugly choice. Face-to-face with the nasty structural reality, the in-fighting has started in earnest. Naturally, both sides have big credibility problems.

This week, it emerged that the Corporation’s online operations have over-run their annual budget of £74m by 48%.

That’s impossible without the connivance of very senior managers. The inevitable result should be high-level sackings.

Instead, we got weasel words from BBC trustee Patricia Hodgson. After investigating, she has decided that the overspend isn’t attributable to human beings. Instead, the “management structure for online activities in the BBC” is to blame.

To cap it all, the BBC’s online operations have been promised £150m+ to spend next year — if they stick to unspecified tighter financial controls.

With this simpering response, the BBC Trust is steering the Corporation’s mighty hull toward a big rock marked The End Of The Licence Fee. Politically, this is about as inept as it gets.

You can’t blame Mark Wood, the chief executive of ITN, for seeing all of this as sinister — rather than merely tragic.

“Commercial competitors thought the BBC website was already over-funded at a declared budget of £74.2m. Thanks to the work of the trust we now discover the real figure is £110m rising to £114m next year.

“On top of that, the BBC plans to add £39m of funding which the trust has limited powers to prevent. That means that instead of a £74m website we are dealing with a £153m website.”

The regional press has a different credibility problem. In fact, it has several of them.

Ian Davies’s reflexive attack on a BBC that is bending over backwards to minimize the perceived threat feels a bit overdone. For example, there seems to be potential for collaboration with local newspapers in the BBC’s proposals, plenty of scope for linking and driving traffic. But these ideas have been lost in the storm of invective.

Another problem: Most regional newspaper chains enjoy de facto local monopolies. In the absence of competition, monopolies will spend peanuts on developing their businesses.

Only a few weeks ago, for example, Tim Bowdler, chief executive of Johnston Press, told analysts that the company had already made its big investments in what he calls “digitization”. Henceforth, he said, developing digital operations “needn’t cost an arm and a leg”.

Really? That’s a claim that would meet with skepticism at the Telegraph, the Guardian — and lots of other places where web projects demand constant funding and development.

Meanwhile, on his blog Out With A Bang, journalist-entrepreneur Rick Waghorn says that the big regional chains could afford to compete with the BBC — if they wanted to:

“Look at the money that is still — even now with all the challenges and new competitors that they face — still being channelled shareholders’ way. Can we find £68 million over five-years in there, somewhere? Probably…

[But what are the] chances of any one of those boys getting up at an AGM and saying: ‘Look people, we need to invest in our medium and long-term future… so we’re not doing a dividend this year…’?

The reality is that dividends are still flooding out of these companies like there is no tomorrow; or maybe, that’s because they know, newsprint-wise there may be no tomorrow. . . So, in part it’s a question of priorities. Who we looking after here?

The answer is that regional newspapers are looking after their shareholders. In doing so, they put print media first — because that’s where the cashflow is. But by doing that, they jeopardize their ability to invest in the future.

So there we have it. You can throw in your lot with a spendthrift with the managerial-financial equivalent of Tourette’s. Or a miserly incumbent who has mortgaged the future to pay for the present.

Some choice. I’d don’t envy Ofcom.

That said, there is a third voice that should be heard amid all of the shouting.

Rick Waghorn, you see, is just the kind of journalist-entrepreneur who could, and should, represent a major part of the future of local news provision.

A former sports reporter on the Norwich Evening News, he has poured his redundancy money into setting up three vibrant web sites for fans of Norwich City, Ipswich Town and Colchester United.

Waghorn and entrepreneurs like him remortgage their homes and work 80-hour weeks. They don’t get audiences with Lord Fowler’s committee in the House of Lords. Nor do their views become page leads in the Guardian or Press Gazette.

But they’re the real innovators.

It would be positive to see Ofcom acknowledge businesses like Waghorn’s as the “embryonic” operations that actually matter.

The end of an era at Johnston Press

Posted by Peter Kirwan on 16 May 2008 at 14:15
Tags: Johnston Press, Trinity Mirror

A few points on the Johnston Press rights issue.

First of all: the discount at which investors will be able to buy new shares issued by Johnston is massive: 61%.

Remember, too, that the company’s share price has already plummeted from 275p in January to 115p now. The new shares will be available at 53p a pop.

That’s a lot of sugar to sweeten Tim Bowdler’s unexpected pill. By contrast, Carlsberg, the brewer that’s been hit hard by recession, is hoping to deliver a similarly big rights issue at a 40% discount.

Yesterday, Bowdler and his lieutenants underplayed their pessimism about ad revenues. Between the lines, however, the belief that ad markets are in serious trouble is obvious.

The discount signals that Johnston Press has limited options. Disposals (at a reasonable price) are unlikely.

But what about cost cutting? Yesterday’s call with analysts was notable for containing zero discussion — on either side — of the potential for job losses.

At this point, wry smiles will cross the faces of Johnston Press employees accustomed to working for a company that squeezes 30% operating margins out of its papers.

Still, the omission will seem odd to those investors who are temperamentally keen on the widespread sharing of pain. If investors start asking questions about Johnston’s cost base, things could get tricky.

More broadly: where does Johnston’s rights issue leave the regional newspaper industry?

Crowded into its respective territories across the UK with the hatches battened down as revenues decline by 10%+ on an annualized basis.

That’s where.

For the next year or two, the industry will be a lot more boring than it was in the credit-crazed mid-Noughties.

So far as Bowdler & Co are concerned, the market for consolidation is firmly shut. Only limited horse-trading is on the agenda.

Johnston might be interested in the occasional digital deal, but even that’s unlikely. (Unlike Trinity Mirror, which likes to acquire digital revenues, Johnston Press believes that what’s needed is the “digitization” of its existing operations.)

Interestingly, Tim Bowdler believes that doing so needn’t cost “an arm and a leg”.

Looking ahead, yesterday’s announcement could come to be seen as the birth of a different kind of Johnston Press.

Much will depend on the identity and preferences of Johnston’s new chief executive, who will succeed Bowdler in 2009. By then, much of Johnston’s debts will be up for re-financing — and the company will embark on a new chapter in its history.

During yesterday’s conference call, the “hypothetical” talk was of returning free cash flow to investors, rather than embarking on more acquisitions when the economy recovers.

In more ways than one, it’s the end of an era.

Newspaper shares: Up, down and round the houses

Posted by Peter Kirwan on 29 November 2007 at 13:27
Tags: Daily Mail & General Trust, Johnston Press, Media, Trinity Mirror

Stock markets are going up and down faster than a whore’s drawers. (Apologies, it’s an old markets expression.)

A week ago, like others before me, I argued in the pages of Press Gazette that maybe — just maybe — the markets might want to reassess the charms of newspaper stocks.

Yesterday, the Dow Jones soared by 330 points. Similar occurred in London and across Europe as the Federal Reserve hinted at the prospect of cheap money. It qualified as transparent tarting. Naturally, investors — showing their fundamental lack of confidence — loved it.

But shares in US newspapers didn’t participate in Wall Street’s brittle joy. The New York Times Co. declined 1%. Others flatlined.

In London, the FTSE 100 rose by 2.7%. Not so the major newspaper shares. Trinity Mirror (TNI) moved up by 0.15%. Johnston Press was down 0.93%. DMGT rose by 1.7%. Overall, not too different from the US scenario.

To some extent, this suggests that investors still view newspapers as a species apart — decoupled from the broader market and facing unique challenges.

Admittedly, the news was better today, as Goldman Sachs upgraded Johnston Press from neutral to buy. The investment bank also rated Trinity and DMGT a buy.

Erratic? You said it.

Meanwhile, of course, the better half of most investors’ brains is waiting for something big to happen. Yes, something like Black Monday.

Coverage:
The Times
CNN Money
Citywire

How many journalists do you employ?

Posted by Peter Kirwan on 27 November 2007 at 11:01
Tags: Johnston Press

So far as we can see, Tim Bowdler’s appearance before a cross-party House of Lords committee produced one interesting factoid. Or maybe two.

First, there was the suggestion that the number of journalists employed by Johnston Press has “remained constant over the past 10 years”.

Er, we feel sure that Bowdler said, or meant to say, something else. Given the number of acquisitions this company has undertaken, a static headcount really would indicate something amiss.

The other factoid sounds a bit closer to the mark. Apparently, the number of journalists employed by Johnston Press has increased from 25% to 30% of the total workforce during the past decade.

The relative increase sounds comforting, until you consider the number of jobs that large companies have either automated, or outsourced, out of existence since the mid-1990s.

And another thing. In absolute terms, doesn’t 30% sound a bit low? It’s an interesting metric: do the numbers look different in your neck of the woods?

Kelvin The Teenaged Scribbler

Posted by Peter Kirwan on 26 November 2007 at 10:02
Tags: GCAP PLC, Johnston Press, News Corp

Kelvin MacKenzie seems to have reinvented himself as an equities analyst.

A few weeks ago, he had a go at Roger Parry, the incoming chairman at Media Square. This, you might recall, is the marketing services business that forced MacKenzie out as chairman in June.

Parry — stay with me — is also chairman of Johnston Press, whose share price isn’t exactly motoring at the moment.

Hence, perhaps, MacKenzie’s back-handed comment on the company’s first results announcement under its new chairman: “I just hope Roger is more successful at Media Square than he has been as chairman of Johnston Press . . . ”

Confronted by MacKenzie’s comment, Parry admitted to being “a bit surprised that Kelvin spoke up”. After all, he added, Media Square’s share price went from 22p to 9p during MacKenzie’s 15 months as chairman of the company.

Parry also described the situation he inherited from MacKenzie at Media Square as “dire”. He added that the company’s problems “were mostly of the company’s own making, rather than as a result of market conditions”.

The slapping down has only emboldened the man who tried to save Highbury House and lost the thick end of £1m in the process.

On Saturday, MacKenzie was at it again.

This time, the object of his considered analysis was Ralph Bernard, the outgoing chief executive of GCap.

“Uniquely disastrous”, MacKenzie told the Daily Telegraph. “Shareholders will be dancing in the streets. I’m critical of the board for not giving him the boot two years ago.”

Sadly, Bernard hasn’t replied publicly. He is unlikely to do so. “You never win with Kelvin,” said Bernard long ago. “Because he will always try to out-succeed in belittling you.”

Hopefully, MacKenzie’s attacks on relatively minor British media companies are just a warm-up for something much bigger. We note that News Corp will be releasing its Q3 results in January.

The date is marked in red letters on our diary.