Johnston Press

Ad revenue recovery: Different strokes for different folks

Posted by Peter Kirwan on 13 August 2010 at 14:25
Tags: Associated Newspapers, Daily Mail & General Trust, ITV, Johnston Press, Northcliffe Media, Reed Elsevier, Trinity Mirror

The recovery is starting to remind me of the Tour De France. High on a mountain ridge, the peloton is stretched out along a vast stretch of road. But two groups are visible. The leaders represent consumer-facing mass media — the broadcasters and national press. The laggards come from B2B publishing and local newspapers. Worryingly, at this stage during a recovery, the latter should be doing far better than they are now. At local newspapers, advertising revenues are still declining.

And the mountain ridge? This represents the risk of a double-dip recession, which now seems to concern many analysts, despite contrary indications.

Consumer media: Q2 advertising revenues

Consumer confidence reached a nadir in early 2009, began to climb and reached a peak in April of this year. Since the election, it’s been falling. Few analysts now expect interest rates to increase soon. The notion of a double dip is no longer a dark, if marginal, fantasy. It’s closer to the mainstream of economic forecasting than at any time during the past two years.

As yet, ad revenues at major media organizations aren’t showing any side effects. Q2 wasn’t wobbly: it was strong. Marketers haven’t yet drawn in their horns, although that could change very rapidly.

Recent weeks have seen a flurry of half-year results and trading updates. DMGT released a trading statement in late July. Here, the trick was to look for the underlying numbers, which strip out the effect of disposals (like the Evening Standard).

At Associated, these advertising numbers confirmed the general pattern we’ve come to expect. The Mail had turned in 15% ad revenue increases during January and March — but less for February. The 15% rise in Q2 looked like continuing solid progress.

Digital revenues were up by 46% at Associated. This isn’t quite the 100% YOY increase that Alan Rusbridger of The Guardian claims to have seen during April. Yet fairly clearly, it’s getting to the point where last year’s online revenue declines are starting to look like a distant memory.

ITV’s half-yearly report suggested ad revenues had risen by 18% during 1H, compared with 15% for the broadcast market generally. These numbers closely resemble those from Associated Newspapers. Although ITV was early to recover and is still growing faster than the market, agencies move in lockstep.

Robust growth like this isn’t universal. At Trinity Mirror, ad revenues in the tabloids increased by a mere 2.2% during 1H. The company predicted flat ad revenues for July. At Trinity’s nationals, digital advertising was similarly subdued, rising by just 4% YOY. You’d have to suspect that chief executive Sly Bailey is examining both the reasons for these oddly muted numbers as well as ways to spur more growth.

Local & business media: advertising revenues

This bit of the peloton contains all sorts. Toward the head of the group are B2B publishers like Centaur Media. It’ll be September before we get Centaur’s full-year results (to 30 June). But the company recently suggested that ad revenues rose by 10% during 1H. For the record, that’s better than Trinity Mirror’s tabloids, where ad revenues only rose by 2%. On this basis, Centaur is up there with the leaders.

Yet a big distance separates Centaur Media from the likes of Reed Business Information. Stripping out the effect of closures and disposals, RBI’s like-for-like ad revenues during 1H declined by 4%. Here, management was content to suggest that the rate of decline in ad revenues has “moderated”.

This puts RBI on a par with what’s happening in local newspapers. Here, too, revenues are still declining, not quite bumping along the bottom. At Northcliffe, for example, underlying revenues were down by 4% during Q2 — the same as Q1’s decline.

If retail has powered ad recovery at the nationals, its relative weakness in local newspapers is worrying. Retail advertising declined by 6% at Northcliffe during 1H. Digital only rose by 10%. The fact that property ads — up by 9% — were one of the few bright spots isn’t exactly comforting.

Trinity Mirror’s local newspapers mirrored Northcliffe’s. During 1H, after stripping out revenue from titles recently acquired from Guardian Media Group, they saw revenues fall by 5%.

The bullish case runs like this: local newspapers are taking longer than expected to recover, but improvement is visible. Last year, after all, Trinity’s local newspapers saw revenues decline by 12.4%. The bearish case is pretty obvious. If a double-dip recession is coming, it seems likely that local newspapers won’t return to YOY growth before it arrives.

Ad revenues, for most media owners, wax and wane far more dramatically than circulation revenues. As a result, it’s ad revenues that tend to define the industry’s mood — as well as the ease with which it can make profits. Typically, too, the distance between the fortunate and the unfortunate always widens at economic turning points.

As a result, life at ITV and Associated Newspapers currently feels very different from existence at Johnston Press and Reed Business Information. The distance between winners and losers will probably contract if a double-dip recession takes hold. But it could expand further, too.

Up, down & sideways: Boom time at The Sun, stability at Trinity Mirror and cuts at The Times

Posted by Peter Kirwan on 13 May 2010 at 17:36
Tags: Johnston Press, News Corp, Times Media, Trinity Mirror

So Sly Bailey’s regionals experienced an 8% decline in ad revenues between January and early May. This mirrors the 7.1% decline at Johnston Press over the same time period.

There was no forecast of a return to growth among the regionals in this morning’s trading statement from Trinity Mirror. Management expects “month-on-month volatility” to continue across the company.

Turn to the company’s nationals, however, and things get interesting. The language here was muted, almost downbeat. Ad revenues are “flat” and “relatively stable”: up 1% in January-February, but down 1% in March-April. Circulation revenue fell by 6% across the period.

This feels like a marked contrast with News Corporation, which unveiled its quarterly results last week.

News Corp reported a 10% YOY increase in ad revenues at Wapping during Q1. During the conference call, James Quinn, the Telegraph’s US business editor, got a word in edgeways with Murdoch about this.

Q: “Any sign that the 10% increase will be sustained?”

A: “At the moment, every sign. We’ve had many weeks when the London Sun has had all-time records in revenues. I’ve got to say I’m surprised. But it’s very welcome.

A: Are there specific titles? Is it all display?

A: It’s all display, yes.

Q: Just the Sun or is it across all four papers?

A: The Sun has been the leader, but across the four papers, we’re up.

The contrast in tone with Trinity Mirror is stark. And yes, something interesting does seem to be going on at The Sun. In early April, Media Week described ad sales for the Easter period as follows:

Among trading highlights for the week are a 50% year-on-year increase in spend from the big four supermarket retailers as they focus on Easter dining as well as their expansion into new categories such as electrical and gaming.

Among the biggest spenders for The Sun, in a sector reported to be up 50% up year on year, are B&Q, DFS, Argos, Wickes and Furniture Village.

Perhaps a fleeting 50% increase on top of last year’s collapse isn’t much to write home about. But Murdoch did seen genuinely surprised — his word, not mine — about The Sun’s ability to break “all-time records” in terms of revenues in such a weak market.

Note, too, those final few words, in which Murdoch suggests that trading is up YOY “across” The Sun, News Of The World, The Times and the Sunday Times.

At the Telegraph, James Quinn interpreted this to mean that each of these newspapers is doing better than it was last year.

It would be churlish to suggest otherwise. But if The Sun really is soaring away into the upper atmosphere, what’s happening at The Times and The Sunday Times?

You have to wonder. In Scotland, the Sunday Times has axed its marketing team. By one account, 16 out of 20 journalists could be let go. There’s a suggestion that the Scottish edition will now be produced “from England, with regionalised pages”.

Today, we got the main act: a 10% cut in editorial budgets that could cost 80 jobs at the Times and the Sunday Times in London.

When it comes to cuts like these, one quarter’s trading performance is neither here nor there.

Like HM Government, Times Newspapers Ltd is trying to cut its structural deficit. In the year to June 2009, pre-tax losses came in at £87.7m, up from £50.2m the previous year.

Perhaps management is taking action before News Corp’s shareholders rise up to demand it. In any event, the logic seems remorseless. Two years ago, Wapping offloaded 100 out of 450 sales staff after merging its tabloid and broadsheet advertising teams. Here’s how Harding describes thinking at the moment:

our losses are unsustainable. We cannot ensure the long-term future of this paper and our futures in journalism if we cannot make a viable business out of The Times.

Up, down and sideways. The good news at The Sun and ITV (ad revenues up by 8% during Q1) is balanced out by the bad news elsewhere.

The IPA’s recent Bellwether Report suggested that media budgets rose during Q1. The last time this happened was Q307, two and a half years ago.

But note that only 21% of marketing bosses increased their total spend during the quarter. As yet, the recovery is patchy and weak. It’s not hard to imagine a pull-back.

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

Last summer, I wrote a piece for the print edition of Press Gazette outlining the scale of the carnage that would be caused by two successive years of 20% declines in ad revenues during 2008 and 2009.

At the time, regional newspaper groups were already delivering year-on-year declines of 20%. The nationals, I reckoned, would surely follow.

To illustrate the scale of the challenge, I calculated what Johnston Press and Associated Newspapers would need to do to maintain their pre-recession profit margins under such circumstances.

They would need to cut deep. At Johnston Press, cuts of £115m — amounting to around one-third of the company’s cost base — would be required across 2008-2009. At Associated, cuts of £150m would be needed.

Partly because these numbers were so huge, The 20/20 Scenario seemed freakishly alarmist. At the time, projections for ad revenues knocking around the market — many of them generated by ad agencies — still looked relatively rosy. In May 2008, for example, WPP-owned Group M predicted that UK ad markets would decline by just 3% in 2008 and by 5.6% during 2009.

Tony Loynes, the then editor-in-chief of Press Gazette, wasn’t best pleased with my copy.

He was keen on pinpointing a few reasons why the newspaper business might emerge from recession in half-decent shape. The copy left him with a bit of a dilemma. “We can’t just tell the industry that it’s fucked,” he said.

Well, the notion of two successive years of 20% declines in ad revenues is no longer looking exotic.

Last week, John Fry, the chief executive of Johnston Press, used the Advertising Association data I’ve reproduced above to illustrate what has happened to ad spend since the onset of the downturn in early 2008.

The regional press has pretty much managed to cram two years’ worth of 20% declines into a single year.

So far as I can tell, Johnston Press has cut £63m out of its cost base since the start of 2008. That’s not quite £115m. But part of the pain has been expressed in declining operating margins, which have nearly halved. And make no mistake: there are more cuts to come, not least because of the penal terms on which Johnston Press refinanced its debt this week.

Ad revenue declines in national media have steadily deepened. The outliers have been run ragged. Channel Five recently reported a 27% YOY decline in ad revenues during the six months to June. Independent News & Media reports that ad revenues at the London-based unit that contains the Independent and the Belfast Telegraph fell by 35% YOY during the first half.

Look, too, at the acceleration of these ad revenue declines at INM’s UK operation. This doesn’t feel like the start of an upturn:

1H08: -7.7%

2H08: -22.7%

1H09: -35.3%

Another way of skinning the same cat: during the first six months of this year, Johnston Press generated £67m less in ad revenues than it did during the corresponding period in early 2008. At INM, the Independent, the Independent On Sunday and the Belfast Telegraph have lost perhaps £30m of ad revenue during the past year.

That’s nigh-on £100m in lost revenue at two newspaper groups since the onset of recession. Multiply these numbers across the rest of the newspaper industry, magazines and commercial television: billions of pounds of ad revenue have been lost during Year 1 of recession. (According to Nielsen, US media markets have lost $10bn in revenue during the first six months of this year.)

So where do we go from here? The uncertainty is visible in headlines that greeted INM’s half-yearly results on Friday:

“Downturn bottoming out, says Independent News & Media” (The Independent, 29 August 2009)

“Independent News & Media sees no ad pickup” (Wall Street Journal, 28 August 2009)

In a way, both were correct. No-one can conceive of ad markets falling much faster, or even at a similar rate. Yet no-one can yet perceive any sign of growth. As Gavin O’Reilly put it last week: “You’re probably at the bottom, though that doesn’t mean advertising is about to suddenly rebound.”

Hence the hopeful talk of “easier comparatives”, “stabilization” and “bumping along the bottom”. But note O’Reilly’s conditional. We’ve “probably” seen the worst.

Aside from the odd glimmer provided by economic data, the potential upside feels eerily limited. This occurred to me last week, reading the financials turned in by the global drinks group Diageo. The company reported a healthy increase in net sales, from £8bn last year to £9.3 this year. Notably, however, global marketing spend fell by 9%, because of “media deflation”.

Even in a recovery, advertisers won’t allow media owners to claw back concessions like this in a hurry.

The potential for downside? It feels plentiful. Households seem to be unwinding debts rather than consuming. As the damage to the real economy over the past year feeds back into the financial system, the banks are being hit by a rapidly rising tide of defaults on corporate loans. This explains why business lending is so anaemic.

Although the figures are notoriously volatile, the apparent collapse in business investment is worrying. Unemployment is still rising. We’ve still got deep public sector spending cuts to come, as well as the withdrawal of VAT cuts and quantative easing.

In the short term, a renewed stock market collapse is the most likely catalyst for a further loss of confidence in ad markets. As chief executives are pummelled by investors in the wake of a crash, marketers swiftly feel the heat emanating from above. Budgets get slashed rapidly.

After a huge bounce from February’s lows, the Footsie feels uncomfortably like a sleep-deprived supermodel clattering along the catwalk in 9 inch heels. As Larry Elliott pointed out in the Guardian on Monday, September is traditionally an “accident-prone” month. October, too.

Setting out The 20/20 Scenario last year, I felt like one of those old guys who used to pace up and down Oxford Street with a sandwich board proclaiming that the end is nigh. This year, I feel like first cousin to the Grim Reaper. Let’s hope the markets avoid an accident this autumn.

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

It’s probably time to plead that I wasn’t one of those hacks who failed to absorb Digital Britain in its full 230-page splendour.

Yes, I read it. Whether this makes me immune to Lord Carter’s charge of having regurgitated “bullshit”, I don’t know. It didn’t feel as if I was doing this. Hopefully, I would have noticed.

Coincidentally, I also read the OFT’s accompanying review of the local and regional media merger regime — twice.

One of the creditable things about government reports like this is the hard data they contain.

Ofcom and the OFT could do worse than release all of this stuff into the public domain without restrictions. Yes, I mean the raw numbers in machine-readable formats, not just spreadsheets.

As Kevin Anderson pointed out at the Guardian recently, the relative lack of hard data on what’s happening to Big Media can be frustrating.

Perhaps Sir Tim Berners-Lee, newly-appointed by HM Government to prod Whitehall towards database openness, will shortly find himself leading the staff of Ofcom and the OFT in a chorus of “Raw data now! Raw data now!”.

We can but dream.

The infoporn attached to this post (and the next one) come from the OFT’s report. They evince a world of pain with which we’re anecdotally familiar, but from which our focus is liable to wander.

Scan them and ponder. For me, the key point is the fact that the long decline of the local press started five years ago.

The argument — still tentatively advanced by John Fry of Johnston Press and others — that we’re witnessing a cyclical correction has never seemed so hollow.

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.