What’s in your budget for 2009?

Posted by Peter Kirwan on 4 September 2008 at 13:19
Tags: Johnston Press, Media, Trinity Mirror

Bit late with this — a piece of forecasting from Deutsche Bank that followed last week’s Johnston Press results for 1H08. The note in question summarises JP’s advertising revenues so far this year:

H1 ad revs (UK print) dropped 11%, with June down 17%. The first 7 weeks of H2 are down around 23%.

This leads Deutsche Bank to forecast that Johnston Press will face YOY ad revenue declines of 25% for the rest of the year.

Because declines were shallower during the first half, Deutsche Bank predicts that for 2008 as a whole, Johnston Press’s ad revenues will end up down 18% YOY.

A couple of things need to be said at this point.

The first is that these 2H expectations currently pivot on a ropey bit of data.

That 23% decline for Johnston Press during the traditionally thin summer months isn’t a reliable guide to what will happen between September and December.

But it is worrying. At the moment, the newspaper advertising business — like the wider economy — sits at a point of inflection. The industry has its Alastair Darling types (forecasting much worse to come). And it has its Caroline Flint types (she’s the housing minister who is a bit naive about telephoto lenses and has been a key proponent of Gordon Bown’s “Don’t panic” line).

The analysts at Deutsche Bank — like most of their peers — seem to be lining up with Ms. Flint. The bank’s forecast for Johnston Press revenues during 2009 makes this plain:

We continue to assume a 7% decline in advertising revenues for 2009, but this is from the new lower 2008 base.

To say the least, this prediction looks rosy. It underlines the fact that analysts’ forecasts tend to lag behind developments in the real world during a downturn.

If 25% ad revenues declines become the reality at Johnston Press in 2H08, some revisions will be required in those 2009 forecasts.

The reckoning will have an unpleasant effect on share prices. And that, in turn, could return us to the dark days of early summer, when valuations for Trinity and Johnston Press rode so low that wild talk became commonplace.

NB: New-ish (and non-financial) readers might be wondering why I keep on referring to Johnston Press and Trinity Mirror in posts like these.

The reason is simple: these companies are part of a small band of media companies whose quoted status means they have to disclose large amounts of financial information. To some extent, this means that they have become proxies for the entire news-generating sector.

But it’s also worth remembering that both TM and JP are heavily exposed to the market’s nastiest risks: they own lots of local newspapers, they’re heavily reliant upon classified advertising and (in the case of TM), they are part of a red-top market that’s declining relatively rapidly in circulation terms.

In other words: what TM and JP offer is a guide to the leading and bleeding edge of recession. Their revenues streams started falling first, and it’s likely they will fall furthest.

If you work in B2B publishing, or even consumer magazines, JP and TM will give you an idea of where the downturn is heading. Almost certainly, however, the prognosis for your business won’t be quite so dark. Given the persistent hysteria that surrounds the media sector, this is worth remembering.

Advertising recession: The state of play

Posted by Peter Kirwan on 27 August 2008 at 11:15
Tags: Johnston Press, Newsquest, Trinity Mirror

Following on from a post earlier this month, here’s what we now know about newspaper ad volumes for July and August.

As last time, the percentages refer to all ad revenues including digital (or in the case of Newsquest, to classified revenues only, where mentioned). The months mentioned are those in which the declines actually occurred (rather than when they were reported to the market by the companies in question). All % comparisons are year-on-year. . .

August:
Johnston Press (first three weeks of the month; incl. digital):
– Total advertising revenue: down by 23%

July:
Trinity Mirror
– Regionals: down by “around” 17%
– Nationals down by “around” 13%

Johnston Press:
– Total advertising revenue (incl. digital): down by 19.7%
– Property: down 40%
– Jobs: down 27.9%
– Motors: down 22.8%
– Other classified: down 8.4%
– Display: down 9.9%
– Digital: up 25%

Newsquest
(in British pounds, so constant currency):
– Total classified revenues: down by 24.4%
– Property: down 44.2%
– Motors: down 24.5%
– Jobs: down 19.4%

Structural x cyclical = hysterical market

Posted by Peter Kirwan on 26 August 2008 at 17:38
Tags: Guardian Media Group, Trinity Mirror

Ahead of tomorrow’s six-monthly financials from Johnston Press, here’s an intriguing quote captured by the Independent’s Sarah Arnott from Steve Liechti at Investec:

“There are three factors all happening at once: the structural, the cyclical, and the structural multiplied by the cyclical.”

Er, the structural multiplied by the cyclical? Is that what happens when Carolyn McCall and Sly Bailey lock horns? We think we should be told.

Why did Yahoo fail to eat the media for breakfast?

Posted by Peter Kirwan on 15 August 2008 at 15:52
Tags: Trinity Mirror, Yahoo

Kudos to Google’s CEO Eric Schmidt, who admitted this week on US television that Google was spurning “some number of billions of dollars” by not running ads on its search engine home page.

“People wouldn’t like it. We prioritize the end user over the advertiser,” said Schmidt.

He’s right. But Google enjoys the luxury of making decisions like this because of its extreme success.

By contrast, look at Yahoo. One commenter here points out that the company’s homepage is “cluttered with useless crap”.

The vulture investor Carl Icahn has probably said something similar about Yahoo’s board in recent months, as he has wheedled and pressurized to “unlock the value” inside the company.

Now Icahn has got what he wanted, installing two henchmen alongside himself on the 11-person board.

And boy, oh boy, are his chosen ones corporate. One is a former telecoms executive. The other comes from the cable industry. Fat cats rarely come fatter (or more tainted by monopoly) than this.

Yahoo’s prospects as an independent company diminished to near-zero a while ago. This year, a vast number of talented employees have simply walked away from the company. Now that the suits have arrived in earnest, presumably Yahoo’s once-freewheeling culture will be dismantled, too.

This induces a twinge of nostalgia. A decade ago, I can recall an expensive internet guru pitching up at the magazine company that employed me. He told us that Yahoo — specifically — was going to eat us alive.

The idea of a media company that didn’t generate any content demolishing our business seemed novel at the time. We listened politely enough, felt a tiny gust of dot.com fear in our souls. . . and went back to trimming our quarterly spreadsheets.

Recently, I’ve noted that Sly Bailey has taken to describing a long list of challenges that print has weathered in the past — including World War II, various recessions, the rise of commercial television and so on.

Very Churchillian. Clearly, the performance will become even more impressive once Yahoo is added to the long line of failed threats. . .

Hot money from Old Mumbai: Bid talk swirls around Trinity Mirror

Posted by Peter Kirwan on 25 July 2008 at 15:10
Tags: Trinity Mirror

“Remember, the market tends to overreact sometimes.”

No wonder the analyst who offered up this pearl while discussing Trinity Mirror with Nikhil Kumar of The Independent this morning wanted to remain anonymous.

Yesterday afternoon, Trinity Mirror’s share price shot upwards on rumours of a bid from Bennett Coleman, which owns The Times of India.

Last week, Trinity Mirror’s shares bottomed out at 41.5p. Yesterday, they closed at 92.25p. As I write, they were down slightly at 87.75p, as everyone reflects on the difficulty of doing a deal.

If the moniker Bennett Coleman calls to mind the signage above an Edwardian grocer’s shop, you’ll need to think again. Controlled by the Sahu Jain family, the company has been valued at anywhere between $15bn and $25bn.

A week ago, I suggested that a bid from a big investor was a strong possibility for Trinity Mirror. Not that this confers brain of Britain status on yours truly. As Chris Tryhorn notes in the Guardian this morning, Trinity Mirror has become “a natural market rumour stock”.

That said, it remains to be seen whether (a) the bid is real, (b) whether it’s friendly and (c) whether Trinity Mirror will welcome it.

The reported (rumoured?) tactic of buying up shares from big investors before approaching Trinity Mirror’s management doesn’t seem particularly friendly, it has to be said.

By the same token, it’s hard to see how Trinity Mirror could invite Bennett Coleman into its tent via a rights issue that offered a similar deal to existing shareholders. (Not for the first time, this makes the timing of Johnston Press’s recent rights issue look smart.)

In passing, it’s encouraging to see that Robert Lindsay of The Times seems intent upon endearing himself even further to Sly Bailey.

According to Lindsay, “some bankers in Bombay” (surely that’s Mumbai?) are asking why Bennett Coleman would want to “acquire an ailing asset in a shrinking UK market when it has better growth opportunities at home”.

By contrast, the analysts at UBS did some sums. In a note quoted at FT Alphaville, UBS has this to say:

If one assumed a potential requirement for further contributions into their pension scheme, on our estimates, an LBO* at an assumed 110p with 3x leverage would require additional cost savings of c£30m (4% of cost base) to achieve a c15% IRR.

In addition to these dire calculations — £30m of cuts ain’t small — UBS points to “limited visibility on the extent of potential advertising declines near-term, limited scope to remove additional costs given previous efficiency programmes and structural pressures longer term”.

Translation: it’s too early in the game for a bid, and Trinity Mirror’s pension liabilities continue to spook all-comers.

Much hangs on Trinity’s results, due on 31^st July. In particular, the company’s pension liabilities will attract lots of questions from analysts.

The market’s incessant fretting on this score is becoming tedious. This morning, for example, an analyst from Kaupthing suggested that Trinity’s pension fund “would no doubt be even more difficult to deal with than most pension schemes given its troubled history”.

This, of course, is a bit like saying that Chelsea have little chance of winning the Premiership this year because they only managed to come top of the Second Division in 1991.

Some clarity is needed. How much of that precious commodity Trinity Mirror wants to give the market remains to be seen. It might be a remote prospect, but a better-than-expected scenario on pension liabilities could open the door to all sorts of mayhem.

* Leveraged buy out: precisely the kind of bid, financed by bank debt, that a private equity firm might contemplate.

Not only in Kamchatka: What happened when Mr Sabbagh went down to the woods. . .

Posted by Peter Kirwan on 25 July 2008 at 13:54
Tags: Telegraph Media Group, Trinity Mirror

As this week’s events in Kamchatka reminded us, bears have sharp claws and teeth. The latter bite chunks out of investors frequently. And commentators get bitten, too.

The Times has had a torrid time of it in recent weeks. On 16 July, its reporter Robert Lindsay suggested that an analyst had concerns about Trinity Mirror breaking its banking covenants.

Breaking promises to bankers ranks as one of the City’s greatest sins. Accordingly, Trinity’s shares slumped. Acting rapidly, the company pushed out a highly unusual announcement outlining the actual terms of its agreements with the banks.

Next, Sly Bailey reached for her lawyers. What is being coyly described as an “exchange of lawyers’ letters” ensued with The Times.

On 17 July, Dan Sabbagh, the paper’s media editor, wrote up what seemed like a considered account of Trinity’s position.

(That said, Sabbagh did quote Richard Desmond’s mischievous suggestion that he would look to buy Trinity Mirror when it went into administration. The following day, for good measure, he wrote an accompanying piece hinting darkly that it simply wasn’t good enough for Trinity to blame its predicament on “irrational advertisers and an advertising downturn”.)

But this, it seems, wasn’t the end of The Times’s media reporting troubles.

This morning, in a space normally reserved for one of Sabbagh’s jaunty vignettes about the media business, The Times carries a curious legal-sounding clarification.

It suggests that Telegraph Media Group was irritated by a piece by Sabbagh that appeared in the paper’s Media Business section on 4^th July.

Partly or wholly written by m’learned friends, the “clarification” makes it clear that Sabbagh had no business comparing Trinity Mirror with The Telegraph Media Group.

Why not? Well, as the clarification points out, Trinity Mirror has a pension fund of £1.5bn and a deficit against that liability of £125m.

We’re further informed that the Telegraph Media Group has no pension fund liability — and “more than sufficient funds to discharge all of its borrowings whenever it chooses”.

Oddly, I can’t locate the original article via Times Online’s search engine. (Perhaps the Media Business section is filed away in a special cupboard somewhere on the site. Maybe Mr Sabbagh will reply to my inquiring email with a link. . . )

But given that the Barclays are to the Telegraph what Roman Abramovich is to Chelsea Football Club, the clarification does seem a little superfluous.

Funnily enough, it may achieve the opposite effect to the one intended.

Although I haven’t considered the possibility until now, it seems entirely obvious that the Barclays will need to write down the value of their vast property estate during the next year or two.

Whether this will force a change in the tempo of investment at Telegraph Media Group is anyone’s guess.

But in the current market, prospects that once seemed as far-flung as Dr Who’s travel itinerary are rapidly becoming as real as the bus stop at the bottom of the road.

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.

The alternatives for Trinity Mirror: Strategic investor or private equity bid?

Posted by Peter Kirwan on 18 July 2008 at 12:34
Tags: Media, Trinity Mirror

At The Times, Dan Sabbagh does the sums on Trinity Mirror’s share price. When Sly Bailey arrived in 2003, it was 370p. On Wednesday morning, it was 41p, valuing the entire company at a derisory £106m.

This, writes Sabbagh, means that the market is allocating a value of £72 to each of the Daily Mirror’s 1.47m buyers. That’s around the value of six months’ continuous purchasing. As Sabbagh puts it:

Perhaps at that point the City believes that all of Britain will become blinded by a Triffid invasion, and hence unable to read. One can only wonder how investors would react if something genuinely serious happened.

Presumably, that’s what Richard Desmond is hoping for. Sabbagh suggests that the owner of the Express reckons it would cost £800m to take Trinity Mirror private. (This sum includes a bid premium, the company’s existing debt and some cash to top up Trinity’s pension funds.)

In relation to the £150m of operating profits expected from Trinity Mirror this year, that’s a fairly big number. It would imply doing a deal with net debt at x5.3 EBITDA. According to Alan Mutter, that’s not impossible.

If Trinity Mirror then nixed its dividend payments, which amounted to £63.7m last year, the company would enjoy wiggle room to accommodate the further YOY declines in operating profit that seem inevitable. Hell, it might even be able to pour some real money into investing for the future.

So a deal is do-able. But there are doubters. Desmond, who thinks £800m is too expensive, is one of them. As he told The Times mischeivously this week: “When it’s in receivership, we’ll look at it.”

Of course, there’s another alternative — specifically, the possibility of someone taking a strategic stake in the company.

Trinity Mirror will present its 1H results to the City on 31^st July. At that point, conjuring a strategic investor out of thin air might be one way for Sly Bailey to keep her job.

Whether the de facto endorsement of her conservative regime that would accompany such a move is the right medicine for Trinity Mirror remains dubious.

Is the Daily Mirror worthless?

Posted by Peter Kirwan on 3 July 2008 at 14:55
Tags: Trinity Mirror

After this week’s major share price falls, have newspapers become worthless in the eyes of investors? In the case of Trinity Mirror, we’re getting mighty close to that moment.

In February, Trinity announced that 3.7% of its revenues come from digital.

As it happens, we can put a value on that digital revenue. Even better, because we know how fast web advertising is growing, we can forecast the value of that revenue five years’ hence.

Let’s start off with the analysts’ mean forecast of £916m in revenues for Trinity Mirror as a whole for the year to December 2008. Of this amount, only £33.9m — or 3.7% — will be digital revenue.

Excluding the effect of acquisitions, Trinity’s digital revenues are growing at around 25% a year. For the purpose of this argument, we’re assuming (not unreasonably) that 25% remains the norm for the next five years, through good times and bad.

Here’s the digital revenue picture for Trinity Mirror under those circumstances:

2008: £33.9m

2009: £42.4m

2010: £53.0m

2011: £66.2m

2012: £82.7m

2013: £103.4m

If Trinity Digital can grow a little bit faster — say 30% — then revenues would top out at £125m by 2013.

What might someone be willing to pay for such revenues in five years’ time?

A toppy comparison is readily available in the form of CNET Networks, the US-based pure-play digital publisher recently sold to CBS Corporation for 3.9 x revenues.

On this (admittedly sketchy) basis, Trinity Mirror’s digital operations could be worth £400m-£500m by 2013.

Perhaps, in Trinity’s case, we should assume a more modest return. Assume, instead, that Trinity Digital generates a 25% margin on its turnover by 2013.

That’s an operating profit of £20m-£25m. Apply to this a multiple of ten times operating profits and you reach a sale price of £200m-£250m by 2013.

That’s the absolute minimum that Trinity’s digital operation would fetch in five years’ time.

Coincidentally, it’s about the same as the £230m valuation currently attached to Trinity Mirror as a whole by the market.

In other words, anyone thinking of buying Trinity Mirror at the moment should think in terms of paying money for its digital operation — and picking up print for free as part of the deal.

This would have its attractions. Managed aggressively, Trinity’s papers could be made to generate £150m-£200m in profits annually. For a while, at least.

Some of that would have to fund Trinity’s pension pot. A bit of it would have to be invested in Trinity Digital. In preparation for a future of diminished revenues, a large portion of it could be used to pay off Trinity Mirror’s £425m of net debt.

Not bad for a bit of bunce attached to the main deal.

Of course, the essential requirement for any such buyer will be nerves of steel.

They will need to set the managers of Trinity Digital free to cannibalise the company’s print business.

Their other objective will be to shoehorn Trinity Mirror’s print-sized cost base into the pint pot of digital revenues within five years. In terms of destructive intensity — if not absolute damage — this would be on a par with what happened to the British steel industry in the 1980s.

Of course, running down the print business in this way will be a good deal easier knowing that you’ve effectively paid nothing for it in the first place. . .

The terminal boredom of waiting to hit rock bottom

Posted by Peter Kirwan on 20 June 2008 at 11:15
Tags: Media, Trinity Mirror

Connoisseurs of these things will love the latest despatches from Ambrose Evans-Pritchard, the Telegraph’s doom-stricken international business editor.

17 June: Morgan Stanley warms of ‘catastrophic event’ as ECB fights Federal Reserve

19 June: RBS issues global stock and credit crash alert

Time to bury the family silver in the back garden, Mabel.

We’re particularly intrigued by the warning from Bob Janjuah, credit strategist at RBS, that “a very nasty period” is on the way for the stock markets.

He is predicting that the S&P Index will fall more than 300 points to 1050 by September. Lord only knows what he’s forecasting for London. Janjuah, who apparently correctly forecast the arrival of the credit crunch last year, had this to say in a note yesterday morning:

“I do not think I can be much blunter. . . This is about not losing your money, and not losing your job.”

Message received, Bob.

Actually, all of this makes perfect sense. Trinity Mirror’s share price might have hit an 18-year low of 156p this week, but the current bear market has yet to deliver a totemic one-day slide in share prices that the Evening Standard can describe Black Wednesday or Brown Monday.

In every downturn, this is necessary. We need to be able to look back at a specific point in time and say: “That was when it all went really pear-shaped.”

Perhaps once we’ve had our special day, we’ll then be able to get on with the restructuring of the regional newspaper industry.

A princeling of private equity told me recently that he and his competitors were simply waiting for share prices to hit rock bottom before stepping in.

Let’s get on with it, I say. The worst thing is all of this waiting around.