Meltdown implications: Eerie silence hangs over media stocks

Posted by Peter Kirwan on 18 September 2008 at 11:09
Tags: Johnston Press, Trinity Mirror, United Business Media

You’re probably assuming that the worst has happened to the share prices of media companies this week.

Not quite. Much of the carnage has been confined to financial stocks. By contrast, the broad FTSE-100 index of Britain’s largest quoted companies fell by 7% between Monday morning and Wednesday evening.

That’s a lot by normal standards. But it’s not quite a repeat of 1929. And it’s nothing like the hammering taken by HBOS, Barclays and HSBC.

Predictably, however, the media sector fared worse than most. Trinity Mirror’s shares opened at 114p on Monday morning. Last night, they closed at 89p.

Trinity racked up big declines on Monday and Tuesday. Yesterday, the company’s share price seemed to stabilize. This morning, it’s up slightly. Overall, the company’s share price has declined by around 25% since the start of the week.

Johnston Press opened at 45p on Monday morning and fell to 42p at the close. On Tuesday, it recovered to 48p. Yesterday, it declined to 37p. This morning, JP is also up slightly. Overall: a decline of some 17%.

Two things need to be said about these numbers. The first is that stock market has been behaving erratically, to say the least. A huge (and bankrupt) Lehman Brothers sold millions of shares into the market earlier this week, skewing prices all over the place.

The second is a reminder that Trinity and Johnston Press remain two of the sector’s most exposed companies. Despite this, their share prices have yet to go below the lows recorded earlier this summer when short selling them was in vogue.

For a slightly more upbeat view, take a look at the shares of United Business Media, the UK’s largest quoted B2B publisher. The company’s shares fell heavily on Monday before stabilizing on Tuesday afternoon and today.

Overall decline? From 555p to 515p, UBM fell by around 7% — exactly in line with the FTSE-100.

More generally, investors and analysts are still a long way from figuring out the implications of this week’s crash.

Even before this week’s events, the news was bad. On Monday, Newsquest reported that classified ad revenues fell by a whopping 30% during August. Yesterday’s unemployment figures showed the fastest increase in benefit claimants since 1992.

On top of this, the savage forced consolidation of the banking sector means that corporate borrowing will become even more expensive. Consumers will lose even more confidence. And marketers will cut ad budgets further.

How much? No-one knows. But when the dust settles, it makes sense to anticipate another round of speculation about debt levels at places like Johnston Press and Trinity Mirror.

This time, analysts will have to factor the fallout from a remodelled banking system into the equation. It’s hard to see anything positive emerging from that.

Er, what was that about a broad-based recession?

Posted by Peter Kirwan on 29 July 2008 at 22:55
Tags: Daily Mail & General Trust, Media, Pearson PLC, United Business Media

This morning, United Business Media turned in revenues up by 10.4% YOY for the six months to the end of June. Cash conversion improved, and so did operating profit (up 11.4%).

Even CMPi managed growth of 6.2% (although margins dipped slightly below 20%).

For the journalists among you, it’s worth pointing out that all of this happened inside a company (UBM as a whole) where only 25% of revenues are now generated by print. That’s down from 56% four years ago.

It’s just as well, then, UBM’s events business is doing a fair impression of the Duracell bunny. In his presentation to analysts this morning, David Levin, UBM’s chief executive, kept the best news until his last slide, which contained these bullet points:

– Forward bookings across UBM’s major events scheduled for 2H08 are 10% ahead of the previous year.

– Bookings for 2009 major events demonstrating good growth — 10% ahead.

Pearson was also presenting half-year results this morning. There, the FT Group delivered revenues up by 11% for the half-year. Much of that was attributable to the group’s Interactive Data division. But FT Publishing itself managed a 2% increase in subscription, circulation and advertising revenues.

Not bad given what’s happening to City jobs and financial services advertising.

Dame Marjorie sounded over the moon. She told the FT: “In downturns, companies like ours, which have consistently invested and have very strong balance sheets, have huge opportunities. This [the next couple of years] is probably going to be the most fun time I have had yet in this job.”

How so? Scardino mentioned acquisitions, “bolt-ons, things which are hugely synergistic”.

Whether or not she’s thinking — in part? — about enriching the FT Group with acquisitions remains to be seen.

Three or four years ago, when the FT was languishing miserably at the bottom of its profit cycle, investors would have demanded Scardino’s head on a pikestaff at Traitor’s Gate if she’d so much as hinted at such a thing. Now, as the FT prepares to confront a rampaging Wall Street Journal, there’s just a chance that things might be different.

Stranger things have happened.

Memo to private equity: Why not try a proper challenge?

Posted by Peter Kirwan on 2 July 2008 at 17:46
Tags: United Business Media, emap

So a consortium of private equity firms has got round to bidding for Informa.

This, however, feels like one of those deals that — like climbing Mt. Everest — lacks a rationale apart from the fact that it’s capable of being done.

Currently, Informa carries around £1.25bn of debt. At 4.4 times EBITDA (roughly equivalent to operating profits), that already looked high. Indeed, reducing debts was supposedly one of the attractions of talking with United Business Media.

So what will private equity bidders do? Yep: they’re going to increase, rather than reduce, Informa’s debts.

Specifically, according to the FT, they are proposing to ratchet up the company’s loans from £1.25bn to £1.85bn.

This will help to pay for the deal (in the same way it helped the Glazer family buy Manchester United). But it would also mean that Informa’s net debts would amount to more than six times EBITDA.

And take a look at the interest rates that a newly-private Informa would have to pay on its shiny new loans, as reported by the FT:

• £1.39bn at 3.75% over Libor: in other words, around . . . 9.7% *
• £463n in high-yield (a.k.a. junk) debt costing. . . 11.75%

Under these circumstances, after a successful private equity deal, Informa would find itself making interest payments of £188m a year.

In a recent conference call with analysts, Informa suggested that it expected to pay a “blended” interest rate of 6.25% on its debt during 2008.

Of course, this will have increased since then, but it’s worth noting that under such circumstances, Informa would find itself making interest payments of around £78m this year.

What’s £110m between friends?

Actually, quite a lot — even if Informa’s new owners don’t demand much in terms of dividends from their investment in the short term.

If this deal goes through, employees can expect the mother of all cost-cutting programme to swing into action from Day One.

Unless Informa’s board has been deceiving investors about the company’s prospects, this acquisition would take a moderately stressed, but fundamentally solid, company and put it through the wringer without much justification.

By contrast, if private equity were really doing its job, it would be tackling a proper challenge — like restructuring the regional press.

The only silver lining is the market’s suspicion that Informa’s private equity suitors won’t be able to raise the money required for a bid. This is evident in a share price that’s stolidly refusing to perk up to anything like the anticipated offer of 506p.

* I’m using three-month LIBOR (5.95%) here: it seems to be the benchmark.

Who will save Kelvin?

Posted by Peter Kirwan on 20 June 2008 at 11:00
Tags: GCAP PLC, Independent News & Media, Media, News International, United Business Media, emap

The happy-go-lucky saga of Kelvin MacKenzie’s potential candidacy in the by-election at Haltemprice and Howden cannot be allowed to hide the bleak reality.

Kelvin MacKenzie is a man who has lost an empire, but has yet to find a role.

Friends are worried that he is turning into the media world’s equivalent of Gazza.

The drink-sodden Geordie’s latter years were a steady downward spiral of broken dreams in dreary places: Gansu Tianma, Wolves, Boston United, Kettering Town and Burnley.

All the time, he was being helped through the darker moments by old mates from Spurs like Terry Vanables and Gary Mabbutt.

It’s a similar story with MacKenzie, who never properly recovered from the shock of leaving The Sun.

He was edged out of Sky after a few months in 1994. (The job had been arranged by his mate Rupert.) Then it was on to broken dreams in dreary places: LIVE TV, Talk Radio, Highbury House, Media Square.

Every one a winner? Not quite — despite the quiet behind-the-scenes help from his old mates Rupert and Les. At every port of call, MacKenzie’s self-destructive talent for destroying shareholder value resurfaced to devastating effect.

In the Sun column he used to announce that he wouldn’t be standing against Davis, McKenzie admitted that cashflow is, er, a little bit tight.

Will anyone help this once-proud man to conquer his demons? For his own good, MacKenzie needs to be prevented from ever running a business again. . .

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.

UBM-Informa talks collapse as the princes of private equity wave silly money under Mr Rigby’s nose

Posted by Peter Kirwan on 18 June 2008 at 12:29
Tags: United Business Media

So Informa and United Business Media won’t be getting hitched after all.

Talks collapsed last night after the market closed. UBM put out a statement first, suggesting that a deal in shareholders’ best interests had proved impossible to negotiate.

Then Informa followed up, throwing in the added information that it had received “a further approach from a third party that may or may not lead to a takeover offer in cash”.

That approach seems to have come from Providence Equity Partners (PEP). According to Neil Hume at FT Alphaville, PEP made an approach to Derek Mapp, the chairman of Informa yesterday, offering an indicative price of between 520p and 550p.

This would have been enough to embolden Informa — and break UBM’s bid, which was already undermined by the way in which investors had bid up Informa’s shares.

Between 8 June, when news of the talks was leaked, and yesterday, Informa’s share price rose steadily from 386p to 470p. To do the deal, UBM would have needed to bid at least 500p.

On 6 June, Informa was valued at £1.6bn. By yesterday, the market’s valuation had shot up to £2bn. At 500p, the company would have been valued at £2.12bn

Informa’s rising value created a problem for UBM. Under chief executive David Levin, UBM requires that its acquisitions deliver a post-tax return of at least 8% in Year 1.

After buying Informa for £2.12bn — plus the $1.24bn required to settle its debts — UBM would have needed the company to produce post-tax profits of at least £270m in 2009.

For 2009, Informa is likely to deliver post-tax profits of under £170m. Even after adding into the equation cost cuts (or synergies) of £30m to £50m, the deal was always going to be a goner at 500p.

Predictably, the Telegraph is suggesting that the deal was called off because of an “irreconcilable difference between the companies’ relative share price”.

At the Times, Amanda Anthony also suggests that some UBM shareholders were concerned about Informa’s debts.

In retrospect, UBM’s interest in Informa feels like an opportunistic episode triggered by collapsing share prices — and overcooked fears about Informa’s debts.

Who comes out of it better? For the moment, Informa, which has some distracting bait for the sharks in the form of an “approach” from an alternative bidder. For Peter Rigby, the company’s chairman, the dalliance with UBM has worked out well.

He has held on to his job, watched Informa’s share price rise sharply and used UBM to elicit interest from private equity funds (which was probably what he wanted in the first place).

There’s only one cloud on the horizon. At the weekend, apparently unprompted, Rigby made a reference to the possibility that Informa might be broken up into smaller parts and sold off.

This morning, the same suggestion re-surfaced, courtesy of several analysts, including Paul Richards from Numis Securities.

“As a business built by acquisition/merger, Informa could be dismantled into more manageable pieces relatively easily in our view.”

A break-up would serve only one purpose: it would allow a private equity bidder to bid high (possibly as high as 530p) in the hope of recouping some cash by selling off Informa’s specialist businesses on a piecemeal basis.

For UBM, one possible result of an episode like this is renewed market scrutiny. Questions will now be asked about the company’s strategy. Does UBM have another bid target in mind? If not, why not?

Morgan Stanley isn’t alone in recommending UBM as one of the market’s “safe” and “interesting” stocks. That said, David Levin, UBM’s cerebral chief executive, will need to move quickly to quell inevitable post-bid murmurings about quality of earnings and lack of ambition.

Why can’t Peter Rigby think of any positive arguments for a UBM-Informa merger?

Posted by Peter Kirwan on 16 June 2008 at 18:05
Tags: Media, United Business Media

From Andrew Davidson in the Sunday Times, an odd interview with an agitated-sounding Peter Rigby, chairman of Informa.

Odd because. . . well, I can’t imagine a PR advisor telling him to do it. (And PR advisors tend to rule the roost in situations like this).

Perhaps Rigby has chosen the Sunday Times to have a chat because it was the Sunday Telegraph that broke the story about merger talks.

Either way, it’s clear there’s a blame game going on about who leaked news of the UBS-Informa talks to the media. (“Our team didn’t leak it,” says Rigby.)

Also in the air: a clear concern on Rigby’s part that he may not play a part in any merged company.

Indeed, he slips into something like walkaway-mode when he starts to discuss Informa’s motives:

“It’s not to solve a debt problem or a CEO problem. We [Informa] are a fantastically balanced business, 60% of profits come from publishing subscriptions, we have really good geographic spread, our Dubai office is really motoring. Only 3% of our revenues come from advertising.”

Rigby is clearly also negative on the prospect of a UBM takeover (as opposed to a merger). The scenario he sketches out positions David Levin of UBM as a prospective Napoleon on the road to Moscow.

“If it turns out that way, it is more problematic, because people inside will feel like they have been taken over. We have to work very hard with people here, it’s about the niche-ness, the specialisms.”

Rigby spins the obligatory line that he will “try and do the right thing by shareholders”. But in terms of pro-merger arguments, that’s about it — a perfunctory commitment to do the right thing, and nothing else.

Lukewarm? That doesn’t quite cover it. From where I’m sitting, Peter Rigby’s approach to merger talks seems positively chilly.

Annals of spin: For you, Mr Rigby, the war is over. . .

Posted by Peter Kirwan on 10 June 2008 at 14:18
Tags: United Business Media

Did Informa’s spinners come up with this?

At the Telegraph, Damian Reece nails the weak-brained chat suggesting that David Levin, the chief executive of UBM, and Peter Rigby, chairman of Informa, might end up operating in tandem at the top of a merged company.

There’s even a suggestion floating around that Rigby might become executive chairman to Levin’s CEO.

That’s not going to happen. These days, executive chairmen are rarer than foie gras in Hackney. (Instead, they’re supposed to operate in a non-executive fashion, working as a go-between to link the CEO with investors.)

With the combined company destined for FTSE-100 status, Rigby’s job description will come under the spotlight. As Reece suggests, he should “take this opportunity to bow out with the applause of shareholders ringing in his ears”.

UBM & Informa: B2B consolidation just got interesting

Posted by Peter Kirwan on 10 June 2008 at 14:13
Tags: Reed Elsevier, United Business Media, emap

How many ways can you skin a cat?

Johnston Press solved its debt problems by asking investors for cash and accepting the advances of a Malaysian billionaire.

Now comes Informa. After experiencing debt-induced palpitations, the £1bn-turnover B2B publisher is wondering whether it might be best to fall into the embrace of United Business Media.

Actually, the merger-of-equals rhetoric isn’t too far wide of the mark. The markets value Informa at £1.8bn and United Business Media at £1.6bn.

Neither company looks particularly distressed in operating terms. Despite the current signs of a slowdown, both Informa and UBM grew at around 9% last year — not bad at all for companies of their size.

There’s symmetry at the level of motivation, too.

Informa has £1.25bn in debts and wants to reduce that number — fast. Combining with UBM, which has minimal debts, will improve matters. Besides, both companies will benefit from up to £50m of cost savings if they merge.

For its part, UBM will benefit from a deal by reducing its dependence on print and advertising revenues.

The result would be a post-print B2B behemoth turning over £1.7bn a year.

How problematic are Informa’s debts? This, after all, is a company that has grown rapidly on cheap credit. In 2001, Informa was a £300m-turnover company focused on subscription revenue and events.

Just seven years later, its revenues have quadrupled via apparently well-chosen acquisitions in academic publishing (Taylor & Francis), conferences (IIR) and research (Datamonitor).

Last year, however, Informa’s net debts reached a peak of 4.8 times the company’s operating profits.

By comparison, Johnston Press was forecasting 2008 net debts of 3.5 times operating profits before company announced its rights issue. (The multiples involved are similar to the ones used by building societies to assess the size of mortgage they’ll give you. If in doubt, think of your salary as operating profit. In the current climate, multiples higher than 3 aren’t popular among investors.)

How did Informa manage to rack up so much debt? During the naughties, it made big acquisitions. But the company’s fast-growing cashflows easily covered its interest bills.

For most of the decade, Informa looked like a good bet to bankers. It was a publisher with interests in virtually every media format you can imagine, apart from the dodgy no-go sectors of print and recruitment advertising. (In 2007, ads generated just 3% of Informa’s revenues).

Now, however, investors are much more worried by the speed with which B2B publishing profits might decline. Under these circumstances, interest repayments could become burdensome — very rapidly.

That’s why, as with Johnston Press, investors have been shunning Informa’s shares. (During the past year, Informa’s share price has dropped by one-third. The UK media sector as a whole has declined by 25%.)

It also looks as if Informa’s buoyant margins have started to slide in recent months. Helpfully, the combination of UBM with Informa should reduce the merged company’s debts to much more comfortable 2 times operating profits by 2009.

In recent years, United Business Media has avoided mega-deals. But that’s not to say that the company’s managers have been asleep at the wheel.

Far from it.

UBM has sold off Exchange & Mart, its 35% stake in Five and the NOP market research unit.

And since David Levin joined the company as CEO in 2005, UBM has spent almost £400m on 52 acquisitions negotiated by three separate in-house M&A teams in London, New York and Hong Kong.

UBM has been snapping up companies at the rate of one every three weeks. Few, if any, are what you’d call traditional B2B media outfits.

The aim has been to diversify away from the company’s declining roots in print.

But if Informa was self-consciously designed and built as a post-print B2B publisher, UBM still resembles a half-renovated Victorian semi with a skip in the drive and a concrete mixer in the garden.

In 2005, print accounted for 46% of UBM’s revenues. Two years later, the figure is 27.5%. Although UBM now draws four-fifths of its profits from events, databases and press release distribution, there’s still a way to go.

A merger with Informa would propel UBM squarely into the post-print future. The combined company would be largely focused on events, market research, databases and so-called workflow solutions.

In this respect, UBM-Informa could come to resemble Reed Elsevier, whose great leap forward involves selling off Reed Business Information, its magazine division.

If the UBM-Informa deal goes through, and if Reed Elsevier offloads RBI this summer, it will mark a decisive parting of the ways among B2B publishers.

Incisive Media, EMAP — plus whoever buys RBI — would remain as the major players in traditional B2B publishing. Two of this trio are already owned by private equity investors. RBI could go the same way, setting the scene for dramatic restructuring away from the limelight of the public markets.

That’s one scenario.

Plenty of others exist — including a potential counter-bid from private equity investors for Informa. Potential bidders understand investors’ fears that UBM will buy Informa on the cheap.

But by sucking hard-to-find debt financing out of the market, an intervention like this could derail Reed Elsevier’s plans to auction off RBI.

What we’re witnessing is top-of-the-cycle consolidation. By the end of this year, the B2B publishing market will have changed out of all recognition.

Whether investors have sufficient appetite for risk to make the pieces of this puzzle fall to earth in an orderly fashion remains to be seen.

The PPA’s ample-bottomed B2B propagandists would go down a storm in Burma

Posted by Peter Kirwan on 28 May 2008 at 18:38
Tags: Media, United Business Media

Pop this in your RSS feed and smoke it: Private Frazer’s Doomed Magazines looks like a freshly-minted second cousin to Business Media Blog.

Private Frazer’s aim is to “‘celebrate’ the halt, the sick and the lame of UK magazine publishing, preserving for posterity the titles that don’t make it (or don’t deserve to).”

In other words: a kind of F***** Company for magazine publishers. With added local irony, we seem to be following a US trend for death-watch blogs that rejoice in names like The Editorial Dead Zone and Magazine Death Pool.

What on earth does the effervescent Tim Weller, chief executive of Incisive Media, make of all this gallows humour?

As recently as February, when all but the most lame-brained knew that the credit crunch was going to hit the economy in a big way, Weller was shouting from the rooftops that B2B publishers “seem to have got our business models right”. He added:

“As a sector we are truly the envy of our British media peers and the blueprint for a successful industry, and by God let’s not be ashamed to shout about it.”

And by jingo, there was data to support his claim. According to the PPA’s secretariat for B2B propaganda, UK business media generated revenues of £15.6bn in 2004 — and a much-bigger £23bn in 2006. That’s an increase of 47% during two years.

Now there’s a problem with the PPA’s numbers, and it’s this: during the past couple of years, I don’t know anyone in B2B publishing who would have recognized them as a reflection of reality.

In fact, they’re about as credible as a Burmese party political broadcast. And in the wake of the credit crunch, the cognitive dissonance has only grown louder.

Take this week’s story in Press Gazette headlined “Last news reporters leave Music Week“, which told how the CMPi title was planning to face the future with no news reporters and no web editor.

Gary Hughes, managing director of CMPi, sounds like a decent bloke. He had the courtesy to talk to our Colin Crummy when some would have preferred to hide. In the event, Hughes talked about the situation as best he could:

“We are in almost a perfect storm situation. We need to get the product and the business model fit for purpose for the future. I’d say we are doing what we’re doing now to try and keep the business profitable, alive and give it a chance for growing.”

The existence of stories like this (as well as blogs like Private Frazer) should be enough to tell us that B2B publishing has some major problems.

Presumably, the ample-bottomed propagandists who crank out industry statistics for the PPA don’t agree.

Ahead of next year’s stats-fest, perhaps they could try getting out a bit more often.