The Indy is going south with the rest of the consumer media. But as today’s trading update for Q2 proved, Padriac Fallon’s Euromoney Institutional Investor is firing on all (or most) of its cylinders.

Euromoney’s home page gives a flavour of the exotica generated by the company’s employees — everything from Petroleum Economist (which must be rocking at the moment) to a two-day summit for tax specialists in Rome in September that will cost £1,295 to attend.

Padraic Fallon started out editing Euromoney (the magazine) 34 years ago and is now the company’s £2m-a-year chairman. For years, while many in the B2B sector were content to live off dwindling recruitment revenues, Fallon perfected a business model that now defines the ideal.

That’s to say: minimal dependence on advertising, a big events business — and, if you can get it, plenty of subscription revenues generated by high-quality specialist content.

Less than one-fifth of Euromoney’s revenues come from advertising. Subscriptions account for nearly 40%, and the balance is generated by a mix of databases, conferences and training.

In March, the company reported revenues up by 7%. Today, the company unveiled even faster growth. During Q3, revenues rose by 13%.

How has a company that made its name in the financial sector managed this feat? The answer partly lies with Euromoney’s focus on emerging markets, where revenues are roaring upwards at 25%+ per annum.

The company’s interest in booming commodity markets must also have something to do with it — although Euromoney does seem noticeably coy about the performance of Metal Bulletin, which it acquired for £220m in 2006.

Neither do today’s interims specifically mention what’s happening inside the company’s core financial publishing division. But during the six months to March, revenues in this division fell by just 1%.

This feels like a creditable performance, one that reinforces the currently bullish logic of both the FT and The Economist: in a slowdown, the demand for high-quality information about what’s happening in financial markets is relatively robust.

Looking ahead, Euromoney isn’t expecting any problems. Today’s trading statement suggests that the revenue pipeline for Q4 “looks similar to this time last year and [is] in line with the board’s expectations”.

Nice work if you can get it.

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.

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.

In the US, a company called ValueClick — the second-largest online ad network in the country — yesterday announced weak earnings and cut its financial forecasts.

Logically enough, the company’s boss told investors that advertisers are becoming “increasingly performance-oriented”. In other words, they’re less interested in branding, more interested in lead generation.

Theoretically, this should rebound to the advantage of Google. Yesterday, however, Wall Street marked down the company’s shares aggressively when it revealed slowing revenue growth (43% YOY vs. 63% a year ago.)

MSN has problems, too. In Q1, Microsoft’s ad business (excluding aQuantive) grew by 26%. Yesterday it revealed organic revenue growth of just 8%.

Against this backdrop, here in the UK, there’s some plausibility in the recent claim by New Media Age that portals like AOL, MSN and Yahoo! are “offering inventory, in some cases premium space, at cut-price rates as they struggle to hit targets”.

Something equally unpleasant — or worse — must be going on inside the digital departments of newspaper groups.

A few optimists suggest that the shriveling of financial services ad spend is causing the trouble.

“There’s been a drop-off in advertising from financial services so [media owners] are having to chase money harder, so it makes sense to drop prices.” That’s the verdict of Paul Wright, director of sales at Sky Media.

Ron Horler, managing director of Diffiniti, actually qualifies as an outright optimist. He tells NMA: “We haven’t seen a downturn.”

By contrast, NMA itself seems to think that UK digital ad market has just endured a nasty turn for the worse.

The magazine claims that price cuts are being made to both premium and niche inventory, and that portals are pushing more inventory through exchanges in a bid to hit targets. Budgets are being “slashed” and there’s talk of “half-price rates”. Online display ads are being pulled, and money is going into SEO and affiliate schemes instead.

According to David Hart, co-founder of digital agency Codegent, clients are focusing “optimisation, usability and customer insights. . . making what they have work much, much harder.”

All of this might be true, but it’s still too early to suggest that the forward march of digital revenues has been halted.

This much is clear from The Institute of Practitioners in Advertising’s Bellwether Report, which was published on Monday.

The report, which surveys the marketing intentions of 250 large UK-based companies, does suggest that marketing spend has fallen for the third quarter in a row. And it does say that spend is now declining at the fastest rate since the aftermath of 9/11 in 2001.

But — surprise, surprise — The Bellwether Report also notes that expenditure on online marketing is still increasing. In fact, it’s the only medium on which marketers are spending more money as the economy continues to deteriorate.

Granted, the rate of growth is disappointing. According to the report, internet ad budgets are only growing at 6% annually.

That’s still reasonably nice work if you can get it. But the next question on the horizon is a nasty one: can digital advertising budgets avoid going into reverse?

MSN’s internal problems might have contributed to the division’s single-digit percentage growth rate in Q2. But the signs are that a large slug of the digital economy is following it down the dreary path toward zero, or even negative, growth.

]]> http://blogs.pressgazette.co.uk/mediamoney/2008/07/18/digital-ad-revenues-are-still-growing-but-the-signs-of-distress-are-everywhere/feed/ http://blogs.pressgazette.co.uk/mediamoney/2008/07/09/common-sense-a-decade-late-james-murdoch-cuts-20-of-sales-jobs-at-news-international/ http://blogs.pressgazette.co.uk/mediamoney/2008/07/09/common-sense-a-decade-late-james-murdoch-cuts-20-of-sales-jobs-at-news-international/#comments Wed, 09 Jul 2008 15:40:53 +0000 Peter Kirwan http://blogs.pressgazette.co.uk/mediamoney/?p=112 James Murdoch’s decision to merge the separate sales teams that used to service Times Media and News Group Newspapers might sound a bit radical.

In reality, it’s hard to describe the move as anything other than common sense, implemented a decade late in a sector well-known for its old school approach.

From September, News International’s sales teams will flog space through “agency-focused hubs, each housing between six and 10 people”.

The stated aim, of course, is for sales folk to build deeper relationships with the big agencies that generate most of NI’s ad revenues.

The unstated aim involves cutting perhaps 20% of the employment costs out of NI’s sales organization. News International is planning to make 100 out of 450 sales staff redundant.

From a bean counter’s point of view, the timing is excellent. The reorganization was worth doing anyway. But no doubt Murdoch Jr. has grabbed the chance to add a bundle of recession-related job cuts into the total.

The anonymous jeers from rivals quoted in Media Week cut very little ice. One suggests that asking the same team to sell space in both The Sun and The Times is “not a natural fit”.

Why not? Despite demographic differences, both papers trade in the same currency of eyeballs. By selling across a portfolio of titles, News International will hope to generate more incremental revenues than it will inevitably lose by demolishing title-focused sales teams.

The second complaint from an anonymous competitor goes like this:

“I am not convinced it is the best way to go forward. The changes will not grow their revenue base, but it will be a more efficient way to generate sales. This is about cutting out costs.”

. . . Which, last time I looked, seemed to be a perfectly sensible response to recession.

A year ago, Coen thought the US ad industry might grow by 5% during 2008. Last December, Coen was forecasting 3.7% growth. Now, he is predicting 2%.

Coen also suggests that advertising has fallen from a steady 2.25% of US GDP to around 2.02%. That’s the lowest level since 1981.

Predictably, the biggest victim in all of this will be the newspaper industry. Overall, Coen is predicting an 8% decline overall for revenues from printed newspaper ads in the US this year.

Alarmingly, Coen reckons that spending on newspaper classified ads fell by 25% during Q108. (In June, the Newspaper Association of America reported that property and job ads both declined by 35% during Q1.)

These numbers come on the heels of data from the Newspaper Association of America, which suggest — alarmingly — that advertising on newspaper-owned websites in the US is growing by a measly 7.2% YOY.

During Q1, advertisers spent $8.43bn on printed newspaper ads. They spent less than one-tenth of that amount — some $804m — on buying ads on newspaper sites.

At this rate, US newspaper sites will finally generate as much revenue as their print counterparts at some point in the early 2040s.

It’s been said before, but bears repeating, that this isn’t the kind of timetable likely to be appreciated by shareholders who interpret the expression “medium term” to mean six months’ hence.

PS/Update: It’s 3pm and Universal McCann have just sent me the slides behind Cohen’s presentation.

Actually, the bit about advertising representing a “steady 2.25% of US GDP” turns out to be rubbish. (Reporters, eh?)

In the US, advertising expenditure last hit a trough of 2.12% of GDP during the recession of 1992-1993. It then expanded gradually, toward a peak of 2.52% in 2000.

But after the dot.com bust, there was no recovery. From 2000 onward, decline has been constant — right through the Naughties.

Currently, ad spend constitutes 2.02% of US GDP — the lowest proportion for at least two decades (McCann doesn’t supply any data for pre-1987).

This underlines the fact that we’re heading into uncharted territory. Already, the combined effect of economic crisis and web-led deflationary pressure on ad budgets looks startling.

Quite what the market will look like as we emerge from this slump in two years’ time is anyone’s guess.

Also worth bearing in mind: here in the UK, digital advertising has advanced further and faster than in the US. This suggests that web-led deflation is biting UK media organisations much harder than their US counterparts.

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. . .

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.

I wonder if Maurice Levy, chief executive and chairman of Publicis Groupe, feels that way today.

In launching VivaKI — yes, that’s how they spell it — Publicis Groupe has done something important. But the world’s second-largest network of ad agencies is having a very, very hard time explaining it to the world.

Take a look, for example, at this press release, in which Levy himself stakes a claim to being the King — no, the surely Emperor — of Buzzword Bingoland.

It’s a fair bet that the PR bunny who had to write it is now working his or her way through a bucketful of Prozac as a prelude to six months’ compassionate leave of absence.

The tech-flavoured end of the blogosphere is already taking the Michael. Entirely legitimate when you consider that Publicis seems to have wildly misinterpreted the meaning of the expression “open source”.

It would have been far simpler to get Jonah Bloom, the Brit who edits Advertising Age in New York, to write the release. Hacking his way through the thickets of verbiage, here’s what Bloom perceives:

The Audience on Demand Network [will allow] Publicis Groupe clients a single point of access to plan and buy a single campaign across Microsoft, Google, Yahoo and AOL.

And there’s this:

The VivaKi Nerve Center. . . ,which initially will tap into about 30 full-timers situated within Publicis Groupe agencies around the world, will be the data analytics hub of the operation, pooling consumer and media data from all the agencies and developing new ways of analyzing and using it.

So we’re talking about automated planning and trading plus massive data warehouses. And although Bloom doesn’t mention it, we’re also talking about hollowed-out agency brands positioned like shopfronts around the edge of the model.

Publicis isn’t the only ad agency network moving in this direction. In fact, Levy’s proposal feels like the standard template I encounter in discussions with folk from Adland.

Most understand that their organisations need to become system integrators tinkering expertly with the mighty technology platforms built by Google and its rivals.

Along the way, they hope to perform the reverse double backflip that will propel them into the future as technology-intensive, rather than people-intensive, organisations. In other words: just like Google, but less profitable.

M. Levy admitted recently that he got into advertising in order to chase skirt. He also enjoys suggesting — in a pre-Cluetrain French-accented way — that the job of advertising is to “seduce” the consumer.

Perhaps it’s time for him to focus on his strengths and let the technocrats get on with the heavy lifting.

I need to read the report, but I’m not sure that making mergers more difficult will solve what ails journalism.

If anything, it’s the other way round. Arguably, the UK’s regional chains, for example, need more consolidation — and quickly.

The committee recommends that Ofcom should investigate whether specific mergers “will impact adversely on news gathering”. What’s being proposed is a Journalism Quality Test.

This sounds good — actually, really quite good. Until you start to think about it.

For example: would the test mean that merging media companies are forced to sack back-office staff first? (This feels distinctly illegal.)

And how would Ofcom go about measuring the quality of news gathering? Because other factors can influence the need for bodies (such as improved technology), a simple count of heads won’t be the answer. Apart from anything else, that would take us back to pre-Wapping days.

But going down the route of counting sources-per-story or local stories-per-paper would be a nightmare. The spectre of barristers for Ofcom and Big Media brandishing rival studies in the High Court isn’t a pretty one.

And what about B2B and consumer magazine publishers? Why shouldn’t their mergers be subject to the same luxurious test?

Which raises another problem. If the government should regulate media mergers in this way, what will it do when a private equity firm snaps up a publishing company to restructure it behind closed doors?

If the government cannot apply the same test to private equity transactions, then it will end up tilting the M&A market away from trade mergers in favour of private deals. Quoted media companies would end up trading at a permanent discount to pretty much everything else on the market.

Oh, and one final thing. Can you imagine a British government of any complexion approving Lord Fowler’s test when Rupert Murdoch says what’s needed is less, rather than more, regulation? It’s not hard to imagine Andy Coulson’s response.

In an ideal world, the well-intentioned suggestion of a Journalism Quality Test wouldn’t be a problem. But given the industry’s current situation, it feels unworkable to the point of naivety.

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