Scottish Media Group pounced on cinema sales house Pearl & Dean in a £22m deal last week, but the predator may yet end up as prey.
Since Granada snapped up the Mirror’s 18.6 per cent stake in SMG for £110m in March, the media industry has been taking bets that the television-to-hotels conglomerate is planning a full takeover of the Scottish company.
Granada’s move on SMG has given a clear “hands off” warning to any other potential predator, whether a foreign media owner or one of the other “ITV big three” Â Carlton or United News & Media. It has also laid down a marker for its own ambitions to further consolidate ITV by swallowing up SMG’s Scottish Television and Grampian franchises.
Granada, which proved its business was firing on all cylinders at its interim results last week, dominates ITV in the North of England with its ownership of the ITV franchises for Granada, Yorkshire and Tyne Tees, besides having the franchise for London Weekend Television.
But some observers believe SMG’s purchase of Pearl & Dean is part of a strategy to make the company more difficult for another buyer to swallow Â any predator would have to take the time and trouble to break up the group.
SMG chief executive Andrew Flanagan says the acquisition of Pearl & Dean is part of the group’s dual strategy of developing around well-branded, complementary businesses and the need to expand outside Scotland. SMG already owns Herald newspapers in Glasgow and this year made its first foray into outdoor with the £35m acquisition of English six-sheet contractor Primesight and the smaller Edinburgh poster company Baillie.
He says: “When you look at the customers of a TV business, a large proportion of them are exactly the same for another media business. We have a very powerful cross-media sell. We are bringing advertisers from one medium to another in a co-ordinated and packaged way.”
He disagrees with the suggestion that SMG’s venture into cinema, coming on the back of the expansion into outdoor, is a further attempt to shore itself up against a hostile takeover bid. But observers argue that any company looking to buy SMG would be faced with the prospect of paying more for an enlarged group and the troublesome task of selling off unwanted assets.
Granada, for example, has confirmed its strategy of remaining focused on television. Chief executive Charles Allen, in denying he was running the sliderule over UK outdoor company Maiden last week, said: “It’s not my focus. We will concentrate on TV. It’s not for Granada to diversify.”
West LB Panmure analyst Lorna Tilbian says the Pearl & Dean deal is designed to “keep the wolf at bay”. She adds: “This is an attempt to keep earnings growing, because SMG’s core base is not growing.”
SMG has little scope left for expansion in Scotland, particularly with devolution encouraging the competition authorities to assess it as a single market. Two efforts to move outside Scotland have already been frustrated Â its £126m takeover approach for Ulster Television and its raid on video publisher VCI, when it was outbid by Kingfisher.
Further expansion south of the border always looked inevitable, particularly as SMG has access to a considerable war chest on the back of its profitable Scottish businesses.
Some observers see the cinema buy as a good fit with SMG’s existing holdings. Roger Parry, chief executive of Clear Channel International, an outdoor company with interests in radio which also took an interest in buying Pearl & Dean, says: “There is a logical combination of outdoor and cinema. Both are niche advertising media.”
Where outdoor is used to add extra support to TV spend, cinema can also give added weight to TV campaigns by giving clients such as a bank the opportunity to reach the elusive 16- to 34-year-old market.
Flanagan argues that Pearl & Dean, lagging a long way behind its only other UK rival Â market leader Carlton Screen Advertising Â has good growth prospects, given investment from its new parent.
Pearl & Dean, which before its sale was 53.5 per cent-owned by private investors and 45.1 per cent by French cinema advertising company Mediavision, sells advertising on 840 screens in 250 UK cinemas. This is equivalent to 30 per cent of the country’s cinema admissions, but translates as only about 25 per cent share of actual advertising revenue. Carlton takes the rest.
Pearl & Dean has contracts to sell advertising for distributors Time Warner, Showcase, Cine-UK, Apollo Leisure and on behalf of Hoyts. Flanagan argues that the imbalance between Carlton and Pearl & Dean comes down to the share of UK contracts, which usually come up for renewal every three to five years, and he indicates that with SMG’s deeper pockets, Pearl & Dean will have more chance of winning new business.
“Investment would mean more staff and also being able to fund some of the customers themselves. These cinema owners require upfront payment,” he says.
He also believes that cinema, which takes about one per cent of the display advertising cake, is a medium with potential. “Cinema has a young, upmarket audience. Research indicates that audiences have quite high retention of what they see. It’s never going to be a major part of the advertising market, but there is room for growth.”
Andy Smith, Zenith broadcast director and head of cinema, adds: “Cinema is pretty vibrant, especially with Star Wars around the corner.” But he says there are still advertising sectors, such as retail and the record industry, where the medium has failed to make significant inroads.
Flanagan indicates SMG’s shopping spree is not over, as the group is still looking to build its presence in the outdoor market. But with continuing speculation over the long-term intentions of Granada, SMG may yet find itself in someone else’s sights.