Selling off the silver?

DMGT’s auction of regional newspaper group Northcliffe reflects a long-term approach to acquisition and revenue generation. By David Forster

Against the backdrop of a generally buoyant stock market, the UK media sector has had a relatively muted start to 2006. The index of fully listed media shares was flat in January, while AIM-listed media shares fell 4.1% on average.

Only three media sub-sectors made any progress in the market in January/ entertainment rose by 1.3%, marketing services by 1.2% and professional publishing by 0.5%.

Broadcast, as a sector, was distinctly out of favour, with each sub-sector seeing a material fall: free- to-air television fell by 3%, pay television by 5% and radio/outdoor by 11.7%. The latter accounted for the two worst-performing fully listed media shares, with GCap Media down 12.2%, and Maiden Group falling by 30.2% as hopes of a premium bid waned after the company’s confirmation that it had received a number of approaches.

Unsurprisingly, there is a high level of interest in the outcome of the auction of Northcliffe Newspapers, which Daily Mail & General Trust (DMGT) put in to a formal auction process in December. Firstly, DMGT’s decision was in itself a thunderbolt and, in terms of shock value, not far off an announcement along the lines of “BSkyB quits pay-TV”. After all, DMGT has a reputation of being a reluctant seller of anything and, outside of Associated Newspapers, many would see the regional division as a defining asset, not least because of its historical role in the group’s development.

The sale of Northcliffe is worth dwelling on because it gives insights into some of the biggest trends currently taking place in media/ namely, the shift from “old” to “new” media and the growing role of private equity in the fortunes of the public markets.

Of the two big questions that emerge: “Why is DMGT selling?” and “Who will buy and why?”, the latter can be more readily answered. As widely touted in the press, the principal buying interest for Northcliffe Newspapers is from other regional publishers and private equity players and, in some cases, alliances of the two. Regional publishers are obvious candidates because of the synergies they can bring to bear on integrating Northcliffe with their existing businesses.

However, with a price tag of up to &£1.5bn, Northcliffe is a big mouthful for any of the standalone regional publishers to swallow. Furthermore, in what is already a highly consolidated industry, competition issues will limit the ability of some to participate. Furthermore, the financing structures that private equity players can bring to bear (lots of debt and not too much equity) mean that, provided higher profits feed into a higher equity valuation, there should be substantial upside if Northcliffe can be acquired at a reasonable price.

Private equity’s view of Northcliffe, therefore, will be broadly along the lines of: buy it; sell off certain assets to other regional players who will pay a strategic premium and who could not afford to buy the job lot; pay down some debt with proceeds to reduce the risk profile of the investment; cut costs to ramp up margins towards the level of Johnston Press; then re-float on the stock market in approximately three years’ time.

Moving on to the more interesting question of why DMGT is a seller, it is clear that it is not in the interests of short-term value creation. The Northcliffe profits for sale are understood to be about &£98.5m, and if DMGT does realise a sale at a high-end &£1.5bn and puts the money on deposit at 4.5% it would generate &£67.5m of interest – a sizeable shortfall by any standards. However, DMGT’s finance director commented on the day of the sale: “We’ve come to the rather sad conclusion that there may well be better value for shareholders from a sale of Northcliffe rather than retaining the business.” So where does DMGT see scope for long-term value creation? In recent years it has focused on three areas: business publishing and professional information, exhibitions and the internet. Whereas the internet has placed huge pressures on many consumer media business models, in many areas of business publishing it has provided significant benefits, including improving the efficiency and reducing the costs of delivery. Exhibitions and events highlight that, even in an increasingly connected world, the value of face-to-face communication remains undiminished.

Finally, within days of announcing the sale of Northcliffe, DMGT revealed the latest in a stream of online acquisitions – the residential property website, for &£48m. Leaving the money in the bank would have earned DMGT &£2.2m of annual interest assuming the same rate as in our earlier example. Instead, it has chosen to invest that money in a business that made a profit before tax of &£500,000 in 2004.

Many companies on the stock market are criticised for being obsessed with short-term profitability. However, DMGT has always been seen as taking a long-term view, and while the sale of Northcliffe may be revolutionary, it does show that some things never change.

The IBIS Capital Media Indices

IBIS Capital is a corporate finance advisory and investment business focused on the media sector. The IBIS Capital Media Indices are a set of proprietary analytical tools developed to monitor the UK media industry from the perspective of the share price performance of publicly listed companies.

The indices group companies with similar business models into sub-indices. Over time, significant variations in sub-sectors’ performances can be seen. The indices also include a split between media companies fully listed on the London Stock Exchange and those listed on the Alternative Investment Market (AIM). The junior market, with its less stringent listing requirements, has been enjoying a relative boom in investor interest, and many media companies have listed on it. However, fashions change, and when the AIM does suffer a setback, its lack of liquidity relative to the LSE means it is likely to underperform the senior market. The IBIS indices will highlight the relative performance of the two markets and may give an early indication of a change of direction.

As well as being of interest to those concerned with the performance of the UK’s media industry and its sub-sectors, the indices are useful to directors considering a flotation of their own company, or for anyone else considering the purchase or sale of a media company or shares.

The indices monitor all UK media companies listed on the London Stock Exchange and on the AIM with a market capitalisation over &£10m. Some companies are included that are listed overseas or have split listings.

The indices are based on the market capitalisation of each constituent company but, in common with the practices of other recognised stock market indices, they make various adjustments.

Factors taken into consideration in the compilation of the indices include: changes in the share prices and number of issued shares of the constituent companies and the number of shares in free float. The effect of initial public offerings, bringing new companies into the indices, and of mergers and acquisitions, which may take companies out of the indices or create new companies, are also considered.

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