The english patient

European media stocks are prospering, so what’s wrong with the UK sector, which despite high investor interest is lagging behind? asks David Forster

Investing in the UK media sector seems to be akin to digging for gold nuggets in a minefield/ potentially very rewarding, but you could do yourself some serious damage in the process. Is it really worth it?

July saw the index of typically larger fully listed media stocks fall 4.3% on average, and AIM-listed stocks fall 4.7%, leaving both indices firmly in the red for the year to date, down 5.4% and 14.3% respectively.

The culprits behind last month’s falls were a mixture of old faces and new. Further pressure on print and broadcast advertising saw sizeable falls in the share prices of the Daily Mail & General Trust, Trinity Mirror, Johnston Press, ITV, SMG, GCap, Chrysalis and The Local Radio Company. Meanwhile, market research company Taylor Nelson Sofres produced a profit warning relating to its US bespoke research business, EMI slumped on the collapse of its latest attempt to tie up with Warner Music, and property portal Rightmove.co.uk took a dive on the Government’s decision to make its home information packs initiative optional rather than compulsory. It just goes to show that there are many different ways to lose money in media, and why some investors may conclude that trying to second guess oil and gold prices is an easier way of making a living.

Someone’s making money

However, as is often the case, numbers do not necessarily tell the full story. The majority of the UK’s largest media companies have a relatively limited exposure to UK advertising: Reuters, Yell, Pearson, BSkyB, Reed Elsevier and WPP Group all announced solid results in July, producing share-price performances ahead of the averages highlighted above. Investors in Metal Bulletin were also left smiling, with its board recommending a &£221m all-cash offer from Euromoney, leading to a 29.3% share-price increase on the month, and 44.6% in the year to date. Meanwhile, in the world of private equity, Bridgepoint announced that it had sold All3Media, the UK independent television production company, to fellow European private equity firm Permira and the All3Media management team. The transaction valued the group at about &£320m on an enterprise basis, and produced a money multiple of 5.5 times Bridgepoint’s original investment, made in 2003.

With these sorts of returns available on focused opportunities, it is not surprising that investor interest in the UK media sector is still high, even as overall returns continue to disappoint. Despite this, just as a rising tide lifts all ships, it would be much easier to make money were there a generally positive underlying trend buoying the sector.

Although it represents less than 40% of UK media company revenues, there is little question that the depressed state of the advertising market – outside of online – continues to be a major drag on both sector earnings and sentiment. Evidence that the advertising market had at least bottomed-out, even if it hadn’t returned to growth, would probably be a significant factor in restoring the sector to favour.

Limited visibility

By way of background, ITV has stated that it expects its first half-year ad revenues to be down at least 4%, and GCap has confirmed that its half-year revenues were down 6%. Furthermore, there appears to be little indication that things are about to get any better, with GCap stating/ “Recent trading has been weaker than we expected. Visibility remains limited, and the GCap Media board takes a cautious view on market conditions in the near term.”

So, where, if any, are the grounds for optimism? Much of the ad market’s angst is being laid at the door of the share gains enjoyed by – and the general disruption to the market caused by – the online sector. Online, of course, is a global phenomenon, and so we should be able to see the travails of the UK market replicated in overseas markets, especially where they have reached a similar level of development. Let’s start with France, where the commercial TV market is dominated by TF1 and M6.

First-half advertising growth at TF1 was 4.8%, while at M6 it exceeded 5%. What about Germany? Here, ProSiebenSat1 has announced that its first-quarter ad growth was 1.8% and that it saw growth accelerate to 10% in May and June, suggesting that at least one TV station benefited from the World Cup, even though ProSieben didn’t actually carry any of the games. Surely, Italy – with its wretched economy and recently elected centre-left coalition government – must be suffering, but even Mediaset is now managing to produce positive growth, with first-quarter advertising up 2.3% and full-year expectations up about 3%. Meanwhile, Spain is on a roll, with Antenna 3 seeing first-half net advertising growth of 5.8%, and Telecinco experiencing growth of 3.3%.

Out of synch

For a more global snapshot, we can turn to WPP Group’s recent five-month trading update, which noted that: “Geographically, on a constant currency basis, all regions, with the exception of the United Kingdom, showed double-digit revenue growth.”

So it appears that what we have is a curiously English – or UK – disease, where what should be a reasonable advertising environment is being undermined by a combination of contracts rights renewal, the unparalleled strength of the BBC and a botched merger between two of the largest commercial radio players. Either that, or else the rest of the world is simply behind the UK market, and hasn’t woken up to the fact that old established media such as TV and radio don’t work anymore.

Naturally, as an investor, one would hope that the positive trading experienced by the majority of broadcasters in other developed markets is symptomatic of what should be achieved in the UK, once some of the domestic difficulties are resolved. However, until such time, those who are prepared to invest internationally may conclude that other markets are more attractive, or may seek to diversify their exposure by buying into the larger, UK-based groups with significant overseas operations.

David Forster is a director of IBIS Capital.

david.forster@ibiscapital.co.uk

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. 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).

Methodology:

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 included are listed overseas or have split listings.

Indices are based on the market capitalisation of each constituent company but, in common with other recognised stock market indices, they make a number of adjustments.

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