Turning the corner

Despite more bad news for ITV and GCap Media, big investors are starting to show an interest as they sense an opportunity to buy big. By David Forster.

There is a stock market adage that the best time to buy a falling share is when the last buyer capitulates and turns bearish – the rationale being that if everyone is a seller then all the bad news must be in the price. Of course, some companies’ shares do keep falling and end up being worthless; however, it is often the case that the turning point in a company’s share price performance happens well in advance of a discernible change in the direction of news flow.

GCap Media and ITV could be cases in point. It seems unlikely that many media market observers would have tipped this pair as the second- and third-best-performing media stocks of August, up by 9.1% and 8.7% respectively. The month saw another poor set of Rajar results from the GCap perspective, confirming that Capital Radio is continuing to lose audience share. It wasn’t any better for ITV. It announced weak interim results, the loss of its chief executive and gave a dire prognosis for third-quarter advertising revenues, which it expects to be down 14%.

A Bleak Outlook

While confirmation of Charles Allen’s departure was hardly a surprise, the news on ITV revenue prospects just seems to get worse. Notwithstanding, ITV’s share price suggests that investors believe there may be light at the end of the tunnel.

One reason that share prices often start to perform in advance of a clear change in news flow is simply a reflection of the size of the funds under management of the world’s leading investment institutions. With a significant number of the largest institutions having over $100bn (£53.6bn) under management there is no point, from their perspective, in investing in an individual company unless it is possible to buy a sizeable position.

If they only manage to invest $1m (£536,000) and it then doubles in value, it will still not move the needle in terms of overall performance. Consequently, the larger funds need to be confident they will be able to invest tens of millions before they will consider starting to build a position, which in many cases may take several months.

Strategically the managers of these funds will want to have got their position onboard ahead of a share price turning point. In other words they seek to buy when others are selling and if they think that the news flow with regard to ITV, for instance, will start to improve in about six months, then they may be actively purchasing now.

This brings us to this month’s stock market trivia question/ “What do ITV and Marks & Spencer have in common?” The answer is that they both share the same top two largest shareholders, namely Fidelity and Brandes Investment Partners. Respectively these institutions have around $200bn (£107.2bn) and $105bn (£56.3bn) under management.

Fidelity’s position in ITV has been the subject of considerable publicity, given that much of it was accumulated ahead of the Granada/Carlton merger and Fidelity fund manager Anthony Bolton played a significant role in the subsequent restructuring of ITV’s top management.

Brandes’ Values

Brandes, by contrast, is typically a far less high-profile investor, although those followers of Philip Green’s thwarted pursuit of M&S may remember the Brandes name, given its position as M&S’s largest shareholder, with a stake of approximately 12%. At the time, the rejection of Green’s bid, which was putatively valued at 400p a share, seemed a brave move as M&S seemed to be utterly becalmed. Subsequently there has been a dramatic revival under the new management team led by Stuart Rose and M&S’ shares are 594p.

At 7.5%, Brandes’ position in ITV is less significant than that which it held in M&S. However, in conjunction with Fidelity’s 14%, the two institutions are likely to have a significant say in ITV’s future. A key insight into Brandes’ style is provided by its website: “Since our inception in 1974, we have applied the value investing approach to security selection pioneered by Benjamin Graham. Value investing emphasises the accumulation of wealth over the long term versus the pursuit of potentially fleeting short-term gains.” Taken at face value this would suggest that the Brandes’ view of ITV is that it represents intrinsic long-term value, and that it is prepared to be patient.

Control Your Destiny

Brandes usually takes big positions in big companies, with ITV at the smaller end of the range of its typical targets. Fidelity, by contrast, dedicates significant funds and resources to smaller companies. No prizes for guessing GCap’s largest shareholder, therefore, which is Fidelity at 14.3%, whose holding is identical in size to that of Daily Mail & General Trust, followed by Schroders with 13% and Morgan Stanley Asset Management with 7%. Having nearly 50% of your company in the hands of just four investors tends to focus the mind and GCap’s management must be acutely aware that they need to be seen to be in control of their destiny soon.

• David Forster, director of IBIS Capital.

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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