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Will Dennis change strategy?

The UK-based Dennis Publishing has had a great first year under private equity ownership. The company which (together with The Week in the US) was acquired for £167.4m by Exponent, increased its UK revenue by 24% to £133.2m in 2018 with EBITDA of £16.1m. While the profit was a mere 2% up, it included the expense of launching children’s magazine Science+Nature. But, as so often in the past, the real Dennis story is The Week.

The 24-year-old weekly news digest pushed through a 16% increase in its subscription price in a move which knocked only 5% off total paid circulation. The £1m TV campaign seems to have worked. More than that, the inspired magazine which, just two years ago, was pumping out no fewer than 40k free copies every week, has come to its senses and virtually eliminated unpaid circulation. It is likely, therefore, that The Week accounted for almost 75% of the company’s UK profit in the 2018. Together with the four-year-old The Week Junior (whose paid subscriptions were up no less than 20% to 64.2k in Jan-June 2019), it underlines the extent to which the sprightly magazine-centric media company has three distinct businesses with varying levels of performance.

In addition to accounting for most of the profit, the current affairs group might account for at least 35% of the revenue, despite the struggling Money Week whose subscriptions have fallen by 24% this past year.

A larger share of revenue was accounted for by automotive e-commerce and magazines. The highlight was the BuyaCar e-commerce which made its first operating profit of £200k (from revenue of £57m), despite direct sales of some 1,000 cars per month. Profit margins are notably tiny and a prediction that Dennis would be earning some £3-4m of profit from used car sales by 2021 may have been eroded by the intensifying competition in the UK market.

When it comes to the company’s legacy automotive, computer and specialist magazines, most of the latest ABC figures were down by double-digits compared with 3-4 years ago. Although many are bolstered by the Dennis trademark strength of posted subscriptions in a UK market still dominated by news-stand sales, the company has a long tail of magazines selling less than 20k.

So, the private equity owners of Dennis, which has been one of the UK’s best magazine publishers for more than 30 years, can identify the company’s three types of profitability in its home market: high growth, high margin (current affairs); shrinking (legacy magazines); and loss-making but fast-growing (Buyacar e-commerce).

Those realities might lead to some kind of change in strategy. In the way of these things, Exponent will already be eyeing eventual prospective buyers for Dennis. The growth in The Week (and its younger sibling) in the UK and also in the US where it acquired (for $30m) the $30m-revenue Kiplinger financial newsletters, already seems likely to attract a substantially higher price than Exponent paid for the whole Dennis business. And Buyacar’s sales levels (especially among the under 35s and women most difficult to reach) would make it a highly attractive acquisition for the likes of AutoTrader, CarGurus and Cazoo, now fighting aggressively for market share of second-hand car sales in the UK. An irresistible bid for Buyacar might come at any time, including from the financial and insurance companies which hungrily target car buyers. Beyond those with direct e-commerce relationships, some of the legacy magazines won’t matter much to the investor owners. But the break-up values are already looking great.

For the executives and staff of the distinctive company that was built by Felix Dennis over three decades from its origins in martial arts poster-mags, any kind of break-up might seem unthinkable. But, whether such spin-offs await attractive individual bids for each of the three divisions or Exponent’s eventual marketing of the whole business in 3-4 years, the eventual outcome is becoming clear. That’s the price of Dennis’ strong performance.