Media Fortune Fame & Folly

Who will win UK news sell-off?

Many of the UK’s newspapers are up for grabs. This week, Reach Plc (formerly Trinity Mirror), the listed owner of 30 dailies, including the Mirror, Express, Star and more than 100 regional papers, announced it would not, after all, be bidding for the bankrupt JPI Media (formerly Johnston Press).

It is four months since the UK’s largest newspaper publisher indicated it expected to bid for the 200 JPI news brands including The Scotsman, Belfast News Letter, and Yorkshire Post. It would have been a further step in Reach’s strategy as a ‘consolidator’ of print under CEO Simon Fox. But that disclosure came just weeks before the board made an abrupt change and appointed Jim Mullen to succeed Fox. For all the subsequent reports of an expected bid for JPI regionals (excluding the 221k-circulation i national daily which has just been sold to DMGT for £49.6m), the new Reach CEO and his board are, to say the least, much less keen on doubling down on print.

Falling sales, rising multiples

They may have been affected by Reach’s 2017 acquisition of Richard Desmond‘s Express and Star newspapers for £200m.

The claimed price multiple of some 4-5 x EBITDA for that deal may already have been trashed by continuing sharp falls in newspaper revenues. On acquisition in 2018, the Daily and Sunday Star and Express newspapers had a total circulation of 1.3m (about the same as the Reach’s own Mirror and People). Last month, those circulations had fallen by 22%. And many of Reach’s regional dailies (including the Manchester Evening News, Liverpool Echo and Birmingham Mail) have lost 25% of their paid circulations in the last two years. It’s tricky catching falling knives.

For all Reach’s undoubted success in generating cash and paying down debt, this inexorable trend in newspaper sales has exposed the flaw in its strategy, and the obvious need to use print as a runway for the development of products and services for the future – not as an end in itself. Which, of course, means more than just putting the newspapers online. The new CEO (with a background in digital in the media and elsewhere) acknowledges the need to develop digital services that can become profitable in their own right, not as mere ancillaries to print.

Beyond continued cost-cutting at its newspapers, we should expect to see Reach investing in a raft of digital initiatives including e-commerce, entertainment, and sports. Last week, the company announced the launch of seven digital-only news services under its ‘Live’ brand, across the north of England, mainly in areas where it does not publish newspapers. That’s a valuable lesson from the playbook of Schibsted and Axel Springer: become the digital disruptor, especially in markets where you don’t have newspapers to defend.

Now that Reach has walked away, the JPI regional papers are likely to be acquired by the Gannett-owned, £155m-revenue Newsquest, the UK’s second largest regional news publisher (after Reach). It has long one of the UK’s best performing regional news groups and, even now, is making 23% EBITDA margins.

The slight snag may be its US parent company’s own acquisition by private equity this month, which may (or may not) lead to the divestment of Newsquest itself. But, whether or not Newsquest is eventually sold, its value could be substantially enhanced in combination with JPI, as the UK’s largest regional news group.

Rival bidders for JPI may, though, still include UK newspaper veteran David Montgomery whose National World vehicle has also been linked to possible investments in the troubled Norwich-based Archant regional news group – and also his former employer Reach. He may also be interested in acquiring Newsquest if it becomes available. He’s watching everything.

DMGT ‘back to the future’

DMGT’s acquisition of JPI’s i newspaper (making EBITDA profit of some £11m at a 30% margin) will unlock substantial economies alongside the Daily Mail and Metro. But it’s a sideshow alongside the appetising possibility of acquiring Telegraph Media Group which is expected to be sold sometime during 2020. While the DMGT’s acquisition of i will exercise the UK’s Competition & Markets Authority (CMA) which needs to approve the change of ownership, their deliberations would be dwarfed by any bid to buy the Daily Telegraph.

While regulators everywhere recognise the reality of the collapsing profitability of newspapers and the domination of readership and advertising markets by Google, Facebook, Instagram and Amazon, the DMGT will also be doing its sums on ways in which (even with the Telegraph) its newspapers still face strong competition from News Corp’s UK subsidiary.

News UK’s The Sun now claims a larger digital audience in the UK than Mail Online. But DMGT (plus the Telegraph and i) would actually have a gross audience of some 4m per publication day – almost twice that of News UK. It would be much closer if DMGT calculates its “unique” readers – and also, perhaps, includes News UK’s growing radio audience. While the i is broadly in the same sector as the Mail and Metro, the Telegraph could be said to be helping DMGT to compete with News Corp’s quality brand The Times while the Mail/Metro (sort of) competes with The Sun.

The Telegraph Media Group and DMGT would together have c£900m newspaper revenues, roughly the same as News UK. The regulators might be reassured by the fact that the enhanced DMGT (even if slightly larger than News UK) would still have a strong direct competitor, or even by the fact that News UK’s strategic position might actually be considered stronger because of its concentration on just three newspapers rather than DMGT’s five: a single log is stronger than a pile of twigs, whatever the weight.

While, in theory, News UK itself might also be able to acquire the Telegraph, the fact that the newspaper is the direct competitor of The Times – and that one Rupert Murdoch is chairman of News Corp – would render this difficult politically. Perhaps that is why News UK seems so keen now to expand its radio and digital interests (including TalkSport and Virgin Radio) rather than newspapers in the UK and Ireland.

Having acquired the i, if DMGT does next buy Telegraph Media, the CMA deliberations are likely to represent a watershed in the application of the UK’s outdated media ownership regulations. There is, though, likely to be some fierce bidding for the Telegraph. This week, the FT cited the interest of Belgian media group Mediahuis (which has acquired the Irish Independent group, whose chair is former Telegraph CEO Murdoch MacLennan).

But, if the DMGT were to acquire Telegraph Media Group, it would shift the company’s strategy back to consumer media and away from the B2B information services and exhibitions which have long accounted for a majority of its profit and a succession of investment gains.

Having divested Euromoney (DMGT’s best performing business over the last 40 years) the next sign of that gradual reversal in strategy might be the sale of its second best performing asset, the catastrophe risk modelling Risk Management Solutions (RMS), of California.

RMS was founded in 1988 and acquired by DMGT 10 years later. The £130m price was a steal for a pioneering digital business that has often generated operating profit of more than £50m. But the last 20 years of RMS have been marked by a bitter-sweet combination of: record profits and margins (£45m and 26% in 2014, for example), expensively missed deadlines on software updates, and sharply increased global competition. The founder-CEO left abruptly in 2018, the year in which RMS accounted for £229m of revenue (16% of the DMGT total) and £35m of operating profit.

When Verisk recently paid $364m (38 x EBITDA) for DMGT’s Genscape data group, nobody missed the point that the US analytics group owns RMS’s leading competitor. Even if RMS does not justify a profit multiple approaching Verisk’s own p/e of 40+, it might just be worth more than 50% of the UK group’s £1.9bn market cap. How tempting is that for DMGT as it seeks to fund major expansion in B2C media?

Even before any a high-priced bidding war for Telegraph Media, DMGT’s year-end results next week may reveal that its B2C publishing now accounts for 50% of its revenue – for the first time in more than 10 years. So the (surprising) shift is quietly underway.

Runway to the future

The next steps will be to ramp up the innovation in digital, e-commerce and online ‘broadcasting’. DMGT must build sustainable B2C profits beyond its newspapers.

Last month’s soft launch of MailPlus is an interesting start. It currently features three-times-daily live newsroom bulletins, and audio and video updates from reporters. It also includes a daily report by investigative reporter Michael Crick, a radio talkshow (The Daily Show) with Andrew Pierce, and a weekly political podcast called Order! Order! It will eventually be a subscription service, which underscores the limitations of the celebrity-stuffed, 13-year-old Mail Online with 180m global users, 122m advertising revenue but relatively little profit. The new digital service could be different in every way.

The branding of the embryonic MailPlus (or Mail+) may need to change to avoid confusion with MailOnline – and also because it has previously been the brand for a mobile app, providing a digital version of the Daily Mail for £10.99 a month. But, with a team of 40, MailPlus is now something new.

It could yet become the first online TV/radio network from a daily news brand, and may show how legacy media can create a runway to the future after all.

DMGT

Reach Plc