The UK’s listed Daily Mail & General Trust (DMGT) this week sounded just a little bit smug despite a 10% fall in underlying revenues to £1.3bn and a 78% fall in operating profit to just £15m (£67m in 2019). And the company actually increased its dividend. Despite having returned £1.1bn to shareholders, the company has net cash of some £170m.
The cash pile and a calculation that the dividend has a 30-year (yes) CAGR of 8% enabled CEO Paul Zwillenberg to say that DMGT was “very pleased”, despite the effects of the pandemic on a business that is 30% subscriptions, 24% advertising, 24% copy sales, 16% subscriptions, and 6% events.
The publisher, whose flagship news brand is the famously strident Daily Mail, was being smug about a strategy of improved “efficiency” and cash generation. The family-controlled company is riding out a crisis, seemingly without pain. It’s a familiar story for what, alongside the Hearst Corporation, is one of the world’s oldest media companies. Both were founded as newspaper publishers in the last years of the nineteenth century by head-strong entrepreneurs who shared a lust for money and power.
A hundred years before Fox News looked like a media pioneer of political mud-slinging, W. Randolph Hearst was using his trademark “yellow” journalism to bully US politicians, while laying the foundations for what has become one of the world’s most successful diversified media groups.
Meanwhile, in London’s Fleet Street, Alfred Harmsworth (later Lord Northcliffe) knew all about press power and reportedly said about his Daily Mail: “I give my readers a daily hate”. In 1902, it became Britain’s first 1m-selling newspaper. During the 1914-18 war, the British government had appointed him “director of enemy propaganda”. But Harmsworth died in 1922, the year DMGT was floated on the London stock exchange by his younger brother.
Thus began an ironic sequence in which the Daily Mail dynasty has arguably been defined by the success and failure of alternate generations. A successful heir has followed an unsuccessful one for more than a century. It’s a pattern sometimes joked about by the current, fifth generation chairman, Jonathan Harmsworth (the fourth Lord Rothermere) whose family trusts own 100% of the company’s voting shares but less than 30% of the ordinary equity.
It is 22 years since he took over on the death of his father who had been the company’s most successful leader. The valuation had soared from £31m to £2.4bn (with profits rising from £3m to £197m) during 1978-98. Much of the success came from the resurgent Daily Mail whose widely-acclaimed editor-in-chief David English also died in 1998, just a few months before his boss. During their 20 years, the Euromoney financial information company (launched in 1969 by the Daily Mail’s finance editor) increased its profits from a mere £117k to £32m. Vere Harmsworth left DMGT in great shape.
Three years ago, Jonathan Harmsworth’s own legacy seemed to have been threatened by his father’s stellar performance. He reported 2017 operating profits of just £198m – some 28% down on 2016 and the same as those in his father’s final year. Despite the 20 intervening years of real innovation and success, the £1.7bn revenue was only 12% ahead of the company he had inherited in 1998. There had been no growth in five years and newspapers were in a spin. Such things weigh heavily on the shoulders of dynastic leaders.
But, at a time when Covid has accelerated media disruption and wrecked economies everywhere, DMGT is much stronger than it was 11 years ago in the wake of the global financial crisis. Its 2008-9 pre-tax profits had fallen 23% to £201m, net debt was almost £1bn and it had a pension scheme deficit of £400m. The all-important dividend (then as now) was maintained but investors were nervous.
Fast forward to 2020 and DMGT has net cash, no debt and a pension surplus. The group is now much smaller without Euromoney, its troublesome regional newspapers, and a distant Australian radio network. But, just to reinforce the CEO’s upbeat tone, the shares have been close to a five-year high, valuing the company at £1.5bn. And the financials show that the company was growing strongly until Covid.
DMGT retains a distinctive foothold in both B2B and B2C, dividing revenue almost equally between the two. But the underlying financial strength has come from multiple disposals including Euromoney and Genscape. And, of course, the happy parable of the Zoopla property website from which DMGT sold its last 30% for £642m in 2018. That was more than double the IPO valuation four years previously. DMGT’s total return was no less than 14 x its investment cost.
Zoopla founder Alex Chesterman has now launched Cazoo for used cars -with DMGT, which is hoping for another Zoopla-style result. It is said to have sold 10,000 cars in its first 11 months and to have revenue of almost £150m. The latest funding round of £240m last month valued the business at £2bn. On that basis, DMGT’s 22% stake is worth £409m, equivalent to 25% of its own market value. More to the point, the DMGT stake may be worth four times what it cost. And, with new investors like BlackRock and Fidelity, we might expect an IPO and another windfall gain for DMGT. But there’s more.
It is almost 10 years since B2B media eclipsed newspapers as DMGT’s principal profit-maker. The game changer was the 1998 acquisition of Risk Management Solutions (RMS), a ground-breaking US provider of economic modelling of catastrophe risks by the global insurance industry.
Within a few years, RMS had become DMGT’s most successful wholly-owned business, with operating profit of £57m in 2013. But it has suffered through strong competition (including from a non-profit industry provider), careless trumpeting of its own high profit margins, and by repeatedly failing to deliver new software on time and on budget.
As STM publishers have painfully discovered, excessive profit margins tend to encourage the rival development of open-source systems, inevitably leading to lower margins. And so it is with catastrophe modelling.
DMGT acquired RMS after it was spun-out from Stanford University. The £130m total price was a steal for the pioneering business. But, in recent years, the profits have been flat-lining. This year’s £34m is fully one-third of DMGT operating profit but is down on a 2019 performance which had been trumpeted as a recovery after the departure of the RMS founder.
One company which has always watched RMS closely is its closest competitor, the US-based Verisk which itself has a total market cap of $31bn.
Nobody will miss the point that, even if RMS’s value does not approach Verisk’s own p/e of 48x, it is clearly worth more than 50% of DMGT’s £1.5bn market cap. How tempting is that?
For all its undoubted success with B2B operations across information, exhibitions and RMS, the DMGT portfolio is randomly scattered across sectors and geographies and – to emphasise the point – the company is a minnow alongside the global operators with which it aspires to compete like RELX, Thomson Reuters – and Verisk.
Most of DMGT’s B2B assets have been mere niche players (albeit successful ones) rather than elements of a global market strategy. RMS is the one truly global operator in the portfolio. But its erratic recent history conveys a sense that – however profitable – it can never be a core business in a legacy company that, ultimately, cares about nothing more than its historic role as a news provider.
That’s why it seems reasonable to view DMGT as a quasi investment trust which exists to maintain the Daily Mail and associated brands: news is the company’s DNA. In that sense, DMGT resembles, ironically, the charity structure of The Guardian more than Hearst which has long since diversified away from newspapers and magazines and transformed itself into a B2B and TV powerhouse, even while retaining footholds in all media.
But such longterm strategies depend on much more than buying low and selling high.
Some newspaper-centric companies have managed revolutionary change without having to cut off the branches they were sitting on. Germany’s newly-privatised Axel Springer and Schibsted, from Norway, transformed themselves into digital groups not by abandoning their domestic news brands but by using their traditional skills to launch online classifieds in “new” global markets where they became the disruptors.
Both companies took big decisions to invest digitally and internationally. By contrast, DMGT’s fickle approach to, say, digital classifieds has been to dabble and then cash-in. Its best gains in the past 20 years have been as an investor not a proprietor of businesses.
For all its profit-dependance on B2B information and events, the sale of the high-performing Euromoney was almost the proof that DMGT would sell almost anything. Which is why RMS may be next.
It is, of course, difficult to fault an investment strategy that has consistently generated such great returns for DMGT shareholders – especially in times like these. But there are fault lines in the strategy.
The Daily Mail flagship remains influential and profitable, albeit way behind where it was just five years ago. The weekday print circulation is 860k, about 50% of just a few years ago and, like other UK national dailies, it generates probably 100% of its profit just from the premium-priced Saturday edition.
Although the national tabloid is probably still the strongest in the UK, the slide is inexorable. And, in the week when Mail Online’s key competitor BuzzFeed sought some hoped-for security in the unlikely embrace of HuffPost, it was notable that the DMGT CEO was not boasting about the performance or prospects of his own 17-year-old pioneer of clickbait. The company’s free tabloid Metro has also, inevitably, suffered at the hands of a pandemic which has slashed commuter travel; and even the 2020 acquisition of the i tabloid (think USA Today) no longer looks very clever.
We should, though, assume that the cashed-up DMGT now sees its core business not as newspapers but as news. It has been experimenting with Mail+ (not to be confused with the MailPlus digital edition of the newspaper). Mail+ is online audio and video chat shows, interviews and news. It’s a fascinating initiative which seems to be awaiting promotion to the company’s primary strategy for news. Perhaps that is getting close.
DMGT will be watching closely two television news initiatives coming to UK screens early in 2021.
The first is the Discovery-backed news channel (fronted by veteran journalist Andrew Neil) which is expected to operate as individual programmes rather than rolling news, on cable, satellite and online.
The second is from News Corp which may be even more separate current affairs and news programmes than a single channel, perhaps “pushed” via platforms and available via Netflix, Spotify and other streamers. And News Corp’s UK ambitions may still involve some links with sister company Fox News as well as its newly-launched Times Radio. It’s all under wraps.
What these two quite dissimilar projects may share in common is a realisation that domestic news channels can be much lower-cost than, say, Sky News, the BBC or CNN: only international channels need to be 24/7. The new-style domestic channels could concentrate on peak viewing times and may be able to build large audiences relatively quickly by using a range of platforms and digital distribution, including the streaming platforms.
Before it gets the ultimate super pay-out from RMS, DMGT seems likely to move more quickly towards operating a Daily Mail TV-streaming news service and building on its learnings from the Daily Mail TV programme in the US. Perhaps it will substantially expand Mail+ (or even invest in the Discovery-backed news channel?). Or will it form a UK partnership with Comcast (owner of Sky TV) or Netflix? Or perhaps there’s an entrepreneur just waiting to capture the imagination of Britain’s oldest media company?
DMGT is always looking for the next big thing. As the pandemic recedes, Britain’s oldest media group will be looking even harder – and has all the cash it needs to make a big splash in the market it knows best.