Media Fortune Fame & Folly

What will Reach buy?

News people are not entitled to glaze over at repetitious journalism. But executives at Reach Plc, the UK’s largest newspaper group, are bracing for an avalanche of film, TV and print to mark the 30th anniversary of the death of Robert Maxwell, the larger-than-life publisher who had almost killed their company. His unexplained 1991 death has haunted the former Daily Mirror Group ever since, not least through the £200-300m of pension debt that has periodically threatened to drown the company Maxwell left behind.

The anniversary comes inconveniently at a time when the once-unloved Reach has been winning the hearts and minds of investors. The financials for the last two years – and the projections for this year and next – tell the story:

Reach Plc20192020*2021*2022
Revenue£702.5m£600.2m£591.9m£592.2m
EBITDA£174.9m£161.0m£168.0m£171.1m
Margin25%27%28%29%
EPS+1%-3%+5%+2%
Source: Numis

Note: *Forecasts

It’s a striking picture of strong (and growing) profit margins despite falling revenue. Investors have warmed to the company’s performance which, during Jan-April 2021, has featured:

  • Digital revenue +35% (2020: +11%)
  • Online registrations increased to 6.2m, on track for 10m by 2023
  • Print revenue decreased by 10% (2020: -19%)

The share price has more than trebled in the past 12 months to a 10-year peak. The Reach market value is now more than £850m. Despite the weight of print newspapers on the 118-year-old media company, it has become an attractive investment that is giving shareholders a good return (270% in the past year). But, for all the gains, the share price is still a relatively undemanding pe of 8x. You can judge a company by its shareholders and Reach’s are heavyweight investment fund managers – with no trace of the hedge fund warriors that can signal potential disaster or derailment.

But Reach can be puzzling. It still gets the majority of its revenue from print copy sales (and almost 75% from print overall) but is promising to achieve a major shift towards the digital advertising controlled by Facebook, Google and Amazon. The change of emphasis comes at a time when other publishers are doing everything possible to safeguard print revenue, especially from readership. While a publisher can (and should) grow digital revenues while also defending print, that is not how Reach explains its strategy.

The digital audience of the company’s once mighty flagship, the Daily Mirror, reached 32m adults across all platforms in April 2021 – beating its rival The Sun. It seemed thrilling until News Corp disclosed that the balance sheet value of its once world-beating tabloid was being written down to zero because of continuing annual losses believed to be up to £50m. Significantly, the Daily Mirror print circulation is about one-third of The Sun. And there’s an even bigger gap between Reach’s Daily Express and its rival, DMGT’s Daily Mail.

The clues to the longer-term Reach strategy may lie in CEO Jim Mullen’s declaration that he will double its digital advertising (currently £118m, or 20% of the group total revenue) in the medium-term. He said last month: “With digital now accounting for more of our advertising revenues than print and growing strongly, we are well placed to make further progress during 2021”. That is undeniable progress. But just to put The Big Leap into context, Reach has been spending almost nothing on R&D, capex or M&A. Its 2020 capex was just £2m and it shows through in neglected web site development. The listed company may be choosing to pay shareholder dividends rather than daring to invest in a growth strategy.

But that may all change during the next 12 months.

We may conclude that this is the final sort-out phase of a historic media company, cutting costs, squeezing revenue and digitalising, prior to a transformative deal to monetize Reach’s 50m total audience which is attracted by its high-interest news, sport and lifestyle content, and national and regional newspaper brands.

Has the two years of financial squeeze (and dividends) been a carefully calibrated, heads-down preparation for major investment in a transformational plan?

Reach has told investors that it will gear-up the balance sheet to 1x EBITDA (c£150m), which might mean an acquisition of, say, £200m. But investors (and, come to that, the world of private equity) are indicating their potential support for digital transformation: deals that would completely change the company’s operations and valuation.

The potential targets or partners might come under three broad headings:

Price comparison: These money saving sites increasingly fit with media company marketing, membership and subscriptions. Magazine and news companies are all over them: Axel Springer (Idealo), Future Plc (GoCompare), Meredith (BizRate), and Bauer (Zmarta). Reach might be able to merge with, acquire or establish a strategic partnership with the private equity-owned SkinFlint (Austria-based), Price Runner (Sweden), or Confused, owned by Admiral insurance in the UK.

Pureplay digital: The wide range of possibilities could embrace: the privately-owned Ladbible whose SportBible and GamingBible help it attract a claimed audience of more than 100m young people. In 2019, it had revenue/EBITDA of £29m/ £5.7m. Or, perhaps, there will be the much larger opportunity to sell Reach into the 21-year-old Red Ventures, of the US. The pe-owned $500m-revenue digital media company owns 100 brands and platforms including: CNET, Lonely Planet, Bankrate, Uswitch, and BestColleges, and has a claimed 500m monthly uniques. A combination with Reach could turbocharge RV’s content-rich platforms and price comparison sites in the UK and beyond.

Football: Reach is built on the UK’s obsession with football (soccer). It has strong newspapers in virtually all the cities represented in the cash-rich English Premier League and many others throughout the UK. It has the capacity to create any number of paid-for and free local and national services to exploit the strength of its football reporting but also to tap into the biggest paymasters of The Beautiful Game – betting and pay TV. This could raise the prospect of M&A with television and radio broadcasters or the streamers Netflix and Prime Video. Could Comcast’s Sky TV, ITV, Amazon or Apple be interested in linking with the UK’s largest newspaper group?

Next month, Reach presents its half-year results. Investment analysts will be listening intently for hints about the future of the company that even Robert Maxwell couldn’t kill. Can’t wait.

Reach Plc