The Global Media Weekly for executives and entrepreneurs

Is this the future of UK’s largest news group?

Jim Mullen, CEO of Reach Plc, the UK’s largest newspaper group, sounded positive when he announced the listed company’s results for 2021:

  • Revenue up 2.6% to £615.8m and EBITDA up 2.7% to £165.4m
  • 25% digital growth more than offsetting the decline in print
  • Growth in first party data with 10m online reader-user registrations

The CEO said: “Our strong balance sheet and cash generation underpins continued investment as we transition to an increased mix of higher quality digital earnings.”

Investors have been relatively positive about the changes since Mullen’s appointment in 2019 perhaps, especially, the decision to reintroduce shareholder dividends last year. But the 30% fallback in share price in the last month (and 58% year to date) reflects underlying concern about the economy and also Reach’s exposure to sharply rising print, paper and distribution costs for a company which still generates almost 75% of its revenue from newspapers.

£m2022(est)202120202019
Revenue615.3615.8600.2702.5
EBITDA151.3165.4161.0174.9
Margin25%27%27%25%
EPS33.8p37.6p34.4p41.1p
Digital / % revenue24%20%15%
Reach Plc/ Numis forecast

Behind those erratic numbers is a traditional media company which is haunted by its history.

The group, successively known as Mirror Group Newspapers and Trinity Mirror, sprang from the Daily Mirror, which had been founded in 1903 (like the Daily Mail before it) by tabloid pioneer Alfred Harmsworth. Sixty years later, it became part of IPC (whose magazines eventually became Time Inc UK and, latterly, part of Future Plc). The Daily Mirror soared to a circulation of more than 4.5m and, for decades, managed to combine its role as a racy red-top with serious, left-leaning political coverage and some of the UK’s best-known columnists. But its role as a powerhouse tabloid was disrupted by Rupert Murdoch who persuaded the Mirror’s then owner, Reed International, to sell him a struggling newspaper called The Sun. He quickly turned it into a direct rival for the Mirror.

Within 10 years, a succession of punchy editors had turned UK journalism upside down and transformed The Sun into the country’s best-selling daily with a raucous mix of football, sex and celebrity. Even today, its sales are about double those of the Daily Mirror which, en passant, had to contend with being pillaged by its 1980s owner, the late Robert Maxwell.

Decades before, the Daily Mirror had been the model for Axel Springer’s Bild which, ironically, supplanted it as Europe’s largest-selling newspaper. The UK tabloid and its stable-mates The People and the Scottish Daily Record remained in crisis after Maxwell’s 1991 death, before merging with the regional newspaper group Trinity in 1999. In 2018, it acquired the Daily Express, Daily Star and OK! magazine from Richard Desmond for £200m, which further increased the dependance on print at a time when rivals were investing more heavily in digital.

The history weighs heavily on a company which in 2021 paid £76m (46% of EBITDA) in pension arrears and compensation for historical claims of illegal phone hacking. The impact of those commitments is, arguably, seen in the relatively limited organic development and average capex of only £3.6m for the last two years. It is easy to feel that Reach’s resources and ingenuity are, by necessity, concentrated on the push for digital advertising, with the seeming inevitability of sales decline in its paid-for newspapers being mitigated “only” by cover price increases.

Despite the strategy of no digital paywalls – which presumably has also accelerated the copy sales decline of its daily newspapers (down by 40% in two years) – Reach remains a powerful UK media company. It has more than 100 national and local newspapers with a monthly print and digital reach of 48m, some 80% of the country’s online population. This digital audience is claimed to be the fifth largest in the UK, only beaten by Google, Meta, Amazon and Microsoft. It has almost 1m daily sales of national brands like the Daily Mirror, Daily Express, Daily Star, The People, and Scotland’s Daily Record, and regional flagships including: Manchester Evening News, Birmingham Mail, Liverpool Echo, Bristol Evening Post, Leicester Mercury, and Newcastle Journal. It also publishes more than 300 newsletters with an estimated 50m monthly page views.

In many ways, the Reach newspaper business is built on the UK’s obsession with football (soccer). It has daily papers in virtually all the cities represented in the cash-rich English Premier League and many others. Matchday digital traffic is huge in many of the soccer cities. The company, therefore, seems to have the capacity to create any number of paid-for and free local and national services to exploit the strength of its football reporting and also to tap into the biggest paymasters of The Beautiful Game – betting and pay TV. But Reach executives seem preoccupied with maximising their free digital audience and the programmatic advertising that goes with it.

That’s why we might expect a better-funded (and more resourceful) company to seek to acquire the UK’s largest news group.

Enter Future Plc. Zillah Byng-Thorne, CEO of the UK’s largest magazine group, said last year: “We have thought about [acquiring a newspaper business]. If you had asked me this question five years ago, I would have said absolutely no, but life has taught me to not rule out anything. If you look at the New York Times, it bought the Wirecutter, so it had a convergence into specialist media. If you think about the combination and benefits of that, then there are some interesting plays there.”

The listed Future, whose revenue is 60:40 UK-US, last week reported a 51% increase in operating profit at a 33% margin with cash conversion of more than 100%. The performance reflected the early success of Future’s three largest acquisitions – TI Media, GoCompare, and Dennis – costing some £1bn in the last two years. But it’s striking because it reflected strong growth in all revenue streams: digital advertising (+5% and even stronger in video), e-commerce/ price comparison sites (+100%); and even magazines (+3%, and 5% in subscriptions).

They are just the latest results to demonstrate Future’s success in building e-commerce and digital advertising while also reviving – against the odds – a large print magazine portfolio. Even investor admirers of the Reach strategy recognise that the 37-year-old Future should be a role model, especially for e-commerce which the news group has, surprisingly, not yet exploited on any scale.

Last year, some 36% of Future’s £607m revenue came from e-commerce, a steamroller strategy which began with click-through sales for the company’s young male tech-focused audience. But its 2020 launch of PetsRadar in the US, for example, now has 885k monthly global users and reportedly generated $1m in e-commerce sales in just five months of 2021-2. Future’s GoCompare price comparison sites clearly dovetail with its click-through retailing but so does its burgeoning video activity in the US and UK which is already being integrated into e-commerce. They are all reasons to speculate about the potential magic of combining Future + Reach.

Many of the potential revenue-building synergies are easy to identify:

  • Retail: Roll-out e-commerce and price comparison services for the 70% of the population who get their news from Reach
  • Advertising: Create the UK’s largest audience for digital and print advertisers
  • Circulation: Reverse the decline in newspaper circulations through magazines and membership/subscriptions
  • TV-streaming: Create shoppable online video channels (eg in homes, women’s interest, personal finance, sports, and tech)
  • Global news: Develop a UK and international rival for Daily Mail Online…?

If you assume that Future could probably acquire the listed Reach from its shareholders for, say, £490m (1.3 x current share price), the total cost including the £117m pension deficit and a safety-first provision for settling historic phone hacking claims might be £700m – about one-third of Future’s current market cap.

That total price could be justified by 10% cost efficiencies of, say, £40m and early e-commerce profit of some £10m. On that basis – without calculating sales improvements or new product development – Future could produce a Reach operating profit (2022 basis) of at least £200m (+30%) for a valuation of 3.5 x – before execution costs. There’s a lot of room for manouvre, and Reach’s financials (and its pension deficit) may deteriorate under the pressure of a feared advertising recession and sharply rising paper prices (10% of total Reach costs). Its investors may be tempted to support a more modestly-priced deal.

There would be complications, of course, including those historic liabilities and also the cost of transforming a news business which owns numerous printing plants and is, consequently, more capital intensive than any magazine group. But they are also among the reasons why Reach Plc is still independent and available to be acquired.

The opportunity for Future Plc to become the UK’s largest publisher of news as well as magazines, could be a third big strategic move under Byng-Thorne in her eight years as CEO: first it was all about audience data with the pioneering e-commerce exploitation of what had been a fragmented print-centric portfolio; second came the shift to exploiting major magazine brands with the acquisition of TI Media; next could be the biggest shift of all to become truly mass market in the UK across news, sport, specialist media, and e-commerce in print, digital and audio-video. The synergies could be compelling. Just watch.

Additional research by Alex DeGroote

Future Plc Reach Plc