National World Plc, the UK regional news group founded by veteran newspaper executive David Montgomery, is expected to make a bid of some £400m for the Reach Plc, the country’s largest newspaper group which of which he was once CEO. The disclosure of the “early stages of exploring a possible offer” came last night (Thursday 3 November).
Under the UK takeover rules, National World must make a bid (or withdraw its interest) by December 1.
News of the possibility of what is assumed to be a well-planned bid (despite protestations to the contrary) comes just three months after Reach punctuated disappointing half-year profits (32% down on the corresponding period of 2021) with the disclosure that paper prices in Europe had more than doubled in the past year and had reached “an all-time high”. In the first quarter of 2022, newsprint prices in the UK had increased by almost 30% due to reduced production and increased power and shipping costs.
For the listed company which publishes the Daily Mirror, Daily Star, Daily Express and almost 100 regional newspapers – the 2021 response was to reduce pagination by 6%, an agonising decision for a company which has been keen to mitigate the impact of copy sales with consistent cover price increases.
Newsprint accounts for some 10-12% of Reach total costs (£53m in 2021) so it may have difficulty achieving its forecast profits of £132m (already 20% down on 2021) in what had been expected to be a post-pandemic recovery year:
News of an expected bid will cheer many Reach investors, some of whom have already been discounting the 2022 forecast. The shares have lost 63% of their value YTD and the market cap is now £328m – which may be close to the level of the pension fund deficit.
Despite a relatively aggressive dividend policy which has kept investment analysts supportive, Reach is a company with many more structural challenges than just soaring fuel and newsprint costs. These include:
- Print: The company’s presentations are full of digital plans but a full 75% of revenue still comes from newspapers. In a depressing symmetry, the company’s nine largest newspaper brands (Daily Mirror, Daily Express, Daily Star, Daily Record, Sunday People, Manchester Evening News, Birmingham Mail, Liverpool Echo, and Newcastle Chronicle) have each lost at least 50% of their paid circulation in the last five years, some substantially more.
- Digital: The digital development may not be going that well either. In the half-year results, digital revenue increased by only 5%.
- Historic debts: Reach continues to be haunted by its history. First, there are the seemingly unending legal claims arising from the company’s journalists illegally hacking the phones of celebrities and others. Last year, the settlements totalled £11m and nobody can tell whether the current £41m provision for future payouts will be sufficient. Then there is the pension deficit which has bounced around £130-255m in recent years. Insiders assume that the next review by the pension fund trustees will report an increase in the deficit and the consequent need for Reach (whose own market value and, therefore, ‘bankability’ has been reduced) to increase its payments. In 2021, the company paid a total of £76m (46% of EBITDA) in pension arrears and phone hacking compensation. 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.
These are tough times for traditional news groups, of course, especially those (like Reach) concentrated on ‘red top’ downmarket tabloids which are, therefore, less able to build subscriptions revenue than, say, quality dailies. The company has made major relatively recent major newspaper acquisitions including Montgomery’s own Local World, bought for £187m in 2015, and Richard Desmond’s Daily Express and Daily Star for £200m in 2018. But it may be suffering because its management is so fixated on digital – although print still accounts for the large majority of revenue and profit.
The half-year results seem to show not only that Reach is having to “milk” its legacy newspapers ever more intensively (cutting pagination and pushing cover price increases) but that the digital growth just can’t compensate for the decline in print. Relatively low growth in digital advertising seems ominous.
David Montgomery is known to believe that the decline of the once hugely profitable Reach regional dailies, many of which now have paid copy sales of less than 10,000 (and are still falling), underlines the way the publisher is losing the race to build sufficient digital profits before (much of) the print disappears. It highlights the curious way in which it has been “tolerating” the drain of readership revenue in favour of an advertising-dependant future. Why hasn’t it fought to keep those so-precious readership revenues (still 50% of total revenue) by adding value to the offering instead of pumping out free copies and free online services? Why is it so fixated on the need to convert print payers into mere eyeballs for online advertising?
Industry insiders have been predicting the implosion of Reach and its predecessor companies for most of the 30 years since former owner the late Robert Maxwell plundered its pension fund – and left Montgomery, among others, to pick up the pieces. It remains a relatively powerful UK media company with more than 100 national and local newspapers, and a monthly print and digital reach of 48m, some 80% of the country’s online population. It owns 21 of the top 25 regional papers in the UK. The digital audience is claimed to be the country’s fifth largest, beaten only by Google, Meta, Amazon and Microsoft. It (still) has almost 1m daily newspaper sales. It also publishes more than 300 newsletters with some 50m monthly page views.
Former CEO Montgomery knows too that Reach’s best assets come from the UK’s obsession with football (soccer). It has daily papers in virtually all the cities represented in the cash-rich English Premier League. Matchday digital traffic is huge on those sites from fans in the soccer cities themselves and elsewhere around the world. The company, therefore, seems to have the scope 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.
The sheer level of matchday online activity seems almost to be a secret of Reach Plc. But National World – which this week launched its own football digital following seven news and sport sites in major ‘premier league’ cities – knows all about it.
The news of Montgomery’s possible bid for Reach follows National World’s strong first-half, with revenue up 3%, operating profit up 36% and digital revenue up 41% – almost a complete contrast to Reach. Moreover, the would-be bidder has a strong balance sheet with £25.7m of cash and promising growth from new digital services.
It is almost two years since the startup National World acquired JPI Media (the former Johnston Press) for a mere £10.2m, equivalent to possibly 1.5 x EBITDA for a company which now has a market cap of £52m.
There may not have been many days in the 23 years since he left the former Mirror Group Newspapers that David Montgomery (former editor of the News of the World and of Today at News Corp) has not thought about buying his former company – and he has tried at least once. But it’s a tough task – even given his determination – to raise the £400m backing necessary to do the deal and to reassure the competition authorities and pension trustees.
But, now things are out in the open, Montgomery’s own shareholders will be bullish, given the way he has created value at National World by doing a lot more than cutting costs. He has invested in content and created some fast-growing digital products including the eponymous National World news service which has become the company’s largest online brand in Year 1. Meanwhile, shareholders at Reach have spent most of the year wondering if there was a way out of the morass. Bingo!