As newspaper share prices plunge, don't rule out a trophy bidder

Roy Greenslade
9 Jul 2008

Just four months ago, I devoted this column to my frustration at the lack of faith shown by investors in media businesses, especially in those companies running regional newspapers. "These are dark and depressing days for many media owners and managers," I wrote. They have become much darker and a great deal more depressing since, culminating in last week's stock market devastation for two particular share prices, those of Trinity Mirror and Johnston Press. Both have suffered further falls this week, with the former dropping to 731/2p yesterday and the latter closing on 301/4p.

Even by the standards of stock market variations during this volatile period, these are very worrying declines. To put the figures in some perspective, it means that Trinity's market capitalisation has plunged within a year from £1.3 billion to less than £200 million. Johnston has experienced a similar fate, falling from £700 million to £196 million.

But why is this happening? Is the market behaving irrationally? Or do the analysts, and the people who consume their notes as if they are new additions to the gospels, know something we don't?

These are big companies that, despite the advertising downturn, are still able to generate healthy cash flows. It would not surprise me if Trinity ended the year with £150 million in operating profit, and Johnston came in close to that too. Despite the warnings, those are handsome returns the City appears to be ignoring.

Look a little closer at these companies. They are anything but small beer. Trinity is Britain's largest regional publisher by circulation. It has 186 titles, including 14 paid-for dailies and 52 paidfor weeklies. In January this year, the total weekly circulation of its papers was estimated at 12.5 million. (Its national titles, the Daily Mirror, Sunday Mirror and The People, boost this by a further 10.9 million).

Johnston Press is the third-largest regional chain, with 295 British titles, including 19 paid-for dailies and 147 paid-for weeklies, and an overall weekly sale of 9.4 million. It is also Ireland'slargest publisher of paid-for weeklies.

With their joint regional sale of 21.9 million a week, it means that Trinity and Johnston together account for almost a third of the total 63.5 million papers sold every week across Britain. Trinity employs more than 9000 people in more than 150 centres and operates nine major printing plants while Johnston employs about 8000 people (including some 2500 journalists) and runs 11 printing centres.

So these are substantial businesses and they have not stood still. Both have taken steps into the digital future by investing substantial amounts in online publishing. Between them, they run more than 600 news websites and have tried to attract as much online classified advertising as possible in the face of fierce competition from non-newspaper rivals offering free ads, such as gumtree and Craigslist.

There are differences, of course. Johnston, having expanded by continual acquisition, has built up a lot of debt, now running at £700 million, which placed it in danger of breaching its covenants. That forced the company's chief executive Tim Bowdler to arrange an emergency rights issue and to sell 20% of the company's stock to the Malaysian billionaire, Ananda Krishnan.

Trinity also has debt, of £425 million, but this is in long-term private placements in the United States, and the company has also arranged a bank facility of £210 million, so there is no question of it failing to make its £60 million debt payment in October.

The important fact for both Trinity and Johnston is that they are liquid. Cash, through both advertising and circulation revenue, is coming in week by week. But investors are clearly concerned that the cash flow, even should property advertisers return within a year or so, will go on decreasing in real terms. Online advertising alternatives will always remain a threat.

Meanwhile, on the editorial front, the expansion of BBC websites - with an unlimited call on video material - has spooked analysts too. Indeed, the regional publishers' lobbying against the BBC has probably drawn undue attention to the initiative, which may not be as great a worry as some seem to believe.

Then again, when your company's value is being destroyed on a daily basis, it must be galling to see a public broadcasting rival enjoying the fruits of the £3 billion licence fee income.

So what happens next if the market continues its bearish run on Trinity and Johnston? A rumour about the two merging appears way wide of the mark. However desperate the situation, it is hard to imagine the regulator allowing uncompetitive consolidation, especially in the light of the Lords Communications Committee's report on the need for greater plurality of ownership.

The other alternative is a takeover. It's extremely doubtful that private-equity companies would move in at present. Instead, it could open the door to foreign entrepreneurs or, just possibly, domestic mavericks (oh please no, not Mohamed Fayed).

Johnston has already got Krishnan on board. But I wonder if there is a rich Russian around who fancies having a national paper like the Daily Mirror at his disposal?

There are plenty of oligarchs around who could buy all of Trinity Mirror, let alone its national titles.

Will that thought boost the share price? No, probably not.