Trinity-Mirror, The UK’s Largest Newspaper Group, Sings From McClatchy’s Hymn Book: “Save The Best And Leave The Rest”, But Are They Actually Selling The Family Silver?

Philip Stone December 15, 2006

That huge dull thud heard in London Thursday was just about everyone’s reaction to Trinity-Mirror’s decision to keep its lame national newspapers, and sell, instead, 138 of its 240 regional newspapers plus The Racing Post. The stock market tumbled the shares 5.07% and no financial analyst seemed to have a good thing to say. The Times’ online headline summed up the basic media view: “Selling the family silver.”

Trinity-Mirror is in a Knight-Ridder scenario. Some 23% of its shares are owned by three American investment firms -- The Harris Group – the same Harris Group that helped force the Knight-Ridder sale – with 8.11% of the company that it started accumulating around the 554 pence level and higher, plus. the Capital Group with a 10.08% holding and Tweedy Browne with some 5%.

With its shares near 52-week lows and the advertising and circulation outlook continuing to look bleak, Trinity-Mirror knew it had to somehow increase shareholder value. But how to do that in an environment where pre-tax first half profits had dived 12.8%, operating profits at its national newspapers were down12.8% to £46 million, with revenue falling £15.2 million to £240.3 million, and at the regional newspapers operating profit was off a mighty 18.5% to £64.2 million with revenue down 7.8% to £255.8 million. The nationals were really getting slaughtered in the advertising stakes – down 12.2% on the year – while the regionals saw “just” a 6.3% drop.

The company’s response in August was to bring in the Rothschild bankers to make a thorough review of the company’s business and recommend how to proceed. The way forward came Thursday and If the partial sale of the regionals  was supposed to excite shareholders then someone surely got that wrong for a start.  The shares closed down 25.25 pence to 472.50, well below where the Americans had bought, and that on a day when London shares in general went sharply higher. Not a good start.

Most analysts believed Trinity-Mirror would sell the nationals and keep the regionals, instead of which management is still going to devote much of its time trying to fix the nationals. The word “compromise” was not to be found in the company’s statement but its smell is all around. Be that as it may, Trinity-Mirror believes it is pulling a McClatchy rabbit out of the hat by keeping its healthiest regional newspapers in areas where there are good growth potential, and for those that don’t look too promising then let someone else have a go.

It’s similar to McClatchy getting rid of the 12 newspapers it didn’t want when it bought the 32 Knight-Ridder newspapers earlier this year.  What doesn’t fit in that, however, is that the national newspapers are sliding from one disaster to another in both advertising revenue and circulation so if one was going to dump that part of the business showing the least growth potential then it would be the nationals.

There is a train of thought, however, that says precisely because the national newspapers are doing so poorly right now that this is not the right time to sell them, for their price would be severely undervalued. That was somewhat proven by the company receiving just one offer for the nationals since the review began at  £600 million and that figure was basically considered to be an insult. It did not receive any offers to buy the regional newspapers as an entire group. So, maybe, Trinity-Mirror is actually doing the best it can under the circumstances.

The company has a three-pronged attack to keep shareholders quiet for a while longer as it tries to build added value. It will hand shareholders the net proceeds from the sale, expected to be around £200 million after pension and tax obligations, while at the same continuing its cost-cutting program while embracing new technologies that should provide another £20 million in savings next year, plus it intends to maintain its current dividend level. 

Trinity Mirror was formed by the merger of the Mirror Group (national newspapers) and the Trinity Group (regional newspapers) in September, 1999, becoming the UK’s largest newspaper group. One of the newspapers to be sold is the Birmingham Mail, and its saga is as good an example as any of the type of problem Trinity-Mirror is getting rid of.

Circulation drops of 10% in 2004 and 2005 at the Birmingham Evening Mail saw its distribution drop below 100,000 copies. The paper’s answer -- a £1 million relaunch, based on extensive research that called for a concentration almost wholly on local news. To convince its readership this was really a different animal it went back to the name it gave up in 1967, The Birmingham Mail.

Local news that only used to appear on the inside pages became prominent on the front page. Local offices that had been shut for budget reasons were reopened. Because Birmingham, being the UK’s second largest city, has an extremely diverse population, it increased editions and editorial were focused based on geographically where a particular edition of the paper would circulate. Each edition has a minimum of five local stories for that area.

And the result?  The rate of decrease actually increased with the January-June audit showing a 17.5% year-on-year drop to 75,787. Given that, why not let someone else try and fix it. It’s not as if Trinity-Mirror didn’t try.

Of course, it’s one thing to advocate the selling of newspapers and quite another getting the price you want. The Daily Mail and General Trust (DMGT) found that out last year when it put its Northcliffe regional group on the bloc, looking for around £1.5 billion. As it was the bids came in less and Northcliffe came off the market.

And the numbers for all of the UK’s regional newspapers at the June audit were horrendous. Every single UK regional newspaper, with the exception of one Northern Ireland newspaper, saw circulation down in the first half of this year, many by double-digit percentage figures.  At the time Trinity-Mirror reduced the value of all its 240 regional newspapers by £250 million and blamed “a weak advertising environment with falling gdp growth, sluggish consumer spending and rising unemployment.”

And things have continued to get worse. The company’s trading figures through the end of November are not going to encourage high-prices. Advertising revenues for the regionals year-on-year for the five months ending in November are down 8.6%. For the 11 months of 2006 they’re down 9.2%. For the nationals, advertising for the past five months, compared to the year earlier, is down 8.8% and for the London based nationals it is down 10.3% for the year through November.

The company’s outlook – “We expect to see advertising market conditions stabilize in 2007 with the rate of decline slowing.” Note it is still talking about advertising getting worse for next year, but in percentage terms the decline’s growth won’t be as severe. Not exactly a healthy, inspiring outlook.

The reason most analysts believed the national newspapers would be the ones to go is because they are showing the worst advertising declines. The flagship Daily Mirror has seen its circulation slide 7.32% to 1,549,573, year-on-year to November. The Racing Post that concentrates on the sport of kings and is the one national put on the seller’s block is down 4.77% with circulation languishing at 71,012 although it is said to have still turned a £17 million profit last year.  The Sunday Mirror circulation of 1,333,255 is a 6.2% drop, but the real disaster is The People that is down to 764,409, a 12.18% free-fall. There have been some weeks apparently when The People has failed to sell total advertising even into six figures.

The regionals may well be a difficult sale because the company has been embarked on a cost-cutting exercise for some time. There is very little, if any, real fat left; so a buyer thinking he could do better by cutting costs even more would find it difficult to find those savings and not destroy the product.

Unlike the US where rich private entrepreneurs stepped in to buy some of the Knight-Ridder newspapers off McClatchy, that is doubtful in the UK. The most likely buyers are other regional media groups, but they are having their own problems. Gannett had to put out an announcement this week that it was not selling its troubled Newsquest unit, the second largest regional UK group. The original report on the alleged sale came from the Sunday Express and was very specific, naming the banks acting for Gannett, etc., but it was either all a hoax by unscrupulous people looking for a quick bump in Gannett’s share price, or published word of such a sale before Gannett was ready to talk about it was enough to stop the plan in its tracks.

The other major regional publisher, Johnston Press, also this week issued a dismal trading statement showing that for the five months ending November 30 that its print advertising revenue was down 8%. None of this means that neither Johnston or Newsquest or other newspaper groups won’t pick and choose which additional titles they would like that fits their particular mold, but they’re not going to be offering big bucks.

Trinity is probably looking to get around £500 million on the sale, about £200 million net after liabilities. If the numbers don’t add up to near that then it is going to have to decide whether a fire sale is a good definition for adding to shareholder value.

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