Sale on at SMG

The general reaction from the Scottish media industry was “that’s no big surprise”, after months, even years, of industry speculation that newspapers were not a long-term objective for SMG. But, that said, it certainly caught many media commentators off guard as attentions have been primarily focused on SMG’s television interests, Scottish Television and Grampian Television, since the Communications Bill prepared the way for Carlton and Granada to snap up the ITV licences next year.

However, SMG having recently announced interim results showing a 43 per cent drop in pre-tax profits from £20m last year, this announcement perhaps comes in order to appease SMG’s shareholders, many of whom must be getting pretty nervous at the massive chunks of advertising revenues constantly disappearing from television stations, newspapers and radio stations alike.

Speaking on Radio Scotland shortly after the announcement, Don Cruikshank, SMG’s chairman, denied the sell-off is a panic reaction to the poor results, saying: “The newspaper industry has been rapidly consolidating into larger groups and they get huge benefits of scale, better access to content and it makes sense for these newspapers to flourish within a larger group.

“The business we want to be in is UK-wide selling to national advertisers. And television, radio, cinema and outdoor is where these national advertisers want to advertise and that is where we will be able to serve.”

However, many see this announcement as nothing more than a panic move by SMG to cut its debts.

One newspaper industry insider said: “They have had to do something now. You cannot realistically announce a 40 per cent drop in profits and not follow that up by announcing some pretty radical actions.

“I suppose you can understand what they are saying. They have all these businesses that run national offers, but they have this regional newspaper division that does not really fit any more. Our FD has looked at it a few times over a period of time. But the value of SMG’s newspapers has changed a lot during that time. If advertising came back in the later part of 2002 then the value would have gone up, but it isn’t expected to come back until 2004. One thing is for sure, they’ll have a long queue at the door and it would be daft for everyone not to look at it.”

So, what is SMG’s strategy for the future? Over the last three years SMG has picked up Virgin Radio and a 29 per cent stake in Scottish Radio Holdings, owners of Clyde and Forth, along with Pearl & Dean cinema advertising and Primesite, the outdoor advertising business. With SMG bosses saying that Scottish and Grampian TV are still very much part of their business it seems strange that they are looking to turn their backs on regional and local advertising revenues when it is investing in Micro Regions advertising and they have built up a significant stake in a regional radio group.

One industry source said: “This is just a precursor for a major bid to take over Scottish Radio Holdings when the Communications Bill goes through next year. As it stands, to launch a takeover with the Herald, Sunday Herald and Evening Times as part of the group would prove a considerable stumbling block. There is more flexibility with radio and television, but next year when Granada and Carlton merge they are not going to overlook Scottish and Grampian TV, so SMG is obviously positioning itself as purely a radio group.”

So, just who is in a position to buy SMG’s newspapers, which have a price tag on them of more than £200m? Bearing in mind that the Express Group, which consisted of three national newspapers and a printing plant, was sold to Richard Desmond for only £125m shortly before the advertising downturn really started to bite, perhaps SMG’s £200m asking price is a little over inflated.

Speculation has suggested for many years that a combined stable consisting of the Scotsman and Scotland on Sunday (for the East) and the Herald and Sunday Herald (for the West) could be profitable and realistically capture the whole of the central belt for national advertisers. However, the Scotsman Publications owners, the Barclay brothers, have already invested many millions in the Scotsman and, if truth were known, they have seen little promise of getting a return on that investment as the circulations continue to decline.

Also, if such a move were on the cards there would be significant ownership issues to be addressed by the Scottish Parliament and Monopolies and Mergers Commission as The Scotsman Publications would in effect control all indigenous broadsheets in the central belt.

Steven Walker, managing director of The Scotsman Publications, said: “I think that it is way too early to say yes we are interested or no we are not. There is a lot of thinking to be done and I don’t yet have nearly enough information on the company to make a decision. Obviously there is a strong fit between our newspapers and their titles, but whether it is financially viable is another question.

“I do think that they may have shot themselves in the foot by putting a £200m price tag on it. They should have just let the auction go ahead because they are looking for as much money as possible and they are successful titles. If a Richard Desmond comes along with money to burn then who knows what they could get. SMG does not really care who buys them as long as they get the biggest amount of money possible.

“I actually feel sorry for the guys at SMG as they now have nine months of torture to face. I have been through it. They will not be able to do their jobs to their full ability as they will be waiting for the new guys to come along and make changes. Des Hudson has got his work cut out over the coming months to keep it all together over there.”

An industry insider says that if the Scotsman does want to take over the titles then there will be many hurdles to clear first, without finances even being involved.

He says: “If the Barclay brothers did want the newspapers there would certainly be regulatory and political issues to get over first. Also, I think the Herald’s journalists would revolt if Andrew Neil took over. If they did buy it you would also have to ask if they’d really need Scotland on Sunday and the Sunday Herald. There would be many union issues to address.”

Rohan Lightfoot, a media director at Mediavision, agrees: “In terms of the Barclay brothers taking over the papers, I would have to say that I think that would be extremely unlikely. I can’t see the Parliament being delighted about a monopoly on the broadsheets. It just won’t happen.”

In the last five years, News International has made a real impact in Scotland, with the Scottish Sun really challenging the Daily Record for the mantle of Scotland’s champion. Likewise The Times and Sunday Times are becoming increasingly respected for their Scottish coverage. So, would the Herald and the Sunday Herald and The Times and the Sunday Times Scotland not make comfortable bedfellows for News International Scotland? Probaby not, as News International has little regional interest, but Colin McLatchie, general manager of News International Scotland, politely declined to comment.

Trinity Mirror, the UK’s biggest regional publisher, with titles such as the Daily Record, Newcastle Chronicle and the Liverpool Echo in its portfolio, will also be part of the feeding frenzy, no doubt.

A source close to the Daily Record said: “I was in a meeting with Mark Hollinshead (MD of the Daily Record) the other day and, from some of the things that he said, put it this way, the Herald’s sale was not news to him. He keeps his ear pretty close to the ground and he had a good idea that all this was happening.”

Hollinshead declined to comment on Trinity Mirror’s interest in the newspaper titles, but a spokeswoman for Trinity Mirror said: “There are significant regulatory issues involved here. However we will, of course, continue to keep a close eye on the situation.”

Which comes as no surprise as the company is well known for being more interested in strong regional titles than national titles.

Two other major regional publishers could possibly be tempted to make a bid. Edinburgh’s Johnston Press, which only recently acquired Regional Independent Media, the publishers of the Yorkshire Post, for £560m is known to be keen to continue expanding its interests, with Chief executive Tim Bowdler saying that he is ready to buy “something significant”.

RIM’s former owners, the private equity house Candover, is also expected to be in the chase for the titles. The company maintained the services of RIM’s former chief executive Chris Oakley who was part of Candover’s takeover of RIM’s titles and who is known to be an agressive businessman.

Would DC Thomson be keen to add the Herald, the Sunday Herald and the Evening Times to its portfolio? Doubtful, but the magazine and online divisions could prove an attractive proposition.

Another train of thought is that former Daily Record and Herald managing director Liam Kane, along with Jim Park, could be looking at buying the newspapers. In recent months Kane and Park have been spotted at SMG’s Renfield Street offices, but any talk of a buyout has always been staunchly denied by SMG’s chief executive of publishing Des Hudson. However, Kane, who is currently working at the East London Business Alliance, has already ruled out a return to Scottish media.

Another bet could be Associated Newspapers, owners of the Daily Mail, Metro and the Aberdeen Press & Journal through its Northcliffe subsidiary. A source close to Associated said: “They could definitely buy the Herald as they are a cash rich company. I said to them a while ago that they could actually buy both the Herald and the Scotsman, as I am sure the Scotsman is up for sale if the right price comes along, but they had a laugh about it and didn’t seem too serious about it.”

No doubt one sector that is taking this seriously is the media buyers and sellers.

Euan Jarvie, managing director of Mediacom, said: “I’m not surprised they are selling the newspapers, but I am surprised that they couldn’t have waited for the White Paper to be publsihed in the next year or so. The Paper would have widened them up to a whole lot of potential buyers so to that extent it is a bit surprising.

“The simple reason as to why they are selling the newspapers is that they need the money. TV advertising revenue has hit an all time low and this will have affected them greatly. I think that the main contenders for buying the papers will come from someone like the regional press, such as Johnston Press or Trinity Mirror. I think the Barclay brothers will have a stab at it and try and conquer their position from the East. I have also a feeling that Guardian Media Group might go for it too. They have been very successful in what they have done in the provincial radio market and therefore they might just have a go. Whoever does go for it will be part of a ferocious bidding war, that is for certain.”

Mediavision’s Rohan Lightfoot believes that Associated is a hot favourite: “This is not really a surprise to me as I think that SMG has been under tremendous financial pressure for some time. They have obviously thought strategically about the worth of the newspapers just now as opposed to what the television will be worth when the Communications Bill is passed next year. Obviously the value of the television will be worth more than the newspapers, so they have decided to sell the papers just now to get rid of some debt.

“I would say that one of the clear favourites would have to be Associated. They have a very good relationship with SMG already, so I would not be surprised if they bid for the papers. Hopefully, they will sell all three newspapers to one company, unless they think that the papers sold alone will be worth more than the three of them sold together, but I don’t think that will be the case. The Sunday Herald and Herald have very loyal readers so I don’t think it will affect them greatly.

Tim Reid, MD of Media Link, which sells advertising for SMG’s Virgin Radio, believes that SMG want to offload the newspapers into a publishing-only company and maintain their TV interests to pour their energies into.

He says: “I think it is a prudent time to sell – it is before the White Paper has come into place, they will be ahead of their target to pay off their debt and should get a good price for it.

“The irony is that it can’t be that good a time for many of its larger competitors to enter into the race – the stock markets are off the boil at the moment and I don’t think that many of them will be able to enter into the bidding. But there are some local newspaper groups that remained very cautious and did not enter into new media schemes and other things to make a quick profit. I think that type of company will be in the running.”

Stuart Bell, a director of Feather Brooksbank, says that he finds it surprising that SMG’s newspapers have gone up for sale before the TV interests.

“I honestly thought that they would sell their TV first, but I have a feeling that they might not have got the price they needed for it and have decided to go for selling the newspapers instead.

“I think that there are probably a whole range of people that might go for the newspapers – Associated Press, Northcliffe, and Johnston Press might be an option too, just because of the sheer size and the fact that they can build up local and regional newspapers and have succeeded at it. I think it will be very interesting when it comes to who actually buys the newspapers. That will be a very interesting time indeed.”

Indeed it will.