The sad story of Johnston Press
The purchase of Scotsman Publications in 2005 was seen at the time as the pinnacle of Johnston Press' achievement, writes Raymond Snoddy. Where did it all go wrong?
One of the saddest media stories of the past few days has been the news that Johnston Press, owners of the i, The Scotsman and the Yorkshire Post is seeking buyers after a year of looking at strategic options.
It does not look as if it will end well. If anyone was seriously interested you can be sure a quiet deal would have been done by now as part of a continuing, inevitable process of consolidation in the regional newspaper industry.
The danger is that any potential buyers, and at the head of the queue stands Trinity Mirror - Reach, as it now is - will sit on their hands to see what happens. Why should they rush?
The likelihood is that any predators will quite like the idea of a break-up so that they can choose the best bits, such as the i - bought for £24 million from The Independent and decently profitable.
Someone with no sense of history or involvement with the financial world might wonder why a profitable group of more than 200 newspapers, including a few historic titles such as The Scotsman, could possibly be in such trouble.
After all, operating profits could reach £40 million for this year. There was a particular moment, on December 15th 2005, which was seen at the time as the pinnacle of the group’s achievement, but in retrospect was the beginning of a journey to God knows where, that explains everything.
It was the Christmas party for Johnston directors at the Scotch Malt Whisky Society in Edinburgh and then chief executive Tim Bowdler turned up in triumph to announce that the £160 million purchase of Scotsman Publications from the Barclay Brothers had been completed. Earlier in the year there had been three newspaper acquisitions in Ireland in quick succession totalling £313 million.
Earlier in his reign Bowdler, with chairman Freddy Johnston, who post-war used to turn up at the funerals of owners of Scottish local newspapers to inquire if the widow was interested in selling, had pushed through a hostile takeover of Portsmouth and Sunderland newspapers for £250 million.
Then on the back of a strong share price, and remarkable profit margins, the targets got bigger and included the £560 million acquisition of Regional Independent Media, publishers of the Yorkshire Post.
At the time Johnston’s were the second largest local newspaper group – by a whisker - ahead of both Newsquest and Northcliffe.
The only disappointment was that a suggested offer of around £900 million for Northcliffe was rejected. DMGT was looking for £1.5 billion and decided not to sell.
In retrospect £900 million for Northcliffe would have been an absolutely stellar deal for DMGT.
Johnston Press could do no wrong so far as the City was concerned. In April 2007 the company’s share price stood at 490p, valuing the company at £1.4 billion and clocking up regular profit margins of 35%. That year Bowdler’s total remuneration package was £1 million.
Speaking at an internal management conference in Edinburgh around that time, Bowdler asked guests to play a little parlour game – to guess what Johnston’s profit margins would be in five years time.
Bowdler deeply disliked one suggestion – that the internet meant the near monopoly pricing of local advertising was over and that the company would be lucky to get 20% in future.
Around 20% turned out to be a considerable over-estimate, although the i purchase has helped to bring it back to such a level.
Johnston, like other publishers, was hit by the triple whammy of social media, the financial crash of 2009 and changing consumer behaviour.
But unlike the others, Johnston Press was also hit by the effects of a £440 million pile of debt, which it managed to reduce but has never come close to shifting. It was the ball and chain left behind from the exuberant acquisition spree.
It’s fate, some have argued, the result of greed and capitalism. Well yes, that’s what aggressive capitalist companies do – use a strong share price to either issue paper or take on debt to strengthen their dominance in the market through acquisition.
Johnston certainly had a 10-page plan for what to do when a new company was acquired. The local head office, now largely redundant, was closed immediately and everyone fired, except perhaps for two or three people who moved to HQ to manage the new stream of business.
Such companies going for rapid expansion get away with it while the economic outlook is sunny, but are all too vulnerable if the unexpected happens.
Now the share price of Johnston Press stands at less than 3p and the market capitalisation in around £2.8 million – for more than 200 newspapers.
It is merely academic to debate whether better management could have done better. The company was relatively slow to come to terms with the impact of the internet and at least initially, like many others, just put existing copy online.
Blame has also got to be attributed for the scale and speed of the expansion, which in the end left no room for setbacks.
It’s the debt and a large pension deficit that is threatening to kill Johnston Press.
Apart from a pension deficit of nearly £40 million, the heart of the problem is £220 million in high-yielding bonds which attract interest of around £19 million a year and are due in June.
Johnston Press hasn’t got the money to repay and looks as if it has found it difficult if not impossible to re-finance.
If no-one in the industry is prepared to step forward then the searchlight will turn to Christen Ager-Hanssen, at least for a time the richest man in Norway.
The venture capitalist and internet entrepreneur who owns Sweden’s largest newspaper the Metro, who is routinely described as “controversial” when he is not being called “highly controversial”, owns 22% of Johnston Press.
Given his public statements Ager-Hanssen is unlikely to bail out the existing board.
It would be nice to see a white knight arriving suddenly in Edinburgh willing to buy the group in its present form and write a few large cheques.
It is more likely that without a refinancing its promised land will lie on the other side of administration – a long way from the party at the Scotch Malt Whisky Society.
As a UK newspaper group struggles, far away in a different universe Netflix – by chance a company with billions of debt - has added a further 7 million subscribers to take its total to 137 million.