Jeremy Warner's Outlook: Bailey confounds the sceptics at Trinity Mirror

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The Independent Online

Sly Bailey has been chief executive of Trinity Mirror for almost exactly two years now. The City loves her, even if national newspaper journalists tend not to. One look of the share price, which has more than doubled under her watch taking to the company to within spitting distance of the FTSE 100, tells you exactly why. One look at the circulation figures for the Daily Mirror, which editorially has lost its way since she unceremoniously sacked Piers Morgan as editor, tells you why journalists tend not to be quite so besotted.

Still, Ms Bailey's job is to look after the bottom line, not to throw money at scoops, and on this front, it's hard to fault her performance. Pre-tax profits for last year are up 21 per cent, the dividend is up 10 per cent, and so cash generative has the company become that there's £250m to be spent on buy-backs. The Mirror's circulation may be going nowhere, but the margins are better than the Daily Mail. Trinity Mirror puts all this down to concentrating on the basics - rationalising management of the print works, reforming the supply chain and running a tight ship on costs. It's not rocket science, but in an industry notorious for bad management, it seems to be working wonders.

The comparison with Associated is instructive. Daily Mail's national titles generate almost twice as much revenue as Trinity Mirror's but the profits at about £90m are almost exactly the same. This may tell you more about Associated's embedded culture of investing heavily in its editorial future than it does the quality of management. Indeed, the Mirror's ever shrinking circulation may be in part be a consequence of running the titles for cash.

Ms Bailey has called her strategy for the company "Stabilise, Revitalise, Grow". In her own mind she's achieved the first two, though some might wonder about the second. Yet even on this front there's investment now going back into the national and local titles. Somewhat later than her competitors, she's biting the bullet on investment in new colour presses. As for the growth phase, there's a billion to be spent on acquisitions and organic expansion.

Few were more sceptical than I about Ms Bailey when Sir Victor Blank, the chairman, to the astonishment of London's media village which had expected a News International apparachik, plucked her like a rabbit out of the hat. Her relative lack of national newspaper experience seemed to make her peculiarly ill-qualified for the job. It can now safely be said that in practice this has proved a positive boon. As an outsider, she's been able to attack sacred cows and bring a fresh approach to the way the company is managed.

Yet the bigger challenges are still to come. The national newspapers are generating a lot of money, but as things stand they are wasting assets. Ms Bailey is meanwhile failing in her declared aim of holding their position in the market. For the right price, she'd sell, but it is not easy to see who would buy for the inflated value she would undoubtedly demand. There's little apparent value left in these titles for private equity, for the low hanging fruit has already been plucked.

So here she is, within a whisker of the FTSE 100. Who would have believed it possible looking back on the shipwreck of a legacy Robert Maxwell left behind when he fell off his boat?

Marks & Spencer

When all else fails, there is always the weapon of last resort: cancel your advertising. Stuart Rose, chief executive of Marks & Spencer, has decided to apply it with all three of Daily Mail's flagship newspaper titles, which he accuses of a vindictive campaign of vilification running over a prolonged period. Perhaps I don't read the Mail as carefully as Mr Rose, but it's hard to see from the outside how Associated's coverage of Marks & Spencer has been any worse than anyone else's. Regrettably, M&S is still not a company which it is easy to be charitable about.

Yet even when there is cause for complaint, it is scarcely ever a good idea for the CEO of a major company to declare war on the national press. It looks too vain and autocratic, and when the title in question is the Daily Mail, whose readers I imagine are a key target market for M&S, it looks doubly vainglorious.

What really seems to have got up Mr Rose's nose was a story in the Mail on Sunday which claimed he was about to sell half the company's Simply Food convenience chain. The paper corrected the piece, but the climbdown wasn't grovelling enough for Mr Rose, already bruised by the titles' reporting of his dealings in M&S shares. Cancelling the advertising does sometimes work, as I once discovered to my cost when Sir Stanley Kalms, then chairman of Dixons, pulled his advertising from The Independent on account of some barbed allegation that had appeared in a business supplement. But it only has the desired effect when the complainant is on sound ground. Sir Stanley was gracious and swift to restore his advertising when we admitted our mistake.

Ernest Saunders, former chief executive of Guinness, would according to some accounts quite frequently use the threat, though rarely push the button, while the Indie was blacklisted by British Airways for several years after describing its then chairman, Lord King, as a cantankerous old bully. He could be, of course, but being right in the description rarely helps where a powerful executive ego is concerned. In any case, it was a bit harsh. He did have countervailing charms.

Mr Rose should swallow his pride, kiss and make up. He'll get nowhere by making an enemy of the Daily Mail, which is capable of being a good deal more vicious than The Independent once wounded and has the luxury of alternative advertisers queuing round the block to fill the gap. We are just old softies by comparison, though it would be unwise to try it on with us either.

Underinvestment

With brent at $52 a barrel and gas prices at a seven-year high, you would imagine that the big oil companies would be investing like there's no tomorrow to find and exploit new sources of supply. Not a bit of it. To the contrary, capital spending programmes have rarely been so disciplined and constrained. Throughout the 1990s, the integrated oil companies reinvested some 75 per cent of their upstream cash flow on average. So far this century, the ratio has been at just 50 per cent. Current capital expenditure budgets suggest no plans significantly to raise this ratio for at least the next three years. The cash is instead being paid back to shareholders.

The upshot, according to a circular published yesterday by Credit Suisse First Boston, is that most oil companies are failing to add new reserves at the rate they are expending existing supplies. To correct this position, capital spending will have to revert to historic norms, regardless of whether the oil price settles at more than $40 a barrel, or falls back down again. CSFB calculates that the big integrated oil companies need to be spending $40bn more than they plan to over the next three years to address this shortfall.

So why aren't they? One reason is lack of access to the world's most easily exploited and cheapest reserves, nearly all of which are in the Middle East. Instead, they have to drill in ever more inhospitable and costly places to find their oil. Despite the present high oil price, few oil companies are prepared to lift the benchmark at which new development is required to wash its face beyond $20 a barrel. They've been bitten too often in the past to believe the present high oil price is here to stay.

Yet if CSFB is right, necessity alone will soon force them to buckle. Otherwise they risk eventually running out of oil. Even at BP, the industry leader, the reserve replacement ratio is negative, while at Shell it is at less than 40 per cent on the SEC's, admittedly exacting, new measure. The present bumper crop of dividends and share buy-backs from the oil sector may not be much longer for this world. If the oil industry is to safeguard its future, it must begin to wane, and quite soon.

jeremy.warner@independent.co.uk

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