DMGT may have done the right thing in withdrawing the titles from the market, but there's no disguising the embarrassment. Shareholders were looking forward to a bumper £1bn return of capital. Now they are to get nothing. Worse still, the admission of failure was accompanied by a thinly disguised profits warning.
One of the reasons why no one would pay what DMGT wanted was that there has been a sharp downturn in advertising sales at regional newspapers in recent months. No wonder the shares fell 12.5 per cent yesterday. Vaulting, 180-degree, full-on U-turns are one thing, but to say the market is going down the pan as well is the last thing investors wanted to hear.
In the end, the titles were judged to be worth more to DMGT, which says it has identified further significant cost and revenue opportunities, than they apparently are to anyone else. Better to admit embarrassment than to sell at an undervalue, DMGT would say.
This is an odd outcome, none the less, as DMGT plainly lacks the opportunity for the same degree of cost efficiencies that would be available to a consolidating buyer. When the titles were put up for sale, DMGT said this was a market in which you either had to get bigger or get out of altogether. There was no mention of buying more titles in yesterday's statement. It's hard to avoid the impression that the climbdown is more necessity than choice.
Is the downturn in advertising that has poleaxed valuations a cyclical or a structural phenomenon? Again, when the titles were put up for sale, the working assumption was that if a media company as savvy as DMGT was getting out of regional newspapers, it wouldn't be because of some temporary cyclical downturn, but because the company took the view there was no long-term future for this industry.
Now Lord Rothermere insists that the present soft patch is a cyclical problem which reflects the broader downturn in the consumer economy. I, for one, hope that he is right, for there is no doubt that the fall in valuations also reflects growing alarm in the City over the damage new media might do to traditional sources of newspaper revenue. Particularly exposed to the advance of Google, broadband, and multichannel TV is the sort of classified advertising which is the lifeblood of the regional press.
Are we already witnessing the slow, or even quite rapid, death of the newspaper industry? This seems to me an exaggerated view, yet there is no doubt that in deciding to outbluff Northcliffe's lowball bidders, DMGT is taking quite a gamble. Those that predict imminent Armageddon for the print are almost certainly wrong; much less clear is whether the future for British regionals is quite as rosy as DMGT now, out of necessity, claims it to be.
Stock Exchange: the bar just got higher
The bar facing Macquarie in its quest to takeover the London Stock Exchange, already at challenging enough levels, just got that much higher. With the shares up 8.5 per cent to 827.5p yesterday after a defence document filled to bursting with goodies, it may now be out of reach altogether.
The Exchange promises to more than double the £250m capital return already announced to £510m, equivalent to 200p a share, and there will be a buy-back programme of £50m on top. The dividend is, meanwhile, increased by 71 per cent. The company has also found another £10m of annual cost savings. Applying all these things to last year's figures would have boosted earnings per share by 18 per cent.
If the valuation arguments were not already enough to dissuade Macquarie from proceeding any further, the LSE has another weapon in its armoury too. More than 75 per cent of the company's shares are owned by investors who are also in some shape or form its customers, either as one time member firms or as big institutions that actively trade through the Exchange. Investors therefore have a powerful vested interest in the ongoing financial health of the company.
Even if Macquarie were minded to match the dizzying heights to which LSE shares have now ascended, these shareholder/customers have to ask themselves whether such a necessarily highly geared takeover would be right for the future of the business. It's not so easy for them to take the money and run.
On this front, the LSE doesn't pull its punches either. Macquarie's proposal would harm the quality, efficiency, stability and international competitiveness of the UK equity market, thunders the LSE's chairman, Christopher Gibson-Smith. The more Macquarie is forced to bid, the more it will be forced to borrow, and the more it will subsequently have to sweat the assets to pay the financing costs.
Interestingly, this was not a line of argument accepted by the Office of Fair Trading in its recent decision to waive through the Macquarie bid without a Competition Commission inquiry.
To the contrary, the OFT took the view that Macquarie would increase the LSE's incentive to focus on core activities, rather than expand into related areas, which might result in the Exchange becoming a stronger competitor. In any case, the existence of rival exchanges placed a competitive constraint on the LSE. Liquidity would just shift elsewhere if the LSE didn't remain competitive.
The LSE's line of argument also raises the question of just how the present valuation can be justified unless the LSE sweats the assets. In the end, capital is capital. For these purposes, it doesn't much matter whether it is debt or equity, except to the extent that when the going gets tough, the dividend on equity can be abandoned. Investors wouldn't much thank the LSE for that eventuality.
In any case, the LSE rather hoists itself on its own petard by promising £560m of capital back. What's this other than leverage?
For the time being, however, all these arguments are academic. The LSE is out of Macquarie's reach, and it's not at all clear the Australians have got the backing for the requisite leg-up.
Still, whatever the eventual outcome, Macquarie's Jim Craig has at least managed to get investors to focus on the real value and potential of a company which used to be rated as little more than a dull old utility. Little heard of beyond the obscure world of infrastructure investment before this bid, he's also put Macquarie's name well and truly on the map.
Gas prices up again; is there no respite?
As the still-dominant gas supplier in the UK, Centrica's calculation in raising its gas and electricity prices by another 22 per cent is that it will gain more from inert customers who grin and bear it than it will lose from those who won't and jump ship.
Centrica lost 1 million customers the last time it decided to lead prices up, and that increase wasn't nearly as large as this one. It must brace itself to lose just as many again, despite those annoying advertisements from its British Gas offshoot to the effect that everyone else follows suit eventually.
This is no doubt true, but the worrying thing about the British gas market is that as prices rises and conditions get ever tougher for suppliers, there is an ever-decreasing number of competitors. The suppliers blame it all on the wicked Europeans, yet the reality is that Britain's market-based approach to energy has failed adequately to anticipate the end of North Sea plenty and our growing dependence on imports. New storage and import facilities will eventually ease the problem, but in the meantime there's little chance of respite. Blaming the Europeans is largely a smokescreen for the industry's own failings.Reuse content