Mirror, Mirror on the wall, perhaps staying independent is best of all

News Analysis: Should the newspaper group succumb to a bid from Trinity or RIM or should it soldier on alone?
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The Independent Online
THE MIRROR, one of the world's most famous newspaper brands and Britain's second biggest selling title, is at a crossroads as a public company.

In a report due for release today, the Secretary of State for Trade and Industry, Stephen Byers is expected to rule that competing bids for Mirror Group from rival regional newspaper publishers Trinity and Regional Independent Media (RIM) can go ahead.

There is, however, an additional option: namely, that Mirror Group, which also publishes Scotland's Daily Record and a number of regional titles, including Birmingham's Evening Mail, continues to operate independently.

Support for this option is crucially dependent on the sentiment of Mirror's big shareholders. They include fund managers Phillips & Drew with a 21 per cent holding and a further six City firms that have a combined 30 per cent stake.

Not long ago Mirror's future was widely assumed - not least by company management - to rest with either Trinity or RIM.

In mid-January, news leaked out that RIM, formed in 1998 from a Candover Investment Trust-backed management buyout of United News & Media's regional titles, was preparing a cash bid for Mirror of 200p per share. Following that Trinity, the country's largest regional newspaper publisher with titles such as the Liverpool Echo, formally offered 0.35 of a share plus 40p in cash for each Mirror share.

Trinity's cash and shares offer, once worth about 210p, has now risen to just over 237p as regional newspaper stocks have rallied. The Chester- based publisher is now the clear favourite to take Mirror Group should it be sold, since RIM would be unable to finance a bid without tapping Candover for further cash.

But people close to Mirror's board of directors now claim that the new chief executive John Allwood has revived the company, making independence not only an option, but indeed the most likely outcome.

In recent months, Mr Allwood has pared Mirror's debt to around pounds 300m from pounds 500m by selling its former Holborn headquarters - the so-called Maxwell penthouse - and off-loading its 19 per cent interest in Scottish Media. That's coincided with an uplift in the fortunes of The Mirror itself.

Most encouragingly, sales of the daily title have risen fractionally after years of decline to stand at 2.349m in May. That capped a six month trend of circulation stability. Also indicative of the growing confidence is a view that the paper, under editor Piers Morgan, is tapping into the popular zeitgeist more adroitly than tabloid arch-rival and market leader The Sun.

"I don't think a takeover is inevitable like it was at the beginning of the year," says one Mirror Group executive. "As the shares have risen the mood has become very buoyant. The fact is that John has done a bloody good job." Yesterday Mirror stock closed at 249.5p, up 1.5p, but more importantly, some 60 per cent above its price in January. It makes the company worth pounds 1.14bn.

That Mirror's future as an independent company had largely been written off is something of an oddity, given thedaily's 20 per cent plus profit margins and the traditional domination of the Scottish market by the Daily Record.

There was, of course, the pounds 400m hole in the group's pension funds when Robert Maxwell's empire collapsed in late 1991. More recently, fund managers have tended to feel that money in hand, which could be reinvested elsewhere, is preferable to a continued interest in Britain's volatile and cut-throat national newspaper market.

Here the motives of Phillips & Drew could be crucial. After several years of poor performance, the fund manager's strategy of taking big stakes in medium sized cyclical stocks has started to pay off.

Earlier this year, Phillips & Drew faced sustained criticism for its under-performance. Suddenly, the fund manager's holdings began to attract market interest and it succeeded in engineering a number of value enhancing mergers. The improved returns, according to some analysts, may have alleviated any pressure to cash in quickly on Mirror's strong share price rebound.

Indeed, Phillips & Drew now says privately that the outlook for Mirror has changed, and that failing a knockout bid well above the current price, it is prepared to back Mirror management. Other institutions, including Prudential and Mercury Asset Management are thought to share that feeling.

Whether this new supportive attitude to Mirror would endure a Trinity cash and shares bid pitched above 270p may be open to question, however.

Put bluntly, Mirror shareholders have had their hopes dashed before.

Last year, German media group Axel Springer, publisher of mass market tabloid Bilt, entered talks with Mirror and considered offering 250p. But the Hamburg-based group, headed by former News International chief executive Gus Fischer, withdrew in exasperation as former Mirror chief executive David Montgomery used the bid interest to push for a 300p per share deal.

After that bitter blow, institutions saw their Mirror Group shares head south and stay there until Trinity and RIM arrived at the table.

The possibility of a foreign bid can't be totally ruled out especially since Gannett, the largest US newspaper publisher, gobbled up Newsquest last month with a surprise pounds 904m takeover. But Gannett executives deny any intention to move into national newspapers. Mr Springer, meanwhile, is focusing on building an international TV and on-line operation, and is thought to have gone cool on any deal. If Mirror safeguards its independence, future prospects will depend on management ability to retain readers. Competition from an increasingly discounted Sun, now selling for 20p in a number of regions, as well as the Daily Mail juggernaut will continue to be intense.

"You have to be prepared to invest in the newspapers and fight the good fight," observes one City insider. "Costs have been largely stripped out and what is now needed is further editorial revitalisation."