For sale: a snip at pounds 200m

Regional newspapers can still make hefty profits, so why is Emap putting its 71 titles in the shop window?
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The Independent Online
When a company famed for tight management, lean cost control and soaring profits decides to bail out of one of its core businesses, people tend to sit up and take notice. Just why is Emap's Robin Miller, one of the media sector's more respected chief executives, selling the company's regional newspapers, the very foundation of the organisation from the days when it was known as the East Midland Allied Press?

The move has more to do with Emap's own growth strategy than with any inherent problems with regional newspapers. Indeed, the market is holding up rather well, despite two years of spiralling newsprint costs and a debilitating price war among national titles that produced collateral damage even to local dailies.

Emap's decision to sell stems from a long-standing desire to expand in the specialist business press and the exhibitions market. It is also eager to build up its interests in commercial radio. Emap operates stations in London, Liverpool, Manchester, Preston, Leeds and Cardiff. Finally, the company has been desperate to get into television, which is, perhaps, the industry with the most expensive cost of entry. Miller clearly believes it is time to husband the cash.

But there are other reasons for sale, which go directly to Emap's reputation as a stellar stock-market performer, and its heavy reliance on supportive institutional shareholders.

The company has been acquisition-mad of late, paying pounds 265m in 1995 alone. This year, it paid pounds 142m for the French magazine interests of media giant CLT, which include the best-selling Tele Star listings guide. Emap's debt has soared as a result - not enough to worry its investors, whose shares have risen from about pounds 4 in 1995 to more than pounds 7 this week. But early signs of indigestion are apparent, and a sale of the newspapers, which earn solid but uninspiring profits, would allow some of the debt - which is close on pounds 300m - to retire.

The sale could be finalised as early as today, when Emap unveils its profits for the year to 1 April. City analysts estimate proceeds of between pounds 170m and pounds 220m, depending on the buyer.

In line to snap up the company's 43 paid-for newspapers and its 28 free sheets is a veritable Who's Who of the regional press. The newest kid on the block, Newsquest, is a likely customer. Created to buy the regional newspapers of Reed International earlier this year, Newsquest, run by Reed Regional's former management, is rumoured to be negotiating for a least a few of Emap's main titles, possibly in league with Johnston Press, another big regional player. Newsquest has serious US money behind it, in the form of legendary "leveraged buyout" specialists KKR, which earned a fortune in the go-go 1980s. The US investment specialists backed Reed Regional's management, led by Jim Brown, in its successful pounds 205m purchase of Reed's 129 titles earlier this year.

But Johnston and Newsquest are believed to have some well-heeled rivals for the Emap titles - not least the mighty Daily Mail & General Trust, whose Northcliffe division operates a chain of regional weeklies and dailies, and Midland, publisher of the Birmingham Post.

There are two reasons why the regional market has seen so much consolidation. First, the Government has signalled that, after 20 years of staunch, regulatory oversight, some mergers will again be allowed. The change of approach was confirmed when Northcliffe was allowed to buy the Nottingham Evening Post, despite its already strong presence in the region.

Relaxed rules will probably reduce the number of regional titles in Britain from the current 1,200, and will enable owners to benefit from the economies of scale that shared administration brings.

The possibility of reducing the huge running costs of the business is clearly what is driving the aspirations of the major regional publishers. Starting last year, when small, regional group Trinity catapulted into the big league through its purchase of the Thomson regional titles, there has been a steady stream of deals.

The consolidation has also allowed the industry to invest in modern machinery and new information technology, mirroring the revolution in Fleet Street in the 1980s which ushered in "direct-input" computer systems and far better print quality.

A knock-on effect of the acquisition action has been the departure of huge media players - like Thomson, Reed and Emap - and the emergence of "super-regional" players such as Trinity, Midland, Johnston and Newsquest. The trend makes considerable sense, as the smaller companies can provided focussed management while big conglomerates are far too distracted by the heady returns possible in electronic media. That is one reason Pearson could end up selling Westminster Press, which, along with United's titles, is one of the few regional chains still owned by a major publisher.

Trinity and Midland have proved that regional newspapers can still be highly profitable. The overall market may be shrinking - by 25 per cent in circulation terms since 1981 - but there is still money to be made. Over all, the regional press is responsible for pounds 2bn a year in advertising revenue, and the best- performing titles can achieve profit margins of up to 15 per cent.

Emap's titles are profitable, generating about pounds 10m a year. Ranging from the Stamford Mercury (first published in 1695), the Sussex Express and the Romney Marsh Herald to the Bedfordshire Times & Citizen, the newspapers had turnover of about pounds 100m last year.

But Emap hasn't invested as much as a long-term buyer might be willing to commit, according to some media analysts. This fits with the company's reputation for hopelessly tight operating controls, tight-fisted accountants and - say those unfortunate enough to work on its many trade journals - very low wages.

A new buyer will want to invest in the titles, particularly the regional dailies. In the minds of executives such as Midland's Chris Oakley, only by improving the titles can the margins be improved. Says Newsquest's Brown: "Editorial product must drive the business.".

But that does not rule out closures and additional cost-cutting. Even Emap's legendary low-cost operating philosophy can probably be improved upon by a management dedicated wholly to the regional market.