Mathew Horsman on Conrad Black's latest move
Tuesday 30 April 1996
Certainly last week's offer by Black's Hollinger International to buy out the minority shareholders of the Telegraph Group looks pitched high enough to succeed. By paying pounds 273m for the third of the group his US-based company does not already own, Black hopes to get full control of the Daily Telegraph's cash flow, which would give him fire-power to finance future acquisitions. The City, meanwhile, is being offered a chance to end its acrimonious partnership with the Canadian-born entrepreneur, with whom relations have been sour for at least two years.
Some institutional shareholders don't like Black because they remember how he sold shares to investors only weeks before the Daily Telegraph joined the profit-sapping cover-price war in mid-1994, a move that sent the group's shares plummeting. Black doesn't like the City because he thinks it is arrogant, clubbish and, well, English.
The specifics aside, Black's latest manoeuvre ought to be of great interest even to those not directly involved. For a start, anyone in the newspaper business should take heart. Consider that the current offer, at pounds 5.70 a share (including a 10p special dividend), is a pound higher than the pounds 4.70 Black was prepared to pay just a year ago, in his first attempt to take the group private. Back then, Black argued that the cover-price war and the escalating cost of newsprint conspired to cloud the Telegraph Group's profit outlook. He simply wasn't ready - and nor were his bankers - to offer a premium price. The independent directors of the group, which publishes the Daily Telegraph and the Sunday Telegraph, and which owns 25 per cent of the huge Australian publishing concern Fairfax, held out for pounds 5 a share. They believed that the cover-price war couldn't last forever, and that newsprint prices would moderate at some point.
The independent directors were right. The Daily Telegraph has already been able to raise its cover price, in two stages, to 40p, and there may be room for another increase soon It all depends, of course, on Rupert Murdoch, whose cut-rate Times started the broadsheet price war in 1993.
Just as important to the Telegraph Group's prospects will be newsprint costs. The Daily Telegraph uses a lot of newsprint to print its million copies a day, and has been hammered in the past 18 months by price rises. The most recent - 9 per cent - could be the last for a while, and will provide some welcome stability.
Indeed, minority shareholders might be forgiven for holding out for more money despite the fact that independent directors are recommending the latest offer. If Black's Hollinger International is prepared to cough up pounds 5.70 a share to get its hands on the whole company, might it not go even higher?
Dissident shareholders will also be aware that Black has done ridiculously well with his Telegraph investment. He got control 10 years ago of the then-struggling company with an initial payment of about pounds 30m. Using the latest offer as a benchmark, the group would be worth about pounds 760m today. Can't he sweeten the pot?
Black desperately wants the shares. After all, he is making his second effort in the space of a year. The reason is simple. Black wants Fairfax, the leading Australian publisher. Until the last Australian election, his chances of increasing the Telegraph Group's 25 per cent stake in Fairfax were nil, thanks to media ownership rules. But the new government will relax the limits, and may allow Black to up his holding.
Regulation is only one stumbling block. The bigger problem is money. He can raise it in the market, of course, but investors prefer some collateral. That is where the Daily Telegraph's cash flow helps. Hollinger International could easily raise fresh funds on the strength of 100 per cent control of the best-selling British broadsheet daily.
The other advantage of buying out the minority would be to sever all ties with the City of London, and to shift financial commitments to New York, where Black has not yet outstayed his welcome. Black and his close lieutenants like to argue that the US capital markets - extensive and efficient - are far preferable to London's. The more likely reason for Black's desire to consolidate his global holdings in the US is the sorry state of his relations with UK financial institutions.
It is easy to see why Black has set his sights on Fairfax, publishers of the Sydney Morning Herald, the Melbourne Age and the Australian Financial Review. So lucrative is this company that locals refer to its classified advertising revenue as "rivers of gold". But even if the regulatory review Down Under does not go his way, full control of the Telegraph Group will give Black the collateral he needs to expand elsewhere - in the US or Canada, perhaps, or even in the UK, this time without having to rely on the City. He could always sell the Fairfax stake, freeing yet more funds for expansion.
He certainly hasn't ruled that out. Indeed, under his latest offer to the Telegraph Group's minority shareholders, he has promised to share the gains above a certain level in the event that he does sell his Fairfax stake within two years - a clear indication that a sale is still a possibility.
For the rest of the newspaper industry, little will change if Black takes the Telegraph Group private. But other publishers will be pleased to note how much more money Black is prepared to spend to secure his hold on a flagship of Fleet Street. A corner has been turned.
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