Fears grow over Johnston Press as sale talks end

Offers for Irish titles 'not high enough', says regional newspaper group

Johnston Press, the publisher of The Scotsman, is close to breaching its debt covenants after talks to sell its Irish titles collapsed.

The struggling regional newspaper group said yesterday the sale process of the titles "has now been terminated", sending the shares down almost 30 per cent as investors feared the worst. This has added further pressure as just two months ago it raised doubts over its future as a going concern.

Despite receiving serious interest for the Irish publications, the group did not believe any offer came in "at a sufficiently high price to be in the company's best interest". Gareth Davies, an analyst at Investec, called the news "disappointing".

The collapse in negotiations has made the company's attempts to renegotiate its debt with the lending banks to avoid breaching the terms more urgent.

Johnston had said in March that if the Irish business was not sold off, it would likely breach a financial covenant in its debt facilities during 2009.

Discussions to relax the covenants, and renegotiate the facilities beyond September 2010 have been "constructive and supportive", but the parties are yet to agree terms, the group said. It hopes to have agreed refinancing before reporting half-year results in August.

Advertising revenues, which make up about two-thirds of revenue, fell in the 19 weeks to 9 May by 34.4 per cent on the same time the previous year, disappointing market expectations.

The group was more upbeat about ad revenues however, pointing to "greater stability in recent weeks".

In an attempt to offset the fall in revenues, which has also been hit by the rising cost of newsprint, Johnston has increased its cost-cutting drive and hopes to slash £30m more this year than in 2008. "Whilst these cost savings are encouraging, they will be not be sufficient to offset the fall in advertising revenues which are running below market expectations. This means that operating profit for 2009 is likely to be towards the lower end of current market expectations," it said. Numis Securities predicts earnings before interest taxation and amortisation of about £40m.

The group has reduced its net debt by £29m to £448m at the start of the year, although only £16m came from cash generated from its ongoing operations. The remainder came from sterling strengthening against the euro.

John Fry, Johnston's chief executive, said the market "remains fragile", but added that the ad stability, cost cuts and covenant discussions mean it "will be well placed to benefit from any recovery in the economy as and when it emerges". Regional newspapers are waiting on a government report later this week that is expected to help secure the future of the industry by relaxing merger legislation.