The unholy Trinity of slash, save and sell off

After a year of cost cutting at the group behind the 'Mirror', Sly Bailey has called in McKinsey. Drastic action could be on the agenda, finds Tim Webb

When she took over as chief executive of Trinity Mirror last February, Sly Bailey promised to arrest the decline of the national and regional newspaper group using the motto: "Stabilise, revitalise, grow". The joke now doing the rounds among senior executives, apparently, is that her new motto should read: "Retrench, rethink, demerge".

Last month the ABC circulation of the group's flagship title, the Daily Mirror, was down 7.34 per cent compared with January 2003, the worst annual fall for a daily national newspaper by far. It now stands below the two million mark, despite attempts in recent years to take it downmarket, upmarket, and now back down again. One analyst describes the paper under its talented but unpredictable editor Piers Morgan as "schizophrenic".

On Thursday Bailey will unveil full-year results. The City expects, but not too much. The future isn't bright: the national titles are in decline in a declining market, and the scope for cost cutting in the better-performing regional papers is limited because of competition rules discouraging consolidation. One well-placed source likens Bailey's current predicament to that of King Canute, who, according to legend, commanded the tide to recede and was, of course, ignored as the waters lapped around him.

But then again, management consultants were not around in Anglo-Saxon Britain to help out. Bailey has hired the renowned firm of McKinsey in a move whose irony will not be lost on her predecessor, Philip Graf, who used the same firm to carry out Trinity Mirror's Biggest to Best review. This resulted in a £20m cash injection for the Mirror in 2002 and a bruising price war with Rupert Murdoch's Sun. When Bailey replaced Graf, there was an impression that she would bring strategic decision-making back in house.

In May she appointed a McKinsey partner, Humphrey Cobbold as director of strategic development to help on her long-awaited review, which was not as dramatic as some had expected. Predictably, it focused on cost cuts: a target of £45m in savings by the end of 2005 was set. The programme kicked off with 550 job cuts, or 5 per cent of staff, and the axing of expensive extras like the Mirror's expensive Saturday M magazine, but further significant savings will be needed to meet the target.

The group's remaining Northern Ireland titles were put up for sale, but its stable of regional papers, which includes The Birmingham Post and Liverpool Echo, were left intact. Meanwhile, The People, the struggling Sunday title whose sales still manage to eat into those of its Trinity Mirror stablemate, the Sunday Mirror, has not been closed or sold, as some analysts have suggested.

So why bring in McKinsey? That is a question only Bailey can answer. According to the consultancy's website, its media team, under the title "lean operations" (read "cost cuts"), is helping clients "implement lean systems for production and editorial processes that maintain quality while delivering cost reductions - ensuring that what is spent shows up on the screen or on the page."

Analysts have been impressed with Bailey's cost-cutting efforts over the last 12 months. Not surprisingly, there is scepticism among the Trinity Mirror rank and file about much more savings can be squeezed out of the business. But the issue remains that when she wielded the axe last summer, the job losses, especially among editorial staff, were not as harsh as expected. One industry source speculates that Richard Desmond's management of the Express titles could become the benchmark for Trinity Mirror: huge editorial cuts, copy sharing and the merging of the editorial departments between the daily and Sunday newspapers into close to seven-day operations.

Last month's sales of the Daily Express were down a respectable 4 per cent, year on year, despite the huge cuts. Bailey may well decide that if there is nothing she can do to arrest the falling sales of her national titles, her best option will be to take out as much cost as possible - with the help, no doubt, of McKinsey - while minimising the impact on sales.

But Anthony de Larrinaga of Société Générale Securities warns that if more cuts are made at the Mirror titles, any hope of arresting decline will fade further. "In publishing, you get what you put in," he says. "If you do not invest sufficiently, you will not be rewarded by higher sales or advertising revenues. The most pressing priority is to stabilise the decline, but in such a crowded market, it will be a very difficult assignment for Sly Bailey."

Attempts to reposition the daily newspaper have not helped, he says. "The Mirror has been schizophrenic in its direction. A few years ago David Montgomery [a former chief executive) talked about moving more midmarket, then Piers Morgan pictures England's footballers kitted out as Tommies on the front page before a game against Germany."

Since Bailey's arrival, Morgan - who once derided the standard tabloid fare of celebrity news - has adopted a more populist approach, toning down the Daily Mirror's hostile coverage of the Iraq war. The rate of decline has slowed, but not by enough.

Ian Tournes, press director at buying agency Starcom MediaVest, says that as the paper's sales decline, it is falling further behind the market leaders. "The Sun and the Daily Mail seem to be part of people's lives; everyone quotes the papers. If we were planning a mass-appeal print campaign, we would always use The Sun, for example, while the Mirror would be very much second choice. It is seen to have lost its way over the last few years and hasn't stepped up a gear."

The stock market does not price newspaper groups favourably compared to the rest of the media sector: Trinity Mirror trades at a share price equivalent to around 13 times annual earnings, against an average for the media sector, including broadcasters, of 18 times earnings. But the group, despite outperforming the media sector by more than 15 per cent over the last 12 months, still lags behind its peers in the print industry: regional newspaper company Johnson Press trades at 15 times earnings, while Daily Mail & General Trust trades at 17 times. The suspicion is that the poor performance of Trinity Mirror's national titles is depressing the stock market valuation of the group.

One radical option for unlocking value remains for Ms Bailey: a demerger of the regional and national titles. In effect, this would unwind the merger of Trinity and Mirror Group in 1999, overseen by the current chairman Sir Victor Blank. It could be one step too far, at least while Sir Victor remains.

Analysts say that the combination of the two stables has not resulted in the hoped-for savings, while the stronger performance of the regional newspapers is masked by the struggles of the nationals. This was underlined by a 3.9 per cent year-on-year increase in advertising sales for the regionals in 2003, compared to a 5.7 per cent fall for the national newspaper division. Private equity groups Candover and Apax have looked at taking the group private in the past couple of years, and there has also been interest in the regional newspapers.

Richard Hitchcock, from stockbroker Numis, says a sale of the regional titles is unlikely at the moment: "This would be too soon after the Mirror Group and Trinity merged, though you can never say 'never'." But if Bailey and Mc-Kinsey can't lick the nationals into shape in the next year, calls for a demerger will be back on the agenda.