Is the Daily Mirror worthless?

After this week’s major share price falls, have newspapers become worthless in the eyes of investors? In the case of Trinity Mirror, we’re getting mighty close to that moment.

In February, Trinity announced that 3.7% of its revenues come from digital.

As it happens, we can put a value on that digital revenue. Even better, because we know how fast web advertising is growing, we can forecast the value of that revenue five years’ hence.

Let’s start off with the analysts’ mean forecast of £916m in revenues for Trinity Mirror as a whole for the year to December 2008. Of this amount, only £33.9m — or 3.7% — will be digital revenue.

Excluding the effect of acquisitions, Trinity’s digital revenues are growing at around 25% a year. For the purpose of this argument, we’re assuming (not unreasonably) that 25% remains the norm for the next five years, through good times and bad.

Here’s the digital revenue picture for Trinity Mirror under those circumstances:

2008: £33.9m

2009: £42.4m

2010: £53.0m

2011: £66.2m

2012: £82.7m

2013: £103.4m

If Trinity Digital can grow a little bit faster — say 30% — then revenues would top out at £125m by 2013.

What might someone be willing to pay for such revenues in five years’ time?

A toppy comparison is readily available in the form of CNET Networks, the US-based pure-play digital publisher recently sold to CBS Corporation for 3.9 x revenues.

On this (admittedly sketchy) basis, Trinity Mirror’s digital operations could be worth £400m-£500m by 2013.

Perhaps, in Trinity’s case, we should assume a more modest return. Assume, instead, that Trinity Digital generates a 25% margin on its turnover by 2013.

That’s an operating profit of £20m-£25m. Apply to this a multiple of ten times operating profits and you reach a sale price of £200m-£250m by 2013.

That’s the absolute minimum that Trinity’s digital operation would fetch in five years’ time.

Coincidentally, it’s about the same as the £230m valuation currently attached to Trinity Mirror as a whole by the market.

In other words, anyone thinking of buying Trinity Mirror at the moment should think in terms of paying money for its digital operation — and picking up print for free as part of the deal.

This would have its attractions. Managed aggressively, Trinity’s papers could be made to generate £150m-£200m in profits annually. For a while, at least.

Some of that would have to fund Trinity’s pension pot. A bit of it would have to be invested in Trinity Digital. In preparation for a future of diminished revenues, a large portion of it could be used to pay off Trinity Mirror’s £425m of net debt.

Not bad for a bit of bunce attached to the main deal.

Of course, the essential requirement for any such buyer will be nerves of steel.

They will need to set the managers of Trinity Digital free to cannibalise the company’s print business.

Their other objective will be to shoehorn Trinity Mirror’s print-sized cost base into the pint pot of digital revenues within five years. In terms of destructive intensity — if not absolute damage — this would be on a par with what happened to the British steel industry in the 1980s.

Of course, running down the print business in this way will be a good deal easier knowing that you’ve effectively paid nothing for it in the first place. . .

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