Peter Kirwan: Breaking up could be hard to do for Emap

Nicholas Coleridge, MD of Condé Nast, raised eyebrows with his claim that there was ‘absolutely no reason to be pessimistic’ about consumer magazine publishing

If he’s right, what’s up with Emap? Once fondly regarded as a home-grown success story in the City, Emap jettisoned chief executive Tom Moloney just days before announcing its 2006 financials.

Moloney’s crimes included three profit warnings in less than a year. These came against the negative backdrop of 400 job cuts and a run of poor ABC results for the likes of FHM (down 26 per cent) and Zoo (down 22 per cent).

The sense of crisis was deepened by aggressive commentary from analysts. Described as ‘cowardly’in one account, Emap’s former chief executive was also attacked for surrounding himself with ‘average talent”. Others suggested that Moloney – who spent 21 years with Emap, four of them as chief executive – had become too ’emotionally attached’to the company.

Even his boss, Emap’s chairman Alun Cathcart, said publicly that the company needed ‘a much more determined person’at the top. It all sounds very negative. But how bad is Emap’s situation in reality?

Emap’s top-line numbers for 2006 showed revenues down by 13 per cent and operating profits down by 11 per cent to £217m.

Disappointing? Certainly. But some of the news wasn’t too bad. After stripping out assets offloaded during the year, revenues and profits were broadly flat. In fact, Emap’s underlying performance resembled that of Time Warner’s magazine unit, which owns IPC in the UK.

Emap’s mix of consumer magazines, radio holdings and business publications is designed to be resilient. When High Street spending slows down, for example, business publishing often powers ahead.

This is what happened to Emap during 2006. In the circumstances, the company’s performance – including divisional operating margins of between 19 and 32 per cent – looks reasonably solid.

So if Emap isn’t struggling with a life-threatening crisis, why has coverage of the company turned so sour so rapidly?

There are probably three reasons, and the first is historical. Managed brilliantly by former journalist Robin Miller in the 1970s and 1980s, Emap lost its way in the late 1990s.

Since then, in the words of analyst Simon Wallis of Collins Stewart, the company has ‘lurched from one expensive foray to another in search of growth”. Predictably, some long-term investors have just run out of patience.

The second reason is personal. Oddly for a chief executive, Tom Moloney shunned the limelight. Analysts don’t like reticence of this kind, which increases the risk of the gaps in their knowledge being exposed.

This explains much of the rancour that burst over Moloney’s head following his departure, including the dubious suggestion that he didn’t know what was going on inside his own company.

The third factor is highly political. Emap’s share price has barely moved during the past three years. And this has created the potential for a break-up.

Before Moloney’s resignation, the markets valued Emap at less than £8 per share. Currently, some analysts believe that the company’s constituent parts could be sold off separately for as much as £10 per share.

Any break-up would involve private equity investors. And it would generate big fees for the investment banks that employ analysts. In short, the City has a motive for accentuating the negatives.

Exactly how much of a motive became clear last week, when Emap chairman Alun Cathcart said that the board was committed to ‘building, and not breaking up’the company.

Mysteriously, within 24 hours, Cathcart appeared to have changed his mind. ‘I am open to the idea of a break-up,’he told the media.

The case for a break-up isn’t yet proven. Worst of all, splitting Emap would involve dismantling the mix of consumer and B2B operations that’s so envied by rivals.

Instead, the company’s big institutional shareholders should support the appointment of a chief executive who can fix what’s wrong – before Emap is hit by a real crisis.

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