Square Mile has lost its marbles over media

It’s not yet the kind of purchase you could once have made with a buy-to-let mortgage from Northern Rock. But it’s getting close.

A year ago, the starting point for anyone interested in buying up Johnston Press would have been a bid of £1.5bn. By last week, the company’s theoretical value – based on the price of its shares – had fallen to just £450m.

Imagine, for a moment, that Johnston Press was a house. A property that has lost two-thirds of its value in less than 12 months is a bargain in anyone’s terms.

But it gets better than that. As it happens, Johnston Press is the kind of house that can generate something like £130m in rental income (or post-tax profits) every year.

To buy it, you’d take out a mortgage for £450m, on which the annual interest payments would amount to approximately £30m.

The upshot? You’d be able to pay back the interest and the loan itself within five years – comfortably.

For Johnston Press employees slaving to pay off a 25-year mortgage, this is a sobering thought.

It also raises two questions. The first is whether the Square Mile has lost its collective marbles?

The second is whether journalists should be worried by the share price collapse that currently afflicts most media companies that rely on consumer spending?

The short answers to these questions are: i) no more than usual; and ii) yes, but perhaps not in the way you’d expect.

Some observers would maintain that the City doesn’t have many marbles to lose in the first place.

That’s because, at turning points, share prices traditionally follow a manic-depressive pattern, moving exaggeratedly toward the upside or the downside.

During normal times, we think of a company’s share price as the yardstick of corporate success. But in abnormal times, investors stampede around the market like frightened wildebeest. As a result, share prices start to part company with the underlying reality.

To this, we can add a second proviso: Share prices are based on guestimate about the future. When the most bearish of pundits are predicting a 1930s-style wave of mortgage defaults in the world’s largest economy, the average classified yield achieved by the Derbyshire Times last year suddenly seems irrelevant.

Mix together these truths, you wouldn’t be alone if the resulting picture reminds you of Gypsy Rose Lee swooning over a crystal ball in a fairground tent – without the much-needed blister pack of lithium by her side.

The £450m price tag currently applied by the market to Johnston Press is, in another sense, nonsense.

If a bidder did arrive over the horizon offering the £450m theoretical value, he or she would quickly be laughed out of court. For confirmation of this, take a look at Yahoo.

Since Microsoft bid for the company a month ago, Yahoo’s depressed share price has risen by 50 per cent. Shares in Google, Yahoo’s main rival, collapsed from $500 to $433 during the same period.

So given the markets’ latest gyrations, which saw Johnston Press lose 15 per cent of its value in just two days at the end of last week, should journalists be worried?

Part of the answer lies in general conditions. Last week’s rout affected a vast swathe of consumer-facing shares: Debenhams, HMV, Rentokil and even BT all took a slapping.

These random episodes of violence – powerful, yet driven by enormous insecurity – will encourage chief executives to push the button on the ‘what if?’cost-cutting schemes that their managers have been developing since the New Year.

Part of the answer lies in the specifics. Last week, in the endless search for hints about the economic storm that’s coming, the City’s analysts suddenly decided to look for companies with larger-than-average debts.

The analysts at UBS picked out Johnston Press. If revenues fell by a further five per cent this year, they suggested, then Johnston could breach its banking covenants.

When a bank lends money to a company, it asks for guarantees. One of the most important is an assurance that the company – whatever the circumstances – will make enough cash to service its interest bill.

Companies work hard to avoid breaking covenants, because they usually result in major restructuring and – most distasteful of all – the sacking of chief executives. To free-up cash to placate the banks, companies will happily make employees redundant and sell off so-called non-core operations.

Those are precisely the actions Johnston Press last week promised to take if confronted by the possibility of breaching its banking covenants.

So, yes, be worried by all means. In this particular recessionary drama, we have reached the point at which investors remember that cash-strapped bankers can wield the big stick, too.

But ask yourself this: If most of Western civilisation – or, at least, the bit of it that sells stuff to consumers – is going to hell in a handbasket, where’s left to hide?

True, a job in B2B publishing – or the allegedly recession-proof PR industry – looks like a good bet at the moment. But if the worst-case scenarios are correct, both of these sectors will soon be rolling in the mire with Johnston Press.

Most of us will stay where we are in the hope that the real world is rarely so lurid or dangerous as it seems in Gypsy Rose Lee’s fairground tent.

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