“Remember, the market tends to overreact sometimes.”
No wonder the analyst who offered up this pearl while discussing Trinity Mirror with Nikhil Kumar of The Independent this morning wanted to remain anonymous.
Yesterday afternoon, Trinity Mirror’s share price shot upwards on rumours of a bid from Bennett Coleman, which owns The Times of India.
Last week, Trinity Mirror’s shares bottomed out at 41.5p. Yesterday, they closed at 92.25p. As I write, they were down slightly at 87.75p, as everyone reflects on the difficulty of doing a deal.
If the moniker Bennett Coleman calls to mind the signage above an Edwardian grocer’s shop, you’ll need to think again. Controlled by the Sahu Jain family, the company has been valued at anywhere between $15bn and $25bn.
A week ago, I suggested that a bid from a big investor was a strong possibility for Trinity Mirror. Not that this confers brain of Britain status on yours truly. As Chris Tryhorn notes in the Guardian this morning, Trinity Mirror has become “a natural market rumour stock”.
That said, it remains to be seen whether (a) the bid is real, (b) whether it’s friendly and (c) whether Trinity Mirror will welcome it.
The reported (rumoured?) tactic of buying up shares from big investors before approaching Trinity Mirror’s management doesn’t seem particularly friendly, it has to be said.
By the same token, it’s hard to see how Trinity Mirror could invite Bennett Coleman into its tent via a rights issue that offered a similar deal to existing shareholders. (Not for the first time, this makes the timing of Johnston Press’s recent rights issue look smart.)
In passing, it’s encouraging to see that Robert Lindsay of The Times seems intent upon endearing himself even further to Sly Bailey.
According to Lindsay, “some bankers in Bombay” (surely that’s Mumbai?) are asking why Bennett Coleman would want to “acquire an ailing asset in a shrinking UK market when it has better growth opportunities at home”.
By contrast, the analysts at UBS did some sums. In a note quoted at FT Alphaville, UBS has this to say:
If one assumed a potential requirement for further contributions into their pension scheme, on our estimates, an LBO* at an assumed 110p with 3x leverage would require additional cost savings of c£30m (4% of cost base) to achieve a c15% IRR.
In addition to these dire calculations — £30m of cuts ain’t small — UBS points to “limited visibility on the extent of potential advertising declines near-term, limited scope to remove additional costs given previous efficiency programmes and structural pressures longer term”.
Translation: it’s too early in the game for a bid, and Trinity Mirror’s pension liabilities continue to spook all-comers.
Much hangs on Trinity’s results, due on 31st July. In particular, the company’s pension liabilities will attract lots of questions from analysts.
The market’s incessant fretting on this score is becoming tedious. This morning, for example, an analyst from Kaupthing suggested that Trinity’s pension fund “would no doubt be even more difficult to deal with than most pension schemes given its troubled history”.
This, of course, is a bit like saying that Chelsea have little chance of winning the Premiership this year because they only managed to come top of the Second Division in 1991.
Some clarity is needed. How much of that precious commodity Trinity Mirror wants to give the market remains to be seen. It might be a remote prospect, but a better-than-expected scenario on pension liabilities could open the door to all sorts of mayhem.
* Leveraged buy out: precisely the kind of bid, financed by bank debt, that a private equity firm might contemplate.