Panic or logic: Selling off the Manchester Evening News

In itself, GMG’s effort to sell its regional newspapers to Trinity Mirror isn’t surprising. The timing is interesting, though.

Only a few weeks ago, sources at GMG played down the chances of selling off the Manchester Evening News in the near term. My assumption was that a sale would have to wait until economic recovery took hold. But now we’re looking at ‘exploratory talks”. It’s easy to interpret this as a distress signal on GMG’s part.

In this respect, the Daily Telegraph didn’t disappoint yesterday.

Any disposal would amount to a fire sale because it is thought that GMG Regional would fetch less than £40m. Before the collapse in newspaper advertising, the Manchester Evening News alone was estimated to be worth about £200m.

Yes: but will the Manchester Evening News or GMG Regional Media ever be worth £200m again? If anyone believes this, I’ve yet to meet them.

Set aside the talk of a ‘fire sale’for a moment. At a deeper level, there’s some logic, rather then panic, in this potential deal.

If, like GMG, you’ve already made the decision to get out of regional publishing, now might not be a bad time to sell. The run-up in newspaper valuations has reached a plateau. The prospect of a double dip recession looms.

Remember, too, that GMG’s regionals are a sub-scale operation. The economies of scale being generated by Trinity Mirror are the only source of profits in a declining market. Even if GMG pours management time into its regionals, it won’t be able to catch up.

Perhaps, too, it’s better to sell small assets as consolidation kicks off. The alternative involves the risk that you’ll be left behind when the serious horse-trading begins.

A window of opportunity may well have opened on Trinity Mirror’s side. For a long time, Sly Bailey has looked like the only regional publisher with the wherewithal to initiate consolidation.

Plainly, however, Trinity Mirror has been fretting about the attitude of the Office of Fair Trading. The review of newspaper competition rules initiated by Lord Carter and carried out by the OFT did little to calm its nerves.

Now, however, the election of a new government is only months away. The Cameroons will take a more relaxed view of consolidation.

The City is increasingly impressed with Trinity Mirror’s Terminator-style cost-cutting. Investors might cut Sly Bailey some slack if it can beat GMG down on price.

This vision of jigsaw pieces falling into place with slick precision is tempting. But let’s not get too carried away.

GMG’s situation is tricky. Pre-tax losses at GMG reached £90m in the year to March 2009, and the company will deliver another terrible set of results this year. The company’s cash cushion has started to look uncomfortably thin.

But GMG’s situation isn’t all bad. It has tiny debts, and could raise cash from banks or investors on a temporary basis if required. Emap has its problems, but it’s too early to suggest that GMG won’t get a return on the £300m it invested there 18 months ago.

The Telegraph is within its rights to call this a fire sale. Yet GMG doesn’t need to sell at any price, even if Trinity Mirror appears to be the only interested party.

In deals, it’s the future, rather than the past, that matters. Companies are valued on a multiple of their likely future profits, discounted for inflation. If the value of GMG Regional Media continues to fall during the next decade, selling up for £40m in 2010 could come to be viewed as a smart move.

This is the possibility that should haunt local journalists everywhere. The emotions that stalked local newsrooms when DMGT tried to offload Northcliffe in 2005 are in play once again.

The silver lining, if there is one, lies in the opportunities that will be created by further consolidation. Cost-conscious bosses working at 10,000 feet create organisations in their own image. In the chinks and voids around the footprints of the last remaining giants, new business models will emerge — eventually.

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