Northcliffe: The limits of cost-cutting

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It’s groundhog day at Northcliffe Media. Steve Auckland, the new managing director, laid out his priorities today in an interview with The Guardian:

• Reducing the number of days on which some loss-making titles publish.

• The possibility of newspaper closures.

• Increased autonomy (“I’m trying to do away with the corporate stuff and getting the editors and the managing directors free to do what they want to do.”)

Another year, another overhaul. Six years after the peak of the Blair-Brown boom, the restructuring campaigns have merged into a blur. Today, I’ve spent some time mining Northcliffe’s financials. (You’ll find the original version of my Google Docs spreadsheet here).

Along the way, I’ve encountered these annual references to cost-cutting campaigns at the regional publisher:

2005: This programme commenced in the summer of 2005 and, by September 2006, savings of £35 million had been realised, mainly from a reduction in headcount of over 1,000 people.

2006: Last year we undertook a review of Northcliffe Newspapers which identified the potential for further restructuring of its UK business in addition tothat already being undertaken as part of its Aim Higher programme.

2008: At Northcliffe Media, a significant reorganisation of the business is underway which also involves staff reductions.

2009: At Northcliffe Media, which has faced the most difficult of market conditions, we have reappraised our publishing portfolio and carried out a complete overhaul of operations. This has rebased the business on a much lower cost operating model, which will see substantial benefits when the economy recovers.

Overall, the numbers for the six years between 2005 and 2010 are remarkable:

• Headcount: Down by over 50% from 8,013 to 3,817

• Quoted cumulative cost savings: £125m

• Quoted restructuring costs (incl. redundancy): £71m

• Quoted write-downs in asset values: £200m

As the DMGT slide I’ve reproduced here suggests, the results have included a lot of centralisation.

Perhaps this approach has run its course. This would explain why Auckland’s attention has turned to Northcliffe’s portfolio of titles.

Surprisingly enough, Northcliffe’s current line-up doesn’t look radically different from 2006 (with the exception of an apparently sharp contraction in the number of free weeklies, which were knocked for six by ad recession). Here’s the current roster:

• 17 paid-for dailies (down from 18 in 2006)
• 2 free dailies
• 23 paid-for weeklies (down from 29 in 2006)
• 4 weekly classified titles
• 17 monthly magazines
• 40 free weekly newspapers (down from “over 60” in 2006)

What next? Presumably, we’re looking at paid-for dailies becoming paid-for weeklies, following the example of the Bath Chronicle (which made the switch in 2008). This seems to be very much what Auckland is suggesting. Clearly, those dailies are on his mind:

“If you have got stacks of titles and lots of loss-makers and lots publishing six days a week and not making money you have got to look at the portfolio.

“I want a step change. It might be harsh but it gives a platform for the future. The key thing is a product portfolio review. We have to look at the number of titles and frequency of publishing.”

Platform for the future? The same phrase might well have occurred to Lord Rothermere, who hauled Northcliffe off the market when no-one met his expectations on price in 2005-2006.

What were those expectations? At Press Gazette at the time, Jon Slattery suggested that DMGT thought these “crown jewels” of local journalism might be worth £1.5bn.

At the time, the calculation didn’t seem entirely outlandish. In April 2006, for example, DMGT sold the Aberdeen Press & Journal and the Aberdeen Evening Express to DC Thomson for £132m. This was a business that had generated £38m in revenues the previous year, and operating profit (before interest and tax) of £8.1m.

On a similar multiple of 16 times operating profit, Northcliffe Media would have been worth £1.35bn.

And now? Assuming that a buyer could be found, Northcliffe might fetch three times EBITDA. That’s a good deal less than £100m. In other words, Northcliffe today isn’t worth one-fifteenth of the price Rothermere held out for in 2006.

Almost inevitably, it gets worse. The upfront cash involved in any deal would be considerably less than £100m, because of the likely need to put right Northcliffe’s share of DMGT’s £270m pension deficit.

£50m? £10m? At these levels, the number barely matters.

In addition, the fact that Northcliffe is looking at converting more paid-for dailies to weeklies suggests that plans for industry consolidation have gone badly awry.

This is the kind of radical surgery that buyers, rather than sellers, are meant to undertake.

The conclusion is that DMGT can no longer wait for a suitor, or has given up hope of encountering one who will hand over the requisite cash.