Enemies were elated and then deflated; well-wishers concerned and then (somewhat) relieved.
This week’s Telegraph story suggesting that Apax Partners, the private equity group, had written off its £300m investment in EMAP initially seemed to promise a world of trouble for Guardian Media Group.
In much the same way that Engels subsidized Marx’s writing career by managing grim factories in Manchester, GMG’s cash cows are supposed to provide the wherewithal for the Scott Trust to safeguard the Guardian ‘in perpetuity“.
Titter at the analogy if you like, but the arrangement has proved durable.
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Last year was indicative. GMG’s national newspapers (and sites) lost £25m at the operating level. But after adding in contributions from less glamorous but highly profitable subsidiaries, GMG as a whole delivered a slim operating profit of £5.1m.
Currently, GMG owns two main cash cows:
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- 50.1% of Trader Media Group (the rest held by Apax Partners)
- Roughly 30% of EMAP (acquired with Apax Partners in March 2008)
In addition, at 30 March 2008, GMG had £577.5m of cash on its balance sheet, some of which appears to have been earmarked for investment in EMAP. Shorn of that amount, GMG should currently have at least £300m in the bank.
But back to the main question: does Apax’s write-down mean that GMG’s investment in EMAP is also worthless?
The answer is no -– on at least two levels. The wording of the Telegraph‘s report is vague. Actually, as The Guardian‘s Richard Wachman subsequently confirmed, what has been written off is Apax’s £300m cash investment in EMAP.
In addition, Apax borrowed heavily in order to buy approximately 70% of the B2B publisher. So far as we know, these loans haven’t been written off.
With EMAP expected to generate profits of £100m this year, Apax’s bankers could be forgiven for thinking that their investment still retains some value. Presumably, the biggest risk-taker (Apax) has been forced to take a bath first. (The recent suggestion by David Gilbertson, chief executive of EMAP, that his company is ‘worth around $1bn (£0.6m)’supports this idea.)
As more than one observer has pointed out, the Apax write-down has been dictated by accounting rules that force all companies to ‘mark’their assets to currently-prevailing market prices.
In the run-up to Apax’s write-down, share-based media valuations reached a nadir. Almost certainly, Apax will write back some of the value of its £300m during the next year or two. In other words: Apax’s write-down doesn’t mean that EMAP is worthless in the long-term. Not by a long chalk.
At this point, two further questions suggest themselves:
Q: Will GMG be forced to write down the value of its own investment in EMAP in its forthcoming annual report?
A: Quite probably. But if it does so, GMG won’t be alone. Every media company in the developed world has written down the value of its assets during the past year.
Q: Will an EMAP write-down have any material effect on GMG?
A: Almost certainly not. Only companies that owe large amounts to banks, or which depend on stock market investors, need concern themselves with the theoretical weakening of their balance sheet induced by mark-to-market accounting. GMG neither owes unsustainable debts; nor is it quoted.
So much for GMG’s balance sheet. By contrast with those of its rivals, it still looks reasonably spruce.
In the real world, however, it’s cashflow that counts — for Guardian Media Group (and everyone else). On this basis, GMG’s forthcoming accounts for the year to March 2009 will tell a number of intriguing stories.
We already know one of them. This week, Carolyn McCall suggested that EMAP is generating £100m of profits on an annual basis. This will generate a windfall worth tens of millions for GMG, which owns 30% of EMAP.
It’ll be needed. While she mentioned EMAP, McCall failed to talk about the performance of Trader Media Group, in which GMG holds a 50.1% stake.
Last year, the publisher of AutoTrader delivered operating profits of £91m. This year, the contribution will be thinner. Online or offline, classified auto advertising is hardly flavour of the month.
Profits will also be much-reduced — possibly non-existent — at GMG’s portfolio of regionals. Last year, the regionals delivered an operating profit of £14.3m. No-one is expecting a repeat performance this year.
With some of its cash cows malfunctioning, trading at the Guardian and the Observer has become a very real concern in recent months. As one executive puts it, GMG’s nationals have ‘veered off course’in terms of profitability ‘by several tens of millions”.
Last year, Guardian News & Media, the GMG division that contains the Guardian, guardian.co.uk and the Observer, delivered a £25m operating loss.
It would be foolish to bet on that number being smaller this year.
Similarly, however, it would also be foolish to anticipate a full-scale business model meltdown at GMG. The Marx-Engels model is under significant stress. But it’s a long way from being broken.
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