Independent News & Media: Lidl economics and post-imperial super-profits

No webcasts at Independent News & Media, which yesterday issued its financials for the past six months the old fashioned way: in digital silence.

The noise was provided by dissident investor Denis O’Brien. Floating into the coverage surrounded by the usual fog of speculation, O’Brien did his best to kick up a racket by suggesting that IN&M’s “dividends now seem to be part financed by borrowings”.

It would be interesting to see his sums.

Actually, IN&M’s topline looks like a classic from the annals of tough management: revenues down by 3.7% to E780m and operating profits up by 6%.

But strip out the gyrations of the euro — IN&M’s reporting currency — and a different picture emerges. In constant currency, IN&M’s revenues and profits are actually growing.

Needless to say, most of the coverage (not to mention Denis O’Brien) zeroed in on the UK operation, where revenues fell by 14% and operating profits collapsed from E7.3m to E4.7m.

For investors, London’s weedy profitability isn’t yet an issue. They will continue to forgive most things so long as IN&M’s outposts in Australasia, Ireland and South Africa carry on remitting cash to the post-imperial centre.

Post-imperial? Well, yes: despite The Independent‘s liberal conscience, the business model that sustains it actually belongs to an era of pea soup, gentlemen’s clubs and the British Overseas Aircraft Corporation.

It may have followed the English-speaking peoples around the globe, but IN&M is no gilded relic. This is a company that actively proclaims its status as the newspaper industry’s equivalent of Ryanair and Lidl. Being a “low cost operator” is one of five USPs that IN&M lays out for investors.

Cutting costs, it turns out, involves a form of innovation — in the form of “new publishing operating strategies”. These involve “outsourcing what we can without diminishing points of brand differentiation”.

The other post-modern twist is Irish part-ownership. Traditionally, it’s always been Scottish troops that were the last to leave Britain’s overseas possessions. In media terms, it’s the Irish.

But despite the cultural baggage, IN&M’s model has worked well thus far, for two excellent (and very modern) reasons.

The first is Ireland, where O’Reilly’s quasi-monopoly in newsprint generates one-quarter of the company’s revenues and an outsized 30% of operating profit.

The second is Asia and the commodities boom, which have supercharged the economy of Australia. IN&M’s newspapers Down Under generate half of the company’s revenues and profits.

But the still-warm glow of the Goldilocks Years can’t hide the fact that both Australia and Ireland have suffered some vicious recessions in their time. On this score, a hint of nervousness was visible in the presentation delivered yesterday by Donal Buggy, IN&M’s chief financial officer.

Tucked away at the end of the presentation, after the last slide, was one of those emergency efforts reserved for anyone asking an awkward question.

The slide in question claimed that the Irish economy has more going for it than property and construction.

True enough. But this hasn’t stopped O’Reilly’s editors in Dublin calling frantically for their grossly-indebted government to inject more money into a shrinking economy. Australia, meanwhile, appears to be wobbling its way toward a slowdown.

The next couple of years will sorely test IN&M’s credentials as a low-cost operator.

Inevitably, at some point, the company’s ability to sustain post-imperial losses at The Independent and Independent On Sunday will also be called in question — and not just by Denis O’Brien.

According to one report, O’Brien yesterday called for the sale or closure of both papers.

He surely knows the suggestion is a bit previous. Slightly self-defeating, too. At the moment, potential buyers aren’t exactly queuing around the block.

But neither point matters much yet. The real crunch will come next year. That’s when we’ll finally discover whether Sir Anthony O’Reilly’s amalgam of Lidl economics and imperial super-profits can survive a real battering.