Playing with the price tags inside Lord Rothermere's pound shop

The Times reports that Alexander Lebedev is expected to pay £1 for the Evening Standard.

As regular customers of so-called pound shops know to their cost, it’s a mistake to get too excited about price tags like this. There’s usually a catch.

In this case, for example, Lebedev may end up taking on a slice of DMGT’s debts — a slice that reflects the paper’s contribution to overall revenues.

Remember, too, that a Lebedev-owned Standard will probably strike long-term deals with DMGT covering things like print and distribution. There’s more than one way of greasing Lord Rothermere’s palm.

Still, the Woolworths-style price tag isn’t too surprising. The Times suggests that the Evening Standard ‘loses about £10m a year”. The FT estimates operating losses of £15m-£20m for this year. 

And the Guardian suggests standalone losses of £25m that moderate to a ‘much lower’net loss once the sharing of print and other costs with DMGT is taken into account.

None of these figures make much sense without a number for revenue. But the mooted purchase price of £1 suggests that it’s unlikely to be impressive in relative terms.

Describing the Evening Standard as ‘a zombie business”, Lex says Lebedev’s determination to –- in his own words -– ‘waste money’on it is bad news for ‘profit-oriented rivals hoping to eke some small change out of their own titles”.

True enough.

Lex also suggests that once DMGT sells the Standard, there will be little need for it to continue publishing London Lite. Why would the Rothermeres feel the need to defend something –- ie the Standard -– that they no longer own?

This would be a perfectly logical piece of speculation were it not for one thing. It’s being widely reported that DMGT will retain a 24% stake in the Standard. This means that DMGT might have an incentive to keep the marginally loss-making Lite alive (as a way of minimising the losses on its retained shareholding).

If DMGT does retain a 24% stake, it won’t be conforming to the norm for acquisitions. Typically, a clean break is typically preferred by everyone.

I’m not so sure about Lex’s view that DMGT wants to ‘spare itself any embarrassment in the unlikely event it is later found to have exited at the bottom”. Having described the Standard as a ‘zombie business”, this seems fanciful.

It’s possible, I suppose, that Lord Rothermere views it as his duty to keep watching brief on the Evening Standard as it makes the transition to new ownership.

Quite how paternalism on this scale will go down with outside shareholders who would prefer him to get shot of 100% remains to be seen.

One other point: Lex calculates that selling the Standard could add £110m to the enterprise value of DMGT.

This shouldn’t be taken as an indicator of the price Lebedev is willing to pay. Instead, it’s a prediction of how much more highly the stock market will value DMGT once it’s got rid of the Standard.

This yawning gap between the deal value suggested by the Times and the £110m gain in DMGT’s enterprise value tells us that the market regards the Evening Standard as an irretrievable liability that stands zero chance of clawing its way back to sustained profitability.

On this basis, the market is prepared to reward DMGT handsomely for doing a £1 deal with Lebedev.

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