It was bad news for Daily Mail & General Trust last week when it was announced that the company was being dumped from the FTSE 100 after a seven-year residence.
The owner of the Daily Mail and the Evening Standard was ejected from the elite list. According to Numis, its share price has underperformed the FTSE share index by 18 per cent over the past 12 months. Most observers cite its failure to dispose of its regional newspaper arm, Northcliffe Newspapers, as the reason for the downward pressure on its shares.
However, analysts argue the drop into the lower echelons of the FTSE 250 is not a disaster for DMGT. Paul Richards, an analyst at Numis, says: "As a company with a market capitalisation of between £2.5 billion and £3 billion, DMGT is always going to be on the fringes of the FTSE 100 and media is having a difficult time relative to sectors such as oil and engineering. The Daily Mail has been going for more than 100 years. I can't see it changing the way it does things."
DMGT's ownership structure also insulates it from the vagaries of the market. While a big drop in share price tends to annoy shareholders in most companies, it is unlikely that DMGT's will call for management changes, given that its chairman, Lord Rothermere, controls 63.1 per cent of its voting equity through Rothermere Continuance Limited.
1. The current Lord Rothermere, the great nephew of the founder of the Daily Mail, Alfred Harmsworth (later Lord Northcliffe), has been the chairman of DMGT since 1998. He inherited the post from his father, the previous Lord Rothermere. DMGT was incorporated as a company following Lord Northcliffe's death in 1922, but traces its history back to the launch of the Daily Mail in 1896.
2. DMGT has a surprisingly diversified portfolio of businesses, something that should bolster it as the traditional newspaper market contracts. It operates six divisions: Associated News-papers, Northcliffe Newspapers, DMG Information (a business-to-business unit covering areas such as real estate and chemicals), Euromoney (a business-to-business operation focusing on international finance), DMG World Media (an exhibitions and publishing arm) and DMG Radio (which has a stake in GCap Media and operates radio stations in Australia).
3. The aborted sale of Northcliffe Newspapers in February threw the spotlight on DMGT. DMGT received three offers, but all apparently fell short of its estimated £1.5 billion valuation. Instead of selling, DMGT restructured Northcliffe into six regional divisions and brought it closer to Associated Newspapers by making Kevin Beatty, the managing director of Associated, the managing director of both operations. Michael Pelosi, the managing director of Northcliffe, now reports to Beatty.
4. Despite the difficult advertising economy, Associated Newspapers is still a cash cow for DMGT. However, its operating profit fell by £4.9 million to £39 million during the six months to 2 April. Circulation revenues were unchanged and the Daily Mail's first coverprice increase for five years should help sustain this. However, display advertising revenue fell by 9 per cent to £175 million, owing to lower volumes. Analysts are not unduly concerned, though.
Richards says: "We feel more comfortable with DMGT than almost any other newspaper publisher, reflecting the high quality and unique nature of the Daily Mail's readership."
5. Like other companies rooted in the newspaper business, DMGT faces the issue of future-proofing its activity through digital investment. Observers argue that DMGT is well placed to do this because its ownership structure enables it to take a long-term view when investing in new ventures. In recent months, it has spent more than £40 million across the online recruitment sector - acquiring Jobsite, Zambeasy and Office Recruit - plus £45 million on the dating website company Allegran and the car information resource Data Media Retail. The digital operations of Associated and Northcliffe were brought together in May as Associated Northcliffe Digital, under its managing director, Andrew Hart. The unit is now based at Associated's Kensington HQ and also runs websites including This is London, This is Money and This is Travel.
WHAT IT MEANS FOR ...
- While it is not great news for DMGT to disappear from the FTSE 100, analysts believe that it has the strength to fight back.
- Its investment in digital media is seen as a positive thing and evidence of a strategy to take the business forward.
- Its diverse portfolio and strength in areas such as exhibitions and risk management solutions are seen as some insulation against problems with the display ad market.
- Eyes will be focused, however, on DMGT's national and regional newspaper businesses. The City will be keen to see that promised savings on the regional side are delivered.
THE MEDIA SECTOR
- DMGT's slide out of the FTSE 100 could be said to reflect the weakness of the media sector as a whole.
- The majority of listed media stocks have underperformed the FTSE index as a whole over the past year. The worst-hit have been broadcasting shares, with BSkyB, ITV, Chrysalis, GCap, Scottish Media Group and Ulster TV all down against the total index.
- It is not just display ad revenues that are an issue for listed companies, but also recruitment advertising in regional press, which has declined owing to the internet. DMGT's rivals Trinity Mirror and Johnston Press are especially under the microscope. Johnston's shares are down 19 per cent over the past year and Trinity Mirror's down by 31 per cent against the FTSE index.