Viscount Rothermere’s decision to put 97 Northcliffe titles on the market has been likened to selling off the family silver. But as the rise of the internet threatens to take the shine off the heirlooms, he must find new ways to deliver. Report by Dominic Rushe and Mark Kleinman
As they filed into the oak-panelled Kensington boardroom of Daily Mail & General Trust (DMGT) last Tuesday, the mood among the media group’s directors was unusually sombre.
The public company is majority-owned by Viscount Rothermere and his family, bastions of the newspaper industry for almost 110 years. From the walls, Philip de László’s portrait of company founder Lord Northcliffe gazed down on the cluster of men who were about to approve the most radical shake-up in the group’s history.
Paul Dacre, editor-in-chief of Associated Newspapers, DMGT’s national newspapers arm, was among the executive directors rubbing shoulders with non-execs including Charles Dunstone, boss of Carphone Warehouse, and David Verey, chairman of the British operations of Blackstone, one of the world’s biggest private-equity firms.
They had assembled to sign off the company’s full-year results, which analysts said were decent at a difficult time for the media.
But unknown to the outside world, the board was also steeling itself to unveil one of the most important strategic decisions in DMGT’s history. It was a move that for some seemed a sorry symbol of the declining fortunes of a once vibrant business.
Last Wednesday, that decision was announced to a stunned media industry. DMGT was opting to break with more than eight decades of tradition by exploring a £1.5 billion sale of its regional-newspaper division, Northcliffe Newspapers.
Northcliffe was named after the peer who co-founded the Daily Mail in 1896 alongside the first Lord Rothermere. Home to titles such as the Leicester Mercury, Cornish Guardian and the Grimsby Telegraph, it has until now been the heart of DMGT’s business.
As the DMGT finance director Peter Williams admitted: "It is a sad day. It feels like cutting off an arm."
And at first glance the decision does look like self-mutilation. Northcliffe is the most profitable subsidiary of a media empire that spans the Daily Mail, Sydney’s leading commercial radio station Nova FM, and consumer exhibitions such as the Ideal Home Show.
Northcliffe, with £520m of sales and £102m of operating profit, is the media group’s biggest earner. It is more profitable than the national titles and makes almost as much as the information, exhibitions and broadcasting arms put together.
But over the long term, Rothermere argued, DMGT’s money would be better spent elsewhere. With local newspapers attracting healthy prices, now was the time to get out and look for new opportunities. As his family owns some 85% of the company’s shares, nobody was arguing. And it seems that most of those present were of a like mind.
Rothermere and DMGT have decided to tie their fortunes to the company’s future, not its past.
HOW that future will turn out is a question the viscount and the rest of the newspaper industry are wrestling with. Across the world, newspapers are under growing pressure to respond to the threat of the internet. Websites like Craigslist.com are siphoning off ever more of the classified advertisements that were once print’s bread and butter.
The San Francisco-based website is every newspaper advertising man’s nightmare. It employs just 18 people and posts 6.5m classified ads each month at 190 local sites in 35 countries – most of them free.
Newspapers had to fend off radio and television before the likes of Google and Yahoo. But those sites are competing for readers as well as advertisers, expanding their news content and adding video and music to attract ever greater audiences.
The newspaper industry, one that lives to report on change, has been caught on the hop. Gloom abounds.
Last month Rupert Murdoch, chairman of News Corporation, parent company of The Sunday Times, told the trade paper Press Gazette: "I don’t know anybody under 30 who has ever looked at a classified advertisement in a newspaper."
Warren Buffett, a self-confessed "newspaper addict" and investor in the Washington Post, has said: "The economics of newspapers are very, very close to certain to deteriorate over the next 10 to 20 years. I see nothing that will turn round the erosion from both the circulation and advertising standpoints."
Local papers and titles that rely heavily on classified advertising have seemed the biggest losers. In America shareholders have forced Knight Ridder to put its local newspapers on the market. In Britain News Corporation sold TSL, publisher of Times Educational Supplement, United Media has sold Exchange & Mart and there is speculation about the future of the Guardian’s Auto Trader titles.
The sell-offs have been matched by big bets on an online future. Dow Jones, owner of The Wall Street Journal, spent $519m buying the online financial-news service MarketWatch. News Corporation has spent $1.3 billion on web acquisitions.
But the sale of Northcliffe is different. "It’s a very negative response," said one newspaper executive. "Initially I suppose it looks bold but for me it shows a lack of imagination."
Tim Bowdler, chief executive of the local-newspaper group Johnston Press, said: "I was very surprised. I didn’t think the big four regional publishers would be the same four forever, but I didn’t expect this.
"Local newspapers have tremendous brand strength and connections with their communities. We are better equipped than anybody to manage that challenge."
And there are signs that the growth of the internet need not spell the end for newspapers. In America newspapers are still the first choice for important news. Both the number and percentage of people visiting newspaper websites hit an all-time high in America in September.
According to a report by Nielsen/Net Ratings for the Newspaper Association of America, 47.3m people visited newspaper websites in September, the most in any month since the association began tracking online usage in January 2004. The number represents 31.9% of all internet users, and is up 15.8% from 40.9m for the same period last year.
In the third quarter of 2005 advertising spending online rose 26.7% from the same period a year earlier to $518.9m. It is a fraction of the $11.4 billion newspapers attracted in print advertising, but growth in that sector was a measly 1.6%.
Career Builder, the online recruitment site that Knight Ridder owns in partnership with rival newspaper groups Gannett and Tribune, has now surpassed Monster.com in both listings and audience.
Then there is the Lawrence Journal-World. The Kansas local paper has attracted the interest of newspaper executives across the world. In a town of 85,000 and where 80% of the population have access to high-speed internet, its website attracts 7m page views a month. The paper has a circulation of 20,000.
A small-town newspaper reporting small-town news, Journal-World’s website features everything from children playing little-league baseball to tickets for football games. Journalists write for the paper and for local television and "podcasts" – radio-style reports that can be downloaded to an iPod or computer.
Like DMGT, it is a family business and has been owned by the Simons family since 1891. Through their grandly named World Company, the Simons enjoy something of a media monopoly in Lawrence. Their interests range from cable and telephone services to newspaper and online publishing.
This vision of the future is brought to you by Dolph Simons, a conservative 75-year-old who avoids e-mail and computers and prefers to correspond using an old typewriter.
AT THE end of June, DMGT announced plans to open a new £80m printing plant in Didcot, Oxfordshire. By 2008 the group hopes it will be printing every page of the Daily Mail and The Mail on Sunday in colour. Two days later DMGT said it had commissioned Deloitte to review its local-newspaper assets.
The company was already looking at cost savings of £20m a year. The Deloitte review handed Rothermere a more radical option.
Last week the company announced it now expected £30m in annual cost savings by 2007, rather than the £20m originally sought. But Rothermere concluded that it would be impossible to raise Northcliffe’s profit margins to industry-wide levels without much deeper cuts. Northcliffe’s 20% operating margin compared with figures nearer 30% at its closest rivals, Johnston Press and Trinity Mirror.
The viscount was reluctant to make those cuts, which would be both costly and painful for a company that is proud of its investment in journalists.
"It sounds hard-hearted, but this decision is nothing more than a piece of financial engineering," said Williams. "We think someone else will pay a higher price for these assets than the return we can make from continuing to own them. We do not think there is a structural problem with local newspapers; the downturn in advertising revenue is purely cyclical."
Buyers are already sniffing. Johnston and Trinity in Britain could have some competition difficulties but analysts believe they are not insurmountable. Another interested party is America’s Gannett, which already has a foothold in Britain. Then there are the venture-capital houses, keen to pare the business back and sell it on at a profit.
Local news is now in for another round of consolidation on the scale of the transactions of 1995 and 1996, in which Thomson Regional Newspapers sold out to what was then Trinity International; Pearson, the owner of the Financial Times, sold Westminster Press to Newsquest; and Emap sold its local titles to Johnston Press.
Northcliffe looks certain to find new owners in the near future, albeit less patriarchal ones. But what of DMGT itself? For all the protestations that Northcliffe is a healthy business, Rothermere is clearly convinced that his family money is better invested in mundane corporate housekeeping.
About £1 billion of the proceeds will be given back through share buybacks. Another £250m will be used to reduce debts of £800m. And a further £150m will be used to plug Northcliffe’s pension deficit.
In recent years the company’s strategy has been to diversify both internationally and across industries to get away from the cyclical nature of the newspapers (see panel below). In a rare interview last week Charles Sinclair, chief executive of DMGT, said: "(Lord Rothermere) is concerned about the shape of this business, 30 to 40 years from now."
At 37, the fourth Viscount Rothermere needs to take a long view. The sale of Northcliffe answers one question – DMGT’s future does not lie in its past. But the future remains just as uncertain. It is a feeling many newspaper bosses will recognise.
