Malcolm Magazine, an industry insider, has unveiled his analysis of the Kerry Stokes move on PMP last week.
Strategically, the deal only makes sense to an optimist. Even PMP’s own history confirms that. Kerry Stokes suggests that there are large cross-promotional opportunities for the magazines, implying that perhaps a bit of free TV for cash-strapped New Idea will give it a circulation boost against the Nine-aligned Woman’s Day.
Woman’s Day used to trail New Idea by a country mile back in the eighties under Dulcie Boling but a combination of huge TV promotion from Kerry Packer’s Nine and massive continuing investment in story budgets under the group’s male editor-in-chief put it neck and neck with Dulcie’s once revolutionary New Idea. Unfortunately for New Idea, that all coincided with Dulcie’s self-coronation as undisputed queen of the trashies.
By the time Woman’s Day had caught up, Dulcie was wallowing in an ivory tower of autocracy and self-delusion and believed the only difference between the two mags was some TV promotion. No matter about New Idea’s content and story budgets, which were shrivelling in the grip of Murdoch’s cash squeeze at the time. So Dulcie rolled her dice on a million-dollar reader competition with a similarly-sized TV budget. It turned out to be the epitaph for both Dulcie and the magazine, which never kicked on and, indeed, worsened as the editorial budgets were squeezed more to pay for the TV fiasco.
The lesson was not lost on the managers who followed Dulcie. Even the hapless Colin Duck, now back as chairman of Geelong Newspapers for Rupert, seemed to realise promotion of an inferior product was doomed and refused to spend money on TV when it could be spent on editorial. Colin’s only problem was appointing the right person to run the title. By the time he got it right, he was sacked for spending millions on more magazines which he managed as equally poorly as New Idea. The new editor also got a bit more editorial money and, lo and behold, New Idea began to enjoy a slow resurgence. Something like eight of the magazine’s most recent half-year circulation audits showed successive growth while Woman’s Day and others started to sink.
The lesson of all this is that TV – in fact any marketing – won’t fix a problem product. It remains to be seen whether it helps boost one that isn’t broke but the gamble probably isn’t worth the $65 million that Kerry Stokes is shelling out for half the PMP titles.
No, Stokes’s real game plan in all this is the one in which he holds his strongest suit – opportunism. Contrary to his pompous piffle about creating a “third voice” in Australian media circles, he just happens to have spare cash when some good – but not great – media assets are on their knees. This has effectively enabled him to buy for $65 million what was valued in PMP’s last published annual report (2000) at $373.7 million. The directors of PMP even went so far as to certify the carrying value of their magazines, titles and publishing rights at $747.4 million by stating the following:
“This class of assets, publishing rights and titles, is stated at cost which in the opinion of Directors is not above recoverable amount. New launches are assessed on a case by case basis and start up losses may be capitalised where it is believed that the future cashflows will exceed this capitalised amount. The masthead value attributable to Hit Stars in Germany ($17.4 million) was written off during the year as the Directors are of the opinion that the masthead has minimal value. No amortisation of publishing rights and titles is provided, since, in the opinion of the Directors, this class of assets has a recoverable value in excess of the amount that it is stated in the accounts of the Group.”
Oops! It turns out just 12 months later that the amounts are not just above recoverable, they are something like SIX times higher than recoverable. So much for accountability if PMP’s current board plans to hang around after approving this deal. All Stokes really has to do now is no worse than the current crop of managers – which would be hard given their market-beating ability to destroy shareholder value. A pick-up in the economy should ensure the value of the magazines (and his investment in them) will rise strongly. It is at that time we can expect Kerry Stokes to abandon his apparently dearly-held ambition to create a “third voice” and he will sell the titles as quickly as the Canberra Times went to Rural Press. Who cares about vision when you can have $100 million in the bank?
Yours Sincerely, A Magazine Industry Insider
Crikey’s take on the Stokes purchase
Kerry Packer has come out and declared to analysts at last week’s love-in that he quite likes and admires Kerry Stokes. Stokes certainly fell in behind Packer on the digital TV debate. While Packer might get stiffer competition for his magazines now, the biggest long-term losers out of all of this are the PMP shareholders, including Crikey’s beloved Paula Piccinini who is currently looking for an exit for her rump of a holding.
It is worth remembering that Rupert offloaded PMP shortly after negotiating the $7 billion debt over-ride agreement with his bankers in 1991. He managed to get rid of about $1.2 billion of News Corp bank debt by first floating 55 per cent of PMP at $3.40 a share through JB Were which has probably lost quite a few million on this little play but made it back trading shares in News Corp for Rupert himself. News Corp then dumped the remaining 45 per cent at about $2.40 a share three years back which brought the total cash raised to $700 million. When you consider that PMP was loaded up with about $500 million in debt, you quickly get to the $1.2 billion figure which Rupert has pocketed dumping about 35 per cent of the Australian magazine industry and a our biggest printing business.
Would you buy anything off Rupert Murdoch?
I can remember sitting in a briefing with the Sydney MD of News Ltd, Jerry Harris, in 1998 as he said they’d be making some savings by shafting PMP now that News had dumped the stock. Sure enough, things like the Foxtel Magazine contract went elsewhere and PMP was left to wither on the vine under News Corp director Ken Cowley, who remained chairman of PMP until a few months ago.
The Stokes move has plenty of ironies. Firstly, Westpac is the major banker to the private Stokes empire and it was a $50 million Westpac loan to PMP that fell due a couple of weeks back. Then you have the fact that Dulcie Boling sits on the Seven board as a non-executive director and will therefore be re-united with some of her beloved magazines. She originally joined the board as a News Ltd representative but they sold their 15 per cent stake at a knock-down price three years back and Dulcie stayed aboard as she fell under the spell of Little Kerry.
With Big Kerry heaping praise on Little Kerry they might be able to resolve the court spat over the profit-sharing arrangement on TV Week at the moment. This is a joint venture between Packer and Murdoch which neatly demonstrates how the big boys really had carved up the Australian media between them.
Ironically, Packer flogged a minority stake in his ACP magazines back in 1992 – just a few months after Rupert did. Both of the big boys were under some debt pressure at the time but look at how Rupert’s old mags have withered on the vine whilst Kerry’s have held up reasonably well.
The man that Stokes is backing at PMP is Ian Meikle, a former editor of both The Australian and the Adelaide Advertiser for Rupert. Meikle was the former general manager of The Canberra Times under Kerry Stokes who tried to break the newsagency system in Canberra and also gave Michelle Grattan the sack as editor.
With analysts questioning the $20 million profit forecast for the PMP magazine business, Stokes is saying that Meikle has a 10-year record with him and is the reason he has invested.
The PMP share price has already recovered from around 30c to the mid-60s since the deal was announced and Seven has also held up reasonably well so this might just be a deal that works.
What happens to Bob Muscat?
Bob Muscat’s mate Ken Cowley has already jumped the PMP ship so the big question now is what will happen to the struggling CEO who has overseen such destruction of shareholder value.
One conspiracy theory doing the rounds is that Stokes would like to pick up the rest of PMP for a song. The best way to achieve this would be to retain that chronic underperformer Bob Muscat.
There are rumors that Bob is keen for the big payout and to retire to the farm near Cowley’s in the Hunter Valley. On Crikey’s reckoning he does not deserve another dollar of shareholder’s funds send his way.
In terms of bad CEOs, both Cowley and Muscat would be in our top 10 of the 1990s. Ever since Rupert moved offshore, he has struggled to develop local management talent and these two epitomise the problems. The same can be said for the latest News Ltd CEO John Hartigan, who is a schmoozy tabloid editor and no business guru.
Stokes has made a reasonable fist of Seven but his recent investments in things like Austrim, B Digital and Qantas NZ (with Cowley) have blotted the copybook somewhat. And you should remember that Little Kerry remains heavily indebted at a personal level. Most of the eggs are now in the Seven basket so he wouldn’t want to do his dough on this little PMP play and simultaneously face a drop in ratings and advertising revenue at Seven.
Knowing how business egos work, don’t be surprised if Fairfax CEO Fred Hilmer finally dusts off his long-mooted bid for WA Newspapers at a time when they’re looking for a new CEO. Afterall, Fairfax would not like watching Seven emerge as a major media player while Fairfax continues to twiddle its strategic thumbs. Before Warwick Fairfax ruined everything and Rupert got the Herald & Weekly Times, Fairfax were arguably the most powerful media group in the country. They continue to slide down the ladder and maybe it is time to wake up from the 10-year strategic sleep and do something.
Meanwhile, we hear that Stokes’s GM of Seven Perth is the man most likely to take over the reigns at WA News if Fairfax does not pounce first. Another ex-Murdoch plodder, Denis Thompson, is finally due to retire as CEO of WA News in February, and not before time Denis.