As I See it
Johnston Press: a story of management failure
Anyone familiar with the slow car crash that is Johnston Press should not be surprised at the turn of events. Despite the company claiming there has been “considerable interest” in acquiring the business, it has been obvious that no one would be prepared to take on the enormous debts that the company accrued during a reckless acquisition spree.
Paying £160 million for the The Scotsman titles alone looked like bravado even in 2005. It was billed as a step change in a company that had previously said that acquiring big regional and national titles was out of its comfort zone. It turned out to be a step too far for all who suffered the consequences of these chest-beating empire builders.
Sadly for JP employees, the company bit off more than it could chew. Aside from swamping the balance sheet with massive loans, it never understood The Scotsman and why it should not operate on the same cost basis as, say, the Bridlington Free Press. This not only applied to the papers, but also to its templated websites that failed to take account of the different news agendas at work. Ironically, in 1998 it was one of the first UK newspapers to launch a website updated on a daily basis, but it is generally agreed that each subsequent re-modelling of the site has been inferior to the original and what could have been a market leader.
Management who inherited the £220m debt pile were tasked with paying it off just as the advertising revenue on which it had historically relied went into reverse – classified advertising fell from £177m to £22m in a decade – and readers switched from buying newspapers to reading news online.
A company that had relied on 35% profit margins now struggled to keep the wolf from the door. That said, many of the titles – including The Scotsman group – remained profitable. Unfortunately, all profits were being absorbed in interest payments, leaving precious little to invest in the business.
There could have been more support (and sympathy) for the management team had they been seen to be on the side of the employees. As a former member of staff I recall how we all complied with pleas for pay freezes and knuckling down to help the company battle against cost pressures. All, that is, except the directors who continued to pay themselves six-figure bonuses on top of their already disproportionately fat salaries. Even as recently as last year the company planned to increase the bonus payout to its CEO to 180% his £430,000 salary.
Employees lost all faith in the management and many refused to take part in staff ‘engagement’ surveys seen as worthless box-ticking exercises intended to satisfy those who felt they at least needed to show they cared. When I asked one editor who I should give my engagement survey to, he replied: “Just put it in the bin, no one will read it.”
The company management may blame market forces, the changes in technology and reader habits, but there have been self-imposed failures, including a head-in-the-sand approach to diversification. Where other newspaper groups have also owned hotels, breweries, and so on, JP’s dependence on local newspapers left it vulnerable to any downturn in that market. It failed to listen to advice to seek out other revenue streams, claiming the post-2008 slump was cyclical. No, it was structural. The print industry is heading in one direction and even the growth of its digital businesses cannot replace what it is losing from its newspapers.
Full price sales of The Scotsman were reported to be about 14,000 and attempts to boost sales have not been helped by rash promotions that smack of desperation. However, there is still value in the titles, some of which are institutions. A letter sent to 2,000 group employees seeks to reassure staff that it will be business as usual, with Dave King remaining as CEO and all titles publishing as usual. There is a pledge of further investment from the bond holders.
However the letter enigmatically states that all operations will continue as usual “in the immediate term”. Given the company’s track record this is not the most reassuring of commitments and more cutbacks cannot be ruled out.
Mr King, who replaced the over-optimistic and, frankly, unconvincing Ashley Highfield as CEO stays on with the newco, having helped engineer what is effectively a debt for equity deal that sees the bondholders take a bath, but leaves newco with a lower, unspecified, level of debt. The deal has been in the making for some months and I’m told Mr King is in it for the long term to make sure the project succeeds, but if he should go it would signal that Golden Tree Asset Management, the key bondholder, has indicated a shift in strategy.
There is still a likelihood that the new owners could be tempted by a break-up of the group, with a fire sale of assets in an attempt to claw back some of their losses. The ‘i’ newspaper, which JP bought in 2016 and has turned into a rare success story, is likely to be the most prized, even though buying it added to the company’s debt just after the debt had been refinanced. The Scottish titles, I’m told, attracted separate bid interest and will remain attractive even though their only asset is in the brands.
Should there be a break up my money on bidders would be on DC Thomson, the Dundee-based publisher, which may have been waiting for an opportunity to acquire the Scottish businesses without taking on the debts and the pension liabilities.
Although the jobs of the employees is said to assured, there can be no guarantees. Shareholders, including the 25% holder Custos, see their investments wiped out. Christen Ager-Hanssen, who runs the Custos fund, is now accusing the management of collusion with key bondholder, the US hedge fund GoldenTree Asset Management. He also says he could “ensure the future of the company”. Really? I’m told he did not respond to attempts to engage with the board which requested a detailed business plan.
The pension fund, which has a £40m deficit, is now set for the pension protection fund which may make the titles more attractive to buyers, but affects 5,000 individuals in the final salary scheme. Typically, schemes moving into the PPF take a 25% to 30% haircut. Any defined contribution pension schemes in which the group participates, which cover the majority of the group’s current employees, should not be affected.