Paper profits rise as sales decline

By BRIAN GAYNOR

Australasian newspaper publishers don't have licences to print money but they are still doing extremely well at present.

The five main publishers, APN News & Media, John Fairfax Holdings, Independent Newspapers, Rural Press and West Australian Newspapers, all reported positive earnings growth for the six months to December 31 and most of them expect this trend to continue.

The two main New Zealand publishing groups, Independent Newspapers (INL) and Wilson & Horton (owned by APN News & Media), have benefited from a buoyant economy, strong advertising growth and a more stable circulation environment.

As the attached table shows newspaper circulation has been falling steadily over the past decade. The circulation of INL's Evening Post declined from 72,710 in 1992 to 55,418 just before its merger with the Dominion. Although sales of the new Dominion Post are lower than the combined sales of its two predecessors, the newspaper is considered to be a success.

The Press, which is based in Christchurch, and Sunday News have experienced steady declines since 1992 but their circulation has stabilised in recent years. The Sunday Star-Times, which was created through the merger of the Sunday Star and Sunday Times nearly a decade ago, is a success story. Its circulation has risen 18,639 since 1994.

Like most of the other city papers Wilson & Horton's New Zealand Herald has also experienced a sharp decline in circulation since 1992 but its volumes have now stabilised.

But circulation is only one of the revenue drivers for newspaper proprietors. The others are cover price and advertising.

All of the daily papers have increased their cover price in recent years. The Herald's weekday price has risen from 90 cents to $1.20 over the past five years and the Weekend Herald from $1 to $2.50. The cost of home delivery has risen from $5.50 to $6.50 per week over the same period.

Advertising represents approximately 70 per cent of newspaper revenue and the development of colour pagination and the buoyant consumer sector have boosted returns from this source.

INL reported that advertising revenue for the six months to December 31 rose 5.9 per cent (when adjusted for the Dominion/Evening Post merger the increase was 8.1 per cent). INL's two Sunday newspapers achieved advertising revenue growth of 12.6 per cent.

APN reported that the Herald achieved advertising growth of 20.4 per cent in January and February compared with the same two months last year. The America's Cup was a big contributor to this phenomenal growth.

The industry outlook for the remainder of the 2003 calendar year is far more uncertain and it is unlikely that advertising growth rates can be maintained at recent levels.

INL, which is 45.2 per cent owned by Rupert Murdoch's News Corporation, reported a net profit of $38.8 million for the six months to December 31, a 43.4 per cent increase over the same period in the 2001-02 year.

The good result was due to the growth in advertising revenue, reduced labour costs from the Dominion/Evening Post merger and a much better contribution from its 66.2 per cent-owned Sky Network Television.

Operating earnings (earnings before interest, depreciation and amortisation) from publishing rose from $58.5 million to $63 million and at Sky from $53.8 million to $71.6 million. INL had a large depreciation and amortisation charge associated with Sky but the television operator's tax losses were transferred back to INL, leaving the Wellington-based publisher with only a small tax charge for the interim period.

Sky is expected to report another loss for the June 2003 year but shareholders were told at November's annual meeting that the company should become profitable in the second half of the June 2004 year. Sky has an extremely strong market position but has not yet convinced investors that it can deliver consistent and high returns on a long-term basis.

Wilson & Horton, publisher of the New Zealand Herald, has had a number of ownership changes in recent years.

Sir Tony O'Reilly first became involved in May 1995 when his Dublin-based Independent News & Media bought a 28.3 per cent shareholding from Brierley Investments for $294 million. He subsequently increased his interest to 45.1 per cent and launched a full takeover offer in September 1996 on the following basis:

* $10.50 cash for each Wilson & Horton share.

* Or one exchangeable share for every $8 worth of Wilson & Horton shares.

These convertible shares, which are now called News & Media NZ preference
shares, pay an annual dividend of 40 cents a share and can be redeemed for $8 cash or convert into Dublin-listed Independent News shares on a two-for-one basis on November 30 (more about these shares later).

At the completion of the acquisition in mid-1998, Wilson & Horton became a fully owned subsidiary of the Irish company.

At the end of 2001 Wilson & Horton was sold to APN as part of a complex arrangement to arrest the flagging share price performance of the Dublin and Australian companies and the exchangeable shares in New Zealand. As part of the deal, the Dublin-based company raised its shareholding in APN to 44 per cent.

The transaction has given a big boost to APN. The Sydney-based group recently reported a net profit of A$90.2 million for the December year compared with $48.2 million for the previous year. The New Zealand Herald contributed 35 per cent of APN's operating earnings (earnings before interest and tax) and 81 per cent of the increase between 2001 and 2002.

The Herald has exceeded the forecast earnings contained in the 2001 transaction documents. In the December 2002 year, the Auckland newspaper achieved an operating profit of A$72 million on revenue of A$246 million. In the six months to December 31, the Herald had an operating margin of 30.1 per cent compared with 20.1 per cent for INL's publishing operations.

Meanwhile, Independent News & Media (INM) reported a sharp drop in earnings for the December 2001 year and a further decline for the six months to June 2002 (its December 2002 results have yet to be announced). Its share price, which peaked at €5.85 in March 2000, hit a further low of €1.17 in Dublin on Thursday morning but bounced back to close at €1.29.

This is bad news for holders of the News & Media exchangeable shares in New Zealand because the two-for-one conversion option is no longer attractive (this option is now worth only $2.55). News and Media's last annual report also revealed that the New Zealand-listed entity, with other companies in the INM group, had guaranteed a bank facility to its Irish parent to a maximum of €777 million.

This gives the group a big incentive to encourage News and Media preference shareholders to roll over their investment. News and Media chairman John Maasland hinted at this recently when he stated "the board is currently investigating a number of further replacement options for the exchangeable shares which it expects to bring to shareholders in the next few months".

There is a great deal of talk about the positive aspects of overseas ownership of New Zealand companies. Holders of News & Media exchangeable shares have great difficulty buying into this argument as, based on the Herald's performance, their investment returns would be much higher if they had remained Wilson & Horton shareholders.

* Disclosure of interests: Brian Gaynor is an Independent News & Media shareholder.

* bgaynor@xtra.co.nz