SMG grew and grew, but never realised its management’s £2bn ambition. Now it needs new leadership, writes Ian Fraser
ANDREW Flanagan, the former SMG chief executive, used to take delight in handing out pledge cards that clearly stated the Glasgow firm’s number one aim.
This was that the group, originally founded as Scottish Television (STV) in 1957, would be a “£2 billion UK media company by 2003”. While this looks delusional today, it was a boast made when the company’s market value had been inflated to more than £1 billion on the back of dot.com and media boom. So, doubling it within two to three years was perhaps a more realistic target than it now appears.
However thanks to Flanagan’s series of ill-judged acquisitions and strategic u-turns, coupled with the fact that owning a TV station today is a bit like owning a canal at the dawn of the railway age, SMG has a market value of little more than £175 million.
That is a mere 8% of the recently departed Mr Flanagan’s target. It is therefore perhaps little wonder that Flanagan was surprised to discover he was made to walk the plank by SMG chairman Chris Masters when he returned from a holiday in Florida on July 18.
Unfortunately the move has failed to bolster investor confidence in SMG’s future. In fact it has got even worse. A dire profits warning issued by the company nine days ago did little to still investors’ nerves. The company told the City that its full-year profits would be materially below analysts’ expectations, at the same time warning it was at risk of breaching its banking covenants. Cue a 20% slide in its share price to 55.5p.
The profits warning was “disastrous”, according to Richard Menzies-Gow at Dresdner Kleinwort, and has left the group “extremely vulnerable”. Menzies-Gow cut the brokerage’s forecast for SMG’s 2006 profits from £17.2 million to £10.5m. Numis slashed its pre-tax profit forecast even more, from £19m to £12m.
Anthony de Larrinaga, a media analyst at SG Securities, said: “To breach your covenants once might be regarded as misfortune, to breach them twice smacks of carelessness. Another trip down to the bankers to discuss covenants could easily be an expensive process.”
He believes the company might just be able to limbo under its covenants if it gets a fair price for the Primesight outdoor business and Pearl & Dean cinema advertising business, which are currently being sold off in an auction.
So where now for SMG, which recently moved into a shiny new headquarters complex on the Gorbals side of the Clyde? A possible merger with Ulster Television is now off the cards until next spring at the earliest, so few analysts detect much support the share price.
They are worried that Primesight and Pearl & Dean will end up fetching far less than SMG has hoped, and Menzies-Gow believes Pearl & Dean is on track to lose £4m this year and will go for as little as £2m.
Vague rumours that the private equity house Doughty Hanson is keen to get its hands on SMG seem wide of the mark. The market gossip did little for the SMG share price which closed the week at 55.5p.
Overall Gow says it is “unlikely” that the group will survive as a standalone plc based in Glasgow in three or four years time.
Wilton Fry, an analyst at Merrill Lynch, believes the chances of a private equity takeover of SMG are a long shot.
“We do not believe SMG is a valid candidate for a leveraged buyout for several reasons. There is insufficient debt capacity: In a similar vein to GCap, the business is highly cyclical and has substantial debt already.
“Second there is no clear exit plan for a private equity bidder. If we assume an LBO group bought SMG and sold off the outdoor, cinema and radio business there are no logical buyers for the rump ITV1 licence in Scotland. Third SMG’s pension deficit of £32m is almost all attached to the TV business. If the other parts of the business are sold it is probable that the pension trustees would require a top-up.”
Other City analysts share Fry’s view, which implies its share could be bumping along in the 55p to 60p range for some time.
Given the lack of hope of material uplift, and the poor prospects for the traditional advertising markets in which SMG mainly operates, it would be unsurprising if at least some of the limited number of external candidates for the SMG chief executive role, whoever they are, now quietly withdraw heir applications.
One close follower of SMG is convinced that just two candidates left in the frame.
He said these are SMG’s acting chief executive Donald Emslie (now tainted by his involvement in the profits warning) and the Virgin Radio chief Fru Hazlitt, who is reported to have the backing of some of SMG’s larger shareholders.
“Fru Hazlitt would seem the obvious choice. Before joining Virgin she ran Yahoo! UK and therefore has strong direct experience of running an online business. Since SMG’s stated strategy is to grow their online revenues, she seems the obvious choice,” one investor said.
Menzies-Gow said: “Fru is like a breath of fresh air and has already really revitalised Virgin. She has an infectious enthusiasm and may have the ability to drive media traffic onto the internet and devise ways of transacting around that.”
Hazlitt, 43, started her career selling advertising for Soho-based publishing group Centaur before moving to a similar role at the Guardian. After a spell at Capital Radio she moved to Yahoo! in 2000, becoming managing director of Yahoo! UK and Ireland in 2003. Like Menzies-Gow, other observers are confident she has the skill set to lead SMG into an as yet undetermined digital future.
The heart of SMG’s problem was that it became a piecemeal collection of media assets, with insufficient synergies between them or relevance to each other to make the whole more valuable than the sum of the parts. Also the company borrowed to make its acquisitions at the peak of the media cycle, lumbering itself with a £400m of debt.
But is it fair to lay the blame for the company’s current plight entirely at Flanagan’s door? Not according to Menzies-Gow.
“The whole board was at fault. Their approach to due diligence at the time they bought Ginger Media and the Scottish Radio Holdings stake was lacking. They fell into the fatal trap of believing that the peak of the media cycle would last forever.”
This article published in The Sunday Times on 29 October 2006