Scottish Agenda: There’s no shortage of problems at SMG

By Ian Fraser

Sunday Times

November 11th, 2007

Despite Roy Woodward’s best efforts to orchestrate a turnaround at SMG, the Glasgow-based media company remains stubbornly resistant to change.

Since Woodward took the helm in April the company’s share price has more than halved. It was sitting at around about 67.5p when he joined but closed last week at 27p. No wonder City wags are now calling it the Shrinking Media Group.

SMG has now joined the ranks of the “minus 90% club” – companies whose values have plummeted to less than 10% of their peak-time value. This illustrious band includes the likes of Energis, Atlantic Telecom and Marconi.

Given the crisis in which the company finds itself, it does seem strange that Woodward, a former Touche Ross consultant and a former Warburgs banker, should have wanted to become its chief executive in the first place.

Last year Woodward, previously at Channel 4, was knocking on investors’ doors, seeking to persuade them to install him as Andrew Flanagan’s successor. In the end he managed to persuade the activist investors Hanover to install him as CEO, and two Hanover partners, Matthew Peacock and Vasa Babic, have taken roles on the SMG board.

Woodward, 47, certainly has not had to go looking for his troubles to see in the past seven months. The most pressing has been SMG’s £170m debt pile – a big albatross for a small company at a time when debt markets are in such turmoil and highly leveraged companies face a particularly uncertain future. The fact that the debt – a legacy of the expansionist Flanagan years – is worth nearly double the value of the SMG equity probably sharpened minds at the company’s Pacific Quay headquarters.

At first Woodward thought the best way to address the situation was to hive off the group’s Virgin Radio arm and, using the proceeds, to chip away at the debt mountain. However, last week Woodward wisely postponed that plan. Given the market turmoil and other uncertainties, including the defection of Virgin Radio’s boss Paul Jackson to GCap Media, and suggestions that Richard Branson might not allow the Virgin brand to be used by new owners of the radio station, there was a danger it would at best command a firesale price.

Instead Woodward has found another way of reducing the debt pile. This is through a deeply discounted £95m rights issue. That would effectively reduce SMG’s debts to a more manageable £40m (given that he has already sold poster subsidiary Primesight) and provide scope for a refinancing of the remaining borrowings.

At least this should give Woodward some breathing space. He might even be able to sell Virgin at more than firesale prices and give him time to figure out a more appropriate stategy for SMG.

Another headache for Woodward is that Alan Clements, the man he thought he had hired as director of programming, may be unable to start work at Pacific Quay until 2010, as Clements is embroiled in a high-profile court case with his former employers RDF.

RDF wants Clements to abide by a three-year non-compete clause that he entered into when he sold his own production company to RDF, but Clements claims constructive dismissal. If the verdict goes against Clements (who is married to Newsnight’s Kirsty Wark) Woodward will be in a further quandary: Does he wait or get someone else?

Unfortunately no company ever shrunk its way to greatness.

Hard hats at RBS
In its 2006 accounts, the Royal Bank of Scotland boasted it was “No 1 for Global Asset-Backed Securities and Mortgage Backed Securities”. Last week this boast came back to haunt it. The bank’s shares had one of the worst weeks in their history, and have fallen 22% since the start of November.

Investors are fretting about the extent of the bank’s exposure to sub-prime contagion in the US, and fear the £48 billion takeover of ABN Amro has worsened the position. It must be deeply distressing for Sir Fred Goodwin, who is probably wondering if this is the thanks he gets for pulling off the largest banking takeover in history.

Frustratingly for RBS, its hands are tied by the UK’s governance regime. Unless there’s been a “material adverse change” in circumstances, it will be unable to update investors on the true position until its pre-close trading update on December 6. Even then, actual figures are forbidden. Sir Fred and his colleagues are just going to have to don their hard hats as the bombshells fall all around.

Sporting chance
So it’s in the bag. Glasgow has seen off Abuja and will host the 2014 Commonwealth Games. Nicola Sturgeon, the deputy first minister, says hosting the games will be a “huge boost” to the economy and provide a springboard for regeneration in Glasgow.

However, this is by no means certain. When Edinburgh hosted the games in 1986, the event was boycotted by African, Asian and Caribbean countries, and the games plunged into financial crisis. The city had to go cap-in-hand to that old rogue Robert Maxwell in the hope of securing sponsorship, which strangely never materialised.

The fallout from this continued for years, and the organisers ended up with a £4.3m deficit after failing miserably to persuade Maxwell to deliver the promised funds. I hope Glasgow’s experience is more like that of Manchester, which is said to have reaped enormous economic and regenerative benefits from hosting the event in 2002.

This article was published in Sunday Times Scotland on November 11th 2007

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