Further increase in operating result TMG
Ad Swartjes, chairman of the Executive Board at TMG (Telegraaf Media Groep) said in his New Year’s speech that in the context of realising its business objectives TMG made significant progress in 2007 with regard to implementing its strategy and strengthening its structure in order to realise more synergy.
The changes brought about in the portfolio have contributed to the strategy of effectively reaching the media consumer and advertiser in every aspect of media consumption. In order to ensure better revenue coordination and further cost savings, an organisational change was implemented in September 2007 by bundling a large part of the Dutch publishers in Telegraaf Media Nederland.
The year 2007 is expected to close with the largest net result in the more than 110-year history of TMG. This is primarily due to to the book profits realised by the sale of participations in SBS and Wegener, yielding a net result of more than € 400 million.
Swartjes said that the preliminary figures indicate that the operating result before amortisation has risen strongly with fractionally lower revenue. The effects of the change to the portfolio and the lower extraordinary costs had a positive influence on the increase in the result. Especially in the second half of 2007, the extra costs for the Contact project (CRM system), the establishment of Telegraaf Media Nederland (formerly known as the Focus project), and the setting up of the central purchasing organisation had a negative effect.
On revenues of more than € 730 million, the normalised operational margin for the whole of 2007 will come to more than 7%, slighty less than the margin for 2006.
Organically, that is, excluding Keesing Media Group, Sky Radio Group and the Limburg activities divested in 2006, 2007 saw a marginal increase in advertising revenue. Growth primarily took place in job advertisements in the first six months of the year. There was a modest to limited decrease on average in other segments.
The revenue from paid circulation increased modestly.
The net book profits realised from the sale of the participations in SBS, Wegener, ANP and Sky Radio Hessen and over € 30 million growth in extraordinary costs had an effect on the final net result for 2007. Extraordinary costs included among other things about € 15 million for the corporate profit sharing scheme due to the book profits realisedand extra provisions for restructuring. Finally, about € 40 million in amortisation costs must be taken into account. It is stressed that these are still preliminary figures, which are not yet adjusted for the expected effects of an impairment of the CRM system to a maximum of € 10 million.
Despite the expansion of new activities, the total number of FTEs declined, from almost 3,800 at the end of 2006 to just over 3,600 at the end of 2007.
Business divisions in the Netherlands
Telegraaf Media Nederlandis comprised of the following business divisions: De Telegraaf publishing company, HDC Media, Holland Combinatie, BasisMedia, Telegraaf Tijdschriften Groep (Telegraaf Periodicals Group), Pilarczyk Media Groep, Telegraaf Productiehuis (Telegraaf Production House and Librium TV. In a market in which competition has further intensified with the introduction of new titles, Telegraaf Media Nederland realised virtually the same operating result at a marginal increased revenue in 2007. Cost reductions were balanced with the costs of new activities and earlier mentioned extra costs.
In June 2007 TMG increased its share in Sky Radio Group to 85%. Over the course of 2007 revenue and result developed satisfactorily. In December 2007 49% of the loss-producing stake in Sky Radio Hessen (Germany) was divested.
International business divisions
The result of Keesing Media Group was temporarily less favourable than anticipated because of the effect of many new providers on the market for logic puzzles and the losses of the French business division Les Editions de Saxe, which was divested. In July Sanoma’s puzzle activities were taken over.
In Sweden periodical titles grew faster than the economy. The position on the boating market was further consolidated, both by the acquisition of a magazine title and a leading boating website. In cooperation with Bayard/Roularta the lifestyle magazine Plus is in the process of being tested.
The activities in Ukraine consist of: magazines, a free newspaper, a Ukrainian version of Speurders.nl and a participation in Gala Radio. The magazine portfolio has been further expanded and is performing in line with expectations. The results of the free newspaper and internet activities are still negative.
In 2007 TMG chose to continue to play a role in the television market. Broadcast television is extremely successful and profitable worldwide and moreover provides a good springboard for the Internet television. KKR and Permira took over TMG’s 20%-stake in SBS Broadcasting SA via the acquisition in Germany of television company ProSiebenSat.1. At the same time negotiations between these parties resulted in TMG obtaining an option on an economic participation of 6% in the share capital of the ProSiebenSat.1 - SBS combination. This option, which comes with a voting right of 12%, can be exercised in June 2008. TMG has had two seats on the Supervisory Board since July 2007. ProSiebenSat.1 showed very promising results for the first three quarters of 2007: growth in revenue and significant growth in EBITDA, plus substantial synergy advantages to be achieved in the coming years.
The stake in Wegener was transferred to Mecom in 2007. The net book profit came to € 57 million.
In spring 2007 TMG presented objectives for the end of 2009, which, among other things, assume an average normalised margin of 17% (EBITA/Sales) in print and digital publications. This margin does not include the influence of the margin on radioactivities, the Group’s overhead (€ 15 million) and the corporate profit sharing.
It was decided to simplify the objectives for 2009: with the inclusion of the company overhead and applying the new corporate profit sharing scheme, a mix of all sub-objectives leads to a corporate revenue objective of more than € 800 million with an EBITA margin of 15%.
Only the ambitions for growth in revenue in digital media have thereby been adjusted downwards somewhat because potential acquisitions are presently highly valued.
With regard to print activities, a significant part of the improvement in margin will come from cost savings, resulting in the most value for the business. Growth in digital activities will primarily come from acquisitions and taking in a ‘fair share’ of the advertising market.
For comparison: in 2007 revenue of just over € 730 million was realised with a normalised EBITA margin of more than 7%.
The sale of the participations in SBS and Wegener has put TMG in a cash position of about € 500 million at the moment. The following must be taken into account:
- Possible acquisitions in the area of digital/non print media and possible acquisitions abroad
- In the short term to take a decision whether to keep the current format of the daily newspapers or to introduce a new format. The investment amounts involved in the different alternatives vary from a few tens of millions to more than € 100 million between 2009 and the end of 2011
- Whether to exercise the option on participation in ProSiebenSat.1 in which a decision will be made in June 2008.. The financial prospects for ProSiebenSat.1 are excellent, both in terms of current result and in value creation for the long term. TMG’s chances of making strategic steps via this television empire have, however, been diminished by the exit of Axel Springer as a shareholder. If TMG exercises the option between 1 June 2008 and 15 June 2008, it will involve an amount of maximum € 445 million. If the call option is not exercised, there still is the put option, which would involve an investment of maximum € 380 million. Despite the recent exit of Axel Springer at a share price lower than the share price of the put option, based on the considerations above and a recent valuation by an independent third party, we still feel comfortable with the option arrangement.
Depending on the issues mentioned above and the availability of outside capital, there is also the possibility of an extra dividend payment to shareholders. In addition to the ongoing purchase of own shares.
Swartjes said in his New Year’s speech that he is “optimistic because we not only have a good point of departure and market position plus also the right people, resources and brands, but also because the organisation has a more balanced and agile structure now. Growth and improved margin are the key words for shareholders and other stakeholders.”
Cost cutting and divestments have helped to reduce costs but we have to realise that despite the extra attention on growth, cost cutting and reorganisations will remain an important issue in 2008, because we have seen in 2007 that cost increases can not be easily passed on in price increases.
On the basis of the above, assuming a limited increase in advertising and circulation revenue, a considerable increase of the operating result excluding extraordinary influences is expected for 2008.