As the global financial crisis takes its toll, we examine its impact on different parts of the media and entertainment industry. We also provide some pointers for survival in the tough times ahead.
EDITOR'S VIEW: MEDIA IN THE SPOTLIGHT
Aim is always likely to experience a sharp decline in an economic downturn. John Cowie discusses the relative performance of media sub-sectors.
It will be no surprise to anyone that Aim has performed badly over the past few months. Indeed, the FTSE Aim All-Share Index has suffered a much sharper decline in the last 12 months (down 58%) than that of the Main Market (the FTSE All- Share is down a 'mere' 40% as we go to press).
This is exactly what economists would expect in a downturn from a market that seeks to attract growth businesses: the beta of their constituent companies ought, on average, to be greater than one. In other words, they should demonstrate higher volatility than a basket of 'normal' (for which read larger, established company) shares. To put it another way, in the good times, Aim should outperform the Main Market, rewarding greater risk with greater return. In the bad times, it should fall more sharply than the Main Market.
Clearly, some industry sectors perform better or worse overall than others in a downturn. In this issue of Quoted Business, we examine the media sector in some detail and compare its recent performance with the index as a whole.
The Aim media sector, like Aim as a whole, has fallen by 58% in the last year. Within the sector, the only three subsectors which have fared slightly better than this average are media agencies, showing a 35% decline in the last 12 months, broadcasting and entertainment (43%) and publishing (45%). Rays of hope within the overall gloom are online market research houses Research Now and Toluna, whose share prices have risen by 16.4% and 9.6% respectively in the last year. Both sit within the media agencies sub-sector. The only company of the 12 in the publishing sub-sector to have bucked the overall downward trend is international business-to-business (B2B) media company SPG Media Group, which recorded share price growth of 2.9%.
In fact, out of the 66 Aim companies in the media sector, the companies mentioned above are the only 3 which have grown over the last 12 months.
So, what does the near and long-term future hold for media companies on Aim? For answers, we turned to a number of media figures to find out what the big challenges are now, what the issues are for the future and how positive they are about the sector generally. Are there strategic lessons to be learned and deployed over the coming months in the various media sub-sectors?
To set the scene, Smith & Williamson's Andrew Wilkes, a media specialist and a director in our Corporate Tax division, explains the recent performance of media stocks and gives his view on the outlook, opportunities and threats ahead for the sector.
COMMENT - MARKET FALLS OUT OF LOVE WITH MEDIA FOR THE MOMENT
Andrew Wilkes looks at how listed media companies are faring in the current economic climate.
There is no doubt that the worsening state of the global economy has, and will continue to, hit quoted media companies. Analysts are concerned that diminishing investor and consumer confidence will lead to a downturn in advertising, upon which many media stocks are dependent for their revenues. Earnings forecasts are being revised downwards and companies that are particularly exposed to the advertising sector, such as broadcasters, newspaper publishers and advertising and marketing agencies, have seen their share prices slump, with some trading at levels between 60% and 90% below those of just a year ago.
This justified pessimism about the outlook for advertising appears to have led investors to consider the entire quoted media sector as 'toxic'. However, there are a number of quoted companies whose business models do not depend on chasing advertising spend at all, or who are niche businesses benefiting from the migration of advertising from traditional print media to online. Television production companies, film distributors, STM (scientific, technical and medical) and B2B information publishers with subscriptionbased revenues and digital media pioneers have all seen their share prices fall – not as far as their advertising-dependent peers, but well in excess of the market generally.
Cheap deals for the taking?
Little wonder then that trade acquirers, private equity, and the managers of some of these apparently unloved companies, are beginning to think there may be some buying opportunities in these depressed markets. Within the television production space, the executive management team at Tinopolis took their company private with venture capital backing earlier this year. RDF Media's management have also signalled their plans to make an offer to shareholders.
However, while low share prices might mean some companies appear to be cheap by historical standards, the current high cost or reduced availability of debt means that willing buyers may not always be able to fund their interest. Specialist information providers Informa and Wilmington, and marketing services company Creston attracted the attention of private equity earlier this year. But, in all three cases, discussions were called off when, it is believed, the private equity houses involved could not raise sufficient debt to support their interest. Doubts have also been recently expressed about the funding available to the RDF Media buyout team.
Prepare for the upturn
So what should the management teams of depressed media stocks do against the current economic backdrop? Nobody can know how long the current economic difficulties will last, but we can be sure that recovery will eventually come. And, while media stocks tend to underperform during a downturn, they are usually among the first to bounce back when those green shoots of recovery are sighted. So the priority for quoted media companies must be to focus on trading through the downturn – use this time to review the cost base, maintain banking relationships, and, where possible, concentrate on building strong relationships with customers and clients. They should also take time to assess the potential opportunities for their businesses, so that they can take full advantage when the upturn begins.
CLIENT INTERVIEW - STAGECOACH THEATRE ARTS
Quoted Business speaks to David Sprigg, joint managing director and founder of Stagecoach Theatre Arts, about how the business is performing at the moment.
Stagecoach Theatre Arts is an Aimlisted, market-leading franchise network of part-time performing arts and sports schools for youngsters. The business has yet to see much negative impact from the downturn in economic activity and managing director David Sprigg believes that the sector is particularly resilient. In fact, Stagecoach's network fees in June and July grew 5% year-on-year, cash balances hit a peak of £2.3m in June and it opened several new UK schools in September.
Bucking the trend
"Our underlying business is actually doing better than it was a year ago," says David. "This is our third recession and we've survived all of them since we started the business in 1988. We put it down to the strength of the brand and the fact that parents tend not to cut back on children's education in tougher times, whereas they will cut back on luxuries such as holidays. We are confident of future success despite having to make a small increase in our term fees."
In 2006, when Stagecoach slipped into losses, it carried out restructuring and cost-cutting measures. "We'd geared up for growth that didn't materialise and this was hitting profitability. We managed to rationalise four divisions into a single head office through natural wastage without any compulsory redundancies."
This has led to a significant reduction in the group's total cost base, from £5.95m in 2007 to £5.65m in 2008. The company grew its franchise network fees to £26.5m in 2007.
Dealing with the credit crunch
"We have a great track record with our franchisees and have never had a failure," explains David. "However, the credit crunch is affecting prospective franchisees' ability to raise finance. Until recently, HSBC usually fast-tracked franchisees by, for example, giving credit approval on the same day. But now they look at lending on a case-by-case basis. It's also harder for existing franchisees to find a buyer if they want to move on."
Spend on marketing is a key requirement of every Stagecoach franchisee's contract. "We benefit from this as the first thing that many smaller operations do when times get difficult is to stop marketing, whereas our franchisees are contractually obliged to continue theirs. More than half of our student recruitment now comes through our website. When smaller players fall away we also benefit from such things as a better choice of venues."
David explains that they are seeing many businesses in the sector up for sale – around one a week at the moment. "They tend to be small, independent, sub-£2m turnover franchise operations. We suspect that the owners are putting themselves up for sale before they go bust and we expect to see more of it."
"We have a good cash position and if an acquisition opportunity came along, we would also anticipate support from existing shareholders. We have spoken to a few of these businesses which are up for sale, but so far we haven't seen any that are big or profitable enough."
Current challenges
Like most Aim companies in the current market, Stagecoach faces the issue of illiquidity in its shares. So Smith & Williamson is working with Stagecoach to help improve this by, among other things, increasing its profile with existing and potential shareholders.
"Smith & Williamson provides a high level of service, but also does the basics very well," says David. "The Corporate Finance team is close to us in a way that's rare. They attend some board meetings and this has been very useful."
Stagecoach has also revamped the presentation of its accounts into a better, glossier document. "We've also benefited from having a good independent research note prepared by Hardman & Co., a professional corporate research firm recommended by Smith & Williamson," says David.
Finally, along with all other Aim-listed companies, Stagecoach has just prepared its accounts under International Financial Reporting Standards (IFRS) for the first time. "Under IFRS we have to restate last year's accounts so that, in theory, shareholders can make comparisons with this year. The problem with this is that it's expensive and time-consuming. I also don't see the point of accounting for share options on the profit and loss account. It takes accounting further away from the cash generation side of the business."
But these niggles aside, David remains extremely positive about prospects for the business in a challenging economic climate. "We like good, old fashioned profitability," he says, and on current form, this appears to be what the company is delivering.
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Stagecoach: the facts
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MEDIA STRATEGIES - COPING WITHTHE CHALLENGES OF THE DOWNTURN
Quoted Business speaks to the finance directors of two Aim-listed media companies, Media Zest and Shed Productions, to find out about the challenges they are facing and their outlook on the future.
With share values crashing, the outlook for many quoted companies is uncertain. The media sector not only has to contend with worse falls than the market generally, but companies which are dependent on advertising for their revenues are finding times particularly tough. Advertising budgets are often among the first to be cut during a downturn.
Aim-listed media business MediaZest occupies a developing niche within the advertising sector in digital point-of-sale displays, so is at the sharp end of retailers' decisions on advertising spend. Winning new business and collecting cash are the two key challenges currently facing the company according to chief executive and finance director, Geoff Robertson.
"It's very up and down at the moment depending on whether individual clients see the value in MediaZest's offer to help them in these difficult trading conditions," says Geoff.
The company provides technical and creative digital media solutions to retailers to engage and attract consumers, such as standalone networked displays, holographic displays, interactive displays, image projection, directional sound technology and audio systems. Their challenge, Geoff explains, is to get buy-in to these new and innovative digital pointof- sale products.
Opportunities for the taking
"Expanding the number of sites to support our business model is difficult in the current market, but there are opportunities," says Geoff. "It depends how retailers are reacting to the downturn. Some are simply battening down the hatches and won't try anything new. Others are taking the opposite approach and looking for alternatives to traditional methods to do something big to attract new customers and gain market share."
Once clients have invested in the technology, they can re-use it for future campaigns leading to repeat business. He says there is a growing trend towards retailers sharing the costs by getting together to work with suppliers to invest in and use technology to improve sales and branding.
This year, clients including O2 and Foot Locker have used MediaZest technology at multiple retail sites. But a number of other projects which they expected to complete in the first half of 2008 have been delayed by clients.
"People are paying more slowly and cash collection is key," says Geoff. "And when the banks aren't paying on time, you know times are difficult."
Improving cash flow with invoice discounting
MediaZest incorporates Touch Vision, a business that counts among its customers more than a dozen educational institutions. "The education sector is less affected by the general economic downturn as the public sector is still paying on time," says Geoff. "Although margins in this market are tight, Touch Vision provides countercyclical revenue streams to the retail business. It also enables us to increase our scale, which in the audio-visual supply and installation market is essential to gain the best discounts available and to allow operational efficiency in our engineering function," says Geoff.
In February 2008, Touch Vision entered into an invoice discounting agreement with its bankers. This has generated further working capital to fund the growth of the business.
"It has been extremely successful in reducing the time lag between payment to suppliers and receipts from customers and we are now negotiating to provide a similar facility for MediaZest Ventures, which should help our cash flow situation," explains Geoff.
Share price challenge at Shed
Cash collection is not such a major issue for independent film production company, Shed Productions. Instead, echoing the sentiment of many in the industry, finance director Jonathon Kemp says the share price is their biggest challenge at the moment. The company finds that, like many others, Shed is to some extent tarred with the same brush as ITV, even though the company is not advertisingled to the same degree and the majority of its commissions come from the BBC. Shed specialises in contemporary, original drama and factual entertainment programming such as prime-time hits Waterloo Road, New Tricks, Supernanny and Who Do You Think You Are?.
Low multiples
"Most media businesses are currently trading at huge discounts and low multiples," Jonathon says. He explains: "We're currently on a multiple of four compared to around eight on flotation. This makes acquisitions, especially sharebased acquisitions, hard as we can't offer sellers a high multiple or we dilute our own earnings."
Shed has used debt finance for past acquisitions, but Jonathon says that debt has become both more expensive and increasingly hard to find. Also, continuing to use debt for acquisitions would eventually push the gearing beyond a level at which both management and investors would be comfortable. Plus, they are finding few acquisition opportunities available. "There's not a great deal coming to the market at the moment. I've seen only 3 or 4 information memoranda this year compared with at least 30 last year. Companies are reluctant to come to the market as they know it will be hard to get the valuation they want with media companies so lowly valued at the moment."
Confident for the future
Aside from the pressure on the share price, Jonathon says the underlying business is performing well, both from organic growth and through its recent acquisitions. Shed retains control and ownership of the programme rights for all its productions and has a growing library of programmes. The company also generates substantial additional revenue streams through exploitation of the ancillary and secondary rights in its programme brands through Outright Distribution, a wholly owned distribution arm.
Despite current economic woes, Jonathon is upbeat about future prospects. He says the company is "de-risked" to a large extent by having a good spread of business, with four production companies producing a good mix of programmes plus the distribution arm.
"It helps that the BBC is a major buyer and its budgets are protected for the next few years at least. There is still the same demand from broadcasters for good prime time programming so commissions are continuing at pretty much the same level as the last few years."
Shed has also made acquisitions in the US, and while they are a small player in US industry terms, they see huge growth potential. "One of the good things about the US is that broadcasters pay for productions on a value rather than a cost-plus basis – fees are based on ratings success."
On the international front, Shed's evergrowing library means they are still seeing buoyant demand in many territories. While cash collection is not a major issue for Shed, Jonathon says that the major UK broadcasters are tightening their belts as far as funding productions goes. "Previously the BBC and Channel 4 would cash-flow productions, but there's an increasing trend away from this. The BBC's new terms of trade are more restrictive about what they can lend out to fund productions and they're increasingly asking us to cash-flow our own productions. But we always get paid on time."
INVESTOR RELATIONS - GETTING THE MESSAGE ACROSS
Quoted Business talks to Tarquin Edwards of Adventis Financial PR about investor relations for Aim-listed companies.
1. On a practical level, what would your advice be for smaller listed companies to help get their message across to investors?
In today's climate, with growing inflation, the property slump, consumer woe on the high street and the ever-increasing nervousness of banks regarding credit, positive progress from smaller listed companies regularly goes unnoticed. Their often positive and encouraging messages are dulled in a sea of cynicism, wider market nerves and general investor (both retail and institutional) disdain for smaller growth stocks. This is particularly the case for companies with underdeveloped and unproven business models. Against this backdrop, however, the familiar missives of 'don't over-promise', 'maintain relationships' and 'keep communicating with your shareholders' still hold firm.
In this uncertain period we advise smaller listed clients to make sure messages to their institutional and retail investors focus on defence and safety. Most of these investors will have already adjusted their portfolios some time ago, with an emphasis in the current climate on defensive qualities and balance sheet ratios rather than profit and loss performance.
Investors want to hear management taking a realistic line and being honest about how they are going to address the mounting challenges in what is anticipated to be an increasingly difficult period. They want to hear about cost-cutting and prudent measures. They do not believe anyone who says they are growing their business, because no one can be sure of the outlook or of the ability of customers to continue to spend. They are looking for safety, strong balance sheets, cash flow and the ability to survive a very uncertain period of downturn. They want to hear realistic and honest appraisals of the problems ahead and how they will be handled.
2. What are the most effective investor relations tools for companies to help get their message across to investors?
As a rule, smaller companies face less scrutiny from analysts than larger companies and therefore need to exploit every chance to communicate their messages to investors. They should treat their financial calendar obligations as an opportunity to update investors on the company's progress. Likewise, the web, good presentations, one-on-one briefings, independent research, house broker notes and a range of other media should be used to help a client get their key message across to investor audiences.
It's hard to single out any one particular tool as more effective than another as they work best in concert with each other. Good investor relations is the harnessing of a variety of tools towards the common goal of adding to shareholder value.
That said, however, third party endorsement offered by the national and smaller company press is a particularly effective tool in helping to get company messages across to investors. On the back of news flow, it can be very powerful.
3. How do you typically get involved? What do companies struggle with most?
Changing their mindset. In other words, thinking like an investor in order to anticipate what the financial community is looking for. It comes down to disclosure and helping clients think like a public company, and therefore being open and forthcoming.
4. What makes a really good annual report?
Before one looks at what makes a really good annual report, one needs to understand exactly what an annual report is trying to achieve.
Looking from both the investor and analyst perspective, there are several main objectives of an annual report. It should educate and inform both current and potential shareholders on the company's strategy for growth, along with its wider ambitions. It should explain how that corporate strategy is being implemented and offer a report on the company's performance during the period under review, set within the context of its wider markets.
A premium should be placed on clarity and comprehensiveness. Reviews of operations need to be clearly set out in good detail. As a shop window into the merits of the company, the annual report needs to look professional and offer a succinct, honest and, of course, attractive snapshot on its performance. Good photographs break up text and help to put the company's operations into context. Judicious use of graphs and bar charts can often illustrate a point more effectively than a set of figures.
5. What makes a good investor relations website?
The website is now the first port of call for most people seeking information on a company and therefore it is essential that it is used to best effect. It should be comprehensive and easy to navigate. There is nothing more frustrating than wasting time scouring a website looking for a broker's note or an old admission document and having to wait for electronic wizardry to play itself out, only then not to find at first or second glance what one is looking for.
Quoted company websites have improved massively over recent years. This is particularly so with Aim companies which, since February 2007 and the introduction of Aim Rule 26, have been required to make key company information available on a website. This information must be kept up-to-date and free of charge.
Some smaller companies view too much disclosure with suspicion, so obviously a trade-off and balance needs to be drawn. However, if the content is generous, pertinent, up-to-date and presented with clarity, the company under the spotlight should be the ultimate beneficiary.
6. What is the future of investor relations?
Over the longer term, I would say healthy. Over the shorter term and in the current climate, 'frustrating' is the word that comes to mind as far as smaller company stocks are concerned. As we come out of the current downturn and cycle, maybe around the summer of 2009, investors will hopefully be looking for value again. Companies that have maintained discipline and sustained clear channels of communication with their investors should reap the rewards.
TEN-POINT CORPORATE TAX HEALTH CHECK
Feeling cost conscious? Andrew Wilkes offers some pointers to help manage your tax charge.
Businesses should make sure they are maximising the benefits of the tax reliefs available and that deductions for costs are accelerated where possible.
Ten ways to manage tax
1. Review provisioning policies
Assess your provisioning policies to ensure that provisions for expenditure of a revenue nature are made in accordance with FRS 12 and are allowable for corporation tax purposes. As far as bad debt provisions are concerned, you should document evidence of actions taken to attempt to collect the relevant debts. HM Revenue & Customs could seek to disallow a specific provision where no such action has been taken.
2. Watch out for discretionary bonuses
Where discretionary bonuses are to be paid, directors should evidence by letter before the year end the possibility that bonuses for the current year may be declared. These bonuses will need to be paid within nine months of year end in order to be tax deductible in the period they are charged to the profit and loss (P&L) account.
3. Get tax deductions for repair work
If a company has a legal obligation to carry out future repair work (for example under the terms of a lease), it is possible to obtain a tax deduction for this, provided there is an appropriate provision in the accounts. If there is no legal obligation, a tax deduction is only available if the repair work has been carried out by the year-end.
4. Take care over revenue deductions
Take care to avoid capitalising costs which would be treated as a revenue deduction for tax purposes if charged to the P&L account. Relief will only be allowed to the extent a deferred revenue charge is made to the P&L account, such as by depreciation of the capitalised asset.
5. Maximise tax relief on pension contributions
Employers' pension contributions must be paid by the end of the year to obtain corporation tax relief in that year.
6. Plan for capital allowances
Annual writing-down allowances have been reduced from 25% to 20% and there will be an annual investment allowance of £50k for plant and machinery. Companies should consider specific timings of additions, for example deferring some capital expenditure to a subsequent period may benefit a company if it is able to take advantage of two tranches of the annual investment allowances.
7. Reclassify expenditure on industrial buildings
The abolition of industrial building allowances (IBAs) means that companies should consider whether expenditure could be reclassified as plant and machinery or building repair work. If it can, tax relief for periods to 2011 can be accelerated and will avoid the permanent loss of tax relief after this date when IBAs are abolished. Reclassification of expenditure from industrial buildings to plant and machinery is not possible once IBAs have been claimed but can be carried out in respect of open periods (at least two years). However, for reclassification as capitalised repairs it may be possible to re-open up to six years under an error or mistake claim.
8. Claim R&D tax relief
As of 1 April 2008, the research & development (R&D) relief rates increased from 150% to 175% for small or medium enterprises (SMEs) and from 125% to 130% for large companies. There is also a possibility for SMEs to claim a payable tax credit.
9. Look at corporate structure
In general, companies should look also at their corporate structure to ensure there are no tax leakages. This is particularly relevant for international businesses to ensure they are making best use of the differences in tax rates in each country and making sure they avoid double taxation. This may mean some group restructuring or changes to the group's financing arrangements or internal operating procedures.
10. Don't forget compliance
Companies should look at the cost of dealing with their tax compliance obligations. Groups of companies could consider amalgamating the trades of various subsidiaries into a single company, which should reduce audit and tax compliance costs.
SMITH & WILLIAMSON SURVEY RESULTS - AIM COMPANIES FOCUS ON NARRATIVE REPORTING
Our survey of 100 Aim-listed companies' first annual reports under IFRS reveals that companies recognise the value of narrative reporting.
Amendments to the Aim rules mean that, since December 2007, Aim-listed companies have been required to produce consolidated accounts compliant with International Financial Reporting Standards (IFRS). We looked at the annual reports of 100 Aim-listed companies with December 2007 year-ends, including the top 20 Aim companies by market capitalisation.
Reporting under IFRS has undoubtedly been a big challenge for Aim companies, many of which operate with relatively small finance functions. So it's encouraging to see that despite the additional requirements of the first year under a new financial reporting framework, narrative reporting has not taken a back seat.
Nearly half (47%) of the Aim companies we surveyed voluntarily presented a directors' remuneration report despite this only being a mandatory requirement for fully listed companies. As would be expected, this proportion increased (to 65%) when we looked at the 20 largest Aim companies.
The trend towards Aim companies voluntarily disclosing increased narrative information was also illustrated by the following.
- 98% presented a separate chairman's statement in addition to the mandatory directors' report.
- 70% presented a corporate governance statement despite the Financial Services Authority regulations in respect of the Combined Code only applying to companies on the full list of the London Stock Exchange.
We also noticed an increased focus on environment and social issues, with 16% of Aim companies presenting a separate corporate social responsibility statement or report alongside their financial statements.
Many Aim companies continue to provide levels of reporting which are close to those of full list companies. This adds credence to the view that the importance of financial statements as a communication medium goes beyond the numbers. It demonstrates the continued aspirations of Aim-listed companies to be comparable to companies on the full list.
Smith & Williamson Links Up With NEDA Empowering Non-Executive Directors
Smith & Williamson is delighted to announce a new sponsorship agreement with the Non-Executive Directors Association (NEDA), which allows us to offer complimentary membership for the first year to any non-executive director (NED) known to us. NEDA was established in 2007 to offer training and advice to NEDs to help them cope with the changing nature of their role.
With increasing pressure on companies to demonstrate strong corporate governance, the role of the NED is taking on greater significance and the liabilities to which NEDs are exposed are on the increase. Investors and analysts alike are looking to NEDs to act as internal watchdogs, but there appears to be a gap emerging between the perception by that community of what a NED should deliver and what a NED can deliver. NEDA can help realign these divergent expectations.
Membership of NEDA offers access to its information centre, regular newsletters providing legal and technical updates and training and development courses. There are also regular networking events throughout the year. For those already working as NEDs and those considering taking up an appointment, NEDA provides an invaluable set of training and information products to help them understand the extent of their liabilities and the demands likely to be placed upon them.
If you are thinking about taking up membership of NEDA, please email john.cowie@smith.williamson.co.uk
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.