Background

“You do know that we may give you an answer that you will not like, don’t you?” was AMR’s reaction to being asked by Chris Graham of Exponent to assess Times Educational Supplement (TES). The background was that News International had put TES up for sale. Corporate bidders had shied away and Exponent was through the first rounds with a bid to back an experienced MBI candidate who could drive the business more aggressively and guide it through the challenges that lay ahead.

Analysis

The TES brand is rock solid. It is known by all teachers who regularly read it in staff rooms on Fridays. TES carries the lion’s share of teacher recruitment advertising and it is where any serious job hunter looks. Recruitment is the engine room of the business and of its profitability. However, all paper recruitment businesses face the threat of the internet, which will inevitably take the upper hand from paper in the longer term and which will reduce the average value of advertisements. In the public sector there is an added twist as the government has intervened in the nursing market to create its own nursing job site, which has damaged the recruitment revenues of nursing publishers.

AMR’s challenge was to assess the upside as well as the scale of the risks to the business. The sale process took place during the summer holidays, a period when it is hard to gain access to schools. Nonetheless we interviewed a wide range of heads, many of whom specify or place advertisements, as well as teachers. We also spoke to local education authorities, which can pool job ads, agencies which place some advertising for schools as well as competing electronic and paper publishers. This was backed by a detailed analysis of teacher numbers, employment and recruitment trends, which segmented developments in the demographic underpinning of the business.

TES’s online and paper competitors had failed to win ground due to the incumbent’s strength. The government threat was less worrisome than first feared, partly as a result of its difficulties in nursing and the very different structure of teaching. By linking this understanding of the strength of current and future electronic competition to an analysis of the factors that drive recruitment advertising migration to the net, we could assess when TES would have to unbundle its paper and online ads. Unbundling is the point at which a business can “cannibalise” its own revenues. We then assessed the factors that determine the level of cannibalisation of recruitment advertising in this particular segment, which is very different to other more hard-hit segments such as computing. We also showed that the pace of migration would be slow and, to a large extent, could be controlled by TES.

On the eve of presenting, we interviewed the UK’s acknowledged independent expert in teacher recruitment, who confirmed our findings. With a clear view of the revenue model in the electronic world, we could also help address other issues such as editorial, circulation and display advertising.

Result

Exponent invested £235m in the business, backing Bernard Gray, formerly of the FT and United Business Media, who has a clear plan for profit improvement through revitalising tired editorial and by implementing a well defined strategy for internet migration.

“We needed the best commercial advice and we got it; AMR covered every angle and helped us to assess how the business could face the challenges which lay ahead.”
Chris Graham, Exponent Private Equity

Background

A starter for ten! What links Finland, the Netherlands, Austria, the Czech Republic, Slovakia, Poland and Gibraltar? The answer - they are all part of the Yellow Brick Road Group (YBR Group), the most geographically diverse directory group in Europe. In April 2005, AMR received a call from Macquarie Bank Limited, the Australian investment bank. Macquarie was leading a consortium on the shortlist of three bidders looking at the YBR Group and, having read AMR’s European Telephone Directory report, approached AMR to provide commercial due diligence and market analysis as well as to support the consortium’s business plan.

In recent years there has been a flurry of M&A activity in the European directory sector. Directories are typically highly profitable and cash-generative businesses and as such have become attractive private equity investments. A total of over €13bn has been invested in the European sector in the last five years. AMR has been involved in a number of these transactions and also publishes what is seen as the definitive report on the sector.

Approach

AMR was asked to work closely alongside Macquarie and its industry advisers to provide analysis of the directory sector as a whole, the individual markets in which the YBR Group is active, and also to help develop the business plan that would form the basis of Macquarie’s bid. Led by Patrick O’Brien, Macquarie ran a large, well-structured and efficient team with clearly defined roles and responsibilities. The key to a successful bid would be the team’s ability to identify and quantify revenue and profit upside that would support a winning bid.

In a demanding process driven by a tight deal timetable, AMR accompanied Macquarie on site and management visits, touring all the businesses within a single week! Meanwhile, back at the office, AMR conducted interviews with advertisers and AMR’s network of industry contacts whilst analysing mountains of data. AMR has developed a number of tools for analysing directory markets based on its depth of benchmark data from across Europe, which it has built up over a number of years. AMR was able to use these detailed benchmarks, and its understanding of the different structures of European directory markets to help substantiate the business plan.

There were a number of issues which required greater depth of analysis. In the Netherlands and Finland, the two largest YBR markets, there are two players of almost equal size, which is unusual. By segmenting the market, either regionally or by product, AMR could demonstrate that the scope of direct competition was, in fact, fairly limited.

Another issue, and one which has preoccupied the directory industry and investors for a number of years, is the impact of the internet and search engines such as Google on directories. AMR had always argued that search engines would need to partner directory publishers to reach local advertisers, unless they had the appetite to develop costly field sales forces in multiple geographies. Rather conveniently, as AMR was writing its report, Google and Yell in the UK announced a partnership to provide Yell’s local listings for use on Google to enable it to deliver accurate and comprehensive search results. Yell still retains the advertiser relationships. Taking the YBR countries individually, it was quickly apparent that each business was well positioned to compete online or to be the partner of choice for search engines.

Result

In the final stages the transaction intensified as the business plan was finalised, whilst, simultaneously, AMR took part in a number of presentations to potential equity partners and lending banks.

Ultimately, the consortium, which comprised Macquarie Capital Alliance Group, Caisse de dépôt et placement du Québec and Nikko Principal Investments Limited, placed the successful bid, buying the group for a consideration of €1,825m. The deal was completed in early July 2005.

“Thanks for a job so well done - both in terms of results and in the way in which you interacted with each of our team, our financiers and the management”
Patrick O’Brien, Macquarie Bank

Background

In 2001 France’s third largest newspaper publisher Les Editions Amaury took the bold step of withdrawing distribution of Le Parisien newspaper, its key publication, from the national distribution organisation, NMPP. A newly created and wholly owned distribution company, SDVP (Société de Distribution et de Vente du Parisien), took over the daily distribution of 350,000 copies of Le Parisien to retailers and subscribers throughout the Paris region.

SDVP focussed on service and delivery quality, it operated successfully but with high costs. An activity based costing study identified where the costs were, but it was less easy to establish how they could best be reduced.

Approach

Les Editions Amaury asked AMR to conduct an international benchmarking exercise, hoping that SDVP could learn from similar organisations and subsequently adapt its operations while reducing costs and maintaining service levels. Les Editions Amaury were particularly keen to compare key performance ratios, learn how other distribution companies are structured and understand how costs would evolve in the future. Specific questions included the efficiency of operating mixed distribution routes - the same driver delivering to both retailers and subscribers.

First we had to select newspapers with a similar profile to Le Parisien: leading, paid, morning, metropolitan newspapers with a similar circulation and mixed subscribers and retail sales. There were few perfect matches, so we decided to include some evening titles, which proved very useful.

AMR's experience in persuading other newspapers to participate proved essential. Some newspapers were initially sceptical about the potential benefits, and of course, cautious about sharing sensitive information. A dozen meetings followed across Europe and the US with increasingly enthusiastic participants. Meetings scheduled to last only a couple of hours often turned into marathon sessions with a variety of people from newspaper managing directors to third party distribution companies drawn in as discussions evolved. The more we understood each structure, the more we realised that many of the challenges faced by Le Parisien are universal and the more it confirmed that the comparison of performance ratios needed to be complimented by a detailed map of each distribution system.

However, in some respects Le Parisien was facing some unique hurdles. SDVP was contractually restricted from increasing distributed volumes by bidding for distribution contracts for other newspapers in Paris. Also, Le Parisien’s circulation is almost equally split between newsstand and subscription, whereas other newspapers tend to concentrate, often for historical and cultural reasons, on one channel making it easier to squeeze costs.

Despite these points, Les Editions Amaury management was relieved to learn from AMR that SDVP's costs were by no means the highest among the dozen benchmark companies.

Most newspaper publishers have the same concerns: decreasing circulation, subscriber recruitment and retention, declining advertising revenues and increasing distribution costs. For example, how can they contain costs when their eroding subscriber base expects an ever-higher level of service, such as having their newspaper delivered to a different address at weekends? Publishers have found very different solutions, ranging from “throwing money” at distribution to ensure efficiency and high circulation; through merging distribution companies with those of competitor newspapers, even to selling the entire distribution structure to the national Post Office to ensure lowest possible costs.

While some of these options were not open to the SDVP and perfect international comparisons were hard to make, our analysis showed which approaches were performing better than others. Most notably we found that those distribution structures - whether wholly owned by the newspaper or a third party - which are run with an entrepreneurial spirit are both less costly and more reliable. Managers given responsibility for recruiting and organising their own staff and routes, finding their own distribution premises and essentially running their own operation inevitably perform well.

Result

AMR's recommendations were taken on board and work is underway to adapt the SDVP’s structure. In addition, a benchmarking club is being set up to allow the participating newspapers to continue to learn from each other.

“AMR’s benchmarking was of immediate practical use to our organisation.” -
(M. Philippe Amaury; President, Les Editions Amaury)